UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | | | | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2020March 31, 2021
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 Incorporation or Organization) | | | | (I.R.S. Employer Identification No.) | |
| | | | | | |
| 200 Public Square, | Cleveland, | Ohio | | 44114-2315 | |
| (Address of Principal Executive Offices) | | | | (Zip Code) | |
Registrant’s Telephone Number, Including Area Code: (216) 694-5700
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common shares, par value $0.125 per share | | CLF | | New York Stock Exchange |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large accelerated filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares outstanding of the registrant’s common shares, par value $0.125 per share, was 399,241,687499,402,288 as of October 22, 2020.April 26, 2021.
TABLE OF CONTENTS
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| | | Page Number | | |
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| DEFINITIONS | | | | | |
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| PART I - FINANCIAL INFORMATION | | | | | |
| Item 1. | Financial Statements | | | |
| | Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2020March 31, 2021 and December 31, 20192020 | | | |
| | Statements of Unaudited Condensed Consolidated Operations for the Three and Nine Months Ended September 30,March 31, 2021 and 2020 and 2019 | | | |
| | Statements of Unaudited Condensed Consolidated Comprehensive Income (Loss) for the Three and Nine Months Ended September 30,March 31, 2021 and 2020 and 2019 | | | |
| | Statements of Unaudited Condensed Consolidated Cash Flows for the NineThree Months Ended September 30,March 31, 2021 and 2020 and 2019 | | | |
| | Statements of Unaudited Condensed Consolidated Changes in Equity for the Three and Nine Months Ended September 30,March 31, 2021 and 2020 and 2019 | | | |
| | Notes to Unaudited Condensed Consolidated Financial Statements | | | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | | | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | | | |
| Item 4. | Controls and Procedures | | | |
| | | | | |
| PART II - OTHER INFORMATION | | | | | |
| Item 1. | Legal Proceedings | | | |
| Item 1A. | Risk Factors | | | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | | | |
| Item 4. | Mine Safety Disclosures | | | |
| Item 5. | Other Information | | | |
| Item 6. | Exhibits | | | |
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| Signatures | | | | | |
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DEFINITIONS
The following abbreviations or acronyms are used in the text. References in this report to the “Company,” “we,” “us,” “our” and “Cliffs” are to Cleveland-Cliffs Inc. and subsidiaries, collectively, unless stated otherwise or the context indicates otherwise.
| | | | | | | | |
| Abbreviation or acronym | | Term |
| | |
| 4.625% 2029 Senior Notes | | 4.625% Senior Guaranteed Notes due 2029 issued by Cleveland-Cliffs Inc. on February 17, 2021 in an aggregate principal amount of $500 million |
| 4.875% 2031 Senior Notes | | 4.875% Senior Guaranteed Notes due 2031 issued by Cleveland-Cliffs Inc. on February 17, 2021 in an aggregate principal amount of $500 million |
| ABL Facility | | Asset-Based Revolving Credit Agreement, bydated as of March 13, 2020, among Cleveland-Cliffs Inc., the lenders party thereto from time to time and among Bank of America, N.A., as Agent, the Lenders that are parties thereto,administrative agent, as the Lenders, and Cleveland-Cliffs Inc., as Parent and a Borrower, datedamended as of March 13,27, 2020, and December 9, 2020, and as may be further amended from time to time |
| Acquisitions | | The AK Steel Merger and AM USA Transaction, together |
| Adjusted EBITDA | | EBITDA, excluding certain items such as EBITDA of noncontrolling interests, extinguishment of debt, severance, acquisition-related costs, amortization of inventory step-up and impacts of discontinued operations and intersegment corporate allocations of selling, general and administrative costs |
AK Coal | | AK Coal Resources, Inc., an indirect, wholly owned subsidiary of AK Steel, and related coal mining assets |
| AK Steel | | AK Steel Holding Corporation (n/k/a Cleveland-Cliffs Steel Holding Corporation) and its consolidated subsidiaries, including AK Steel Corporation (n/k/a Cleveland-Cliffs Steel Corporation), its direct, wholly owned subsidiary, collectively, unless stated otherwise or the context indicates otherwise |
AK TubeSteel Merger | | The merger of Merger Sub with and into AK Tube LLC, an indirect,Steel, with AK Steel surviving the merger as a wholly owned subsidiary of Cleveland-Cliffs Inc., subject to the terms and conditions set forth in the AK Steel Merger Agreement, consummated on March 13, 2020 |
AMTAK Steel Merger Agreement | | Alternative Minimum TaxAgreement and Plan of Merger, dated as of December 2, 2019, among Cleveland-Cliffs Inc., AK Steel and Merger Sub |
| AM USA Transaction | | The acquisition of ArcelorMittal USA, consummated on December 9, 2020 |
| AM USA Transaction Agreement | | Transaction Agreement, dated as of September 28, 2020, by and between Cleveland-Cliffs Inc. and ArcelorMittal |
| AOCI | | Accumulated Other Comprehensive Income (Loss) |
ArcelorMittal S.A. | | ArcelorMittal S.A., an entity formeda company organized under the laws of Luxembourg and the former ultimate parent entitycompany of ArcelorMittal USA |
| ArcelorMittal USA | | Substantially all of the operations of the former ArcelorMittal USA LLC, (including many of its United States affiliates, subsidiaries and representatives. References to ArcelorMittal USA comprise all such relationships unless a specific ArcelorMittal USA entity is referenced)certain affiliates, and Kote and Tek, collectively |
| ASC | | Accounting Standards Codification |
| | |
Atlantic Basin Pellet PremiumASU | | Platts Atlantic Basin Blast Furnace 65% Fe pellet premiumAccounting Standards Update |
| Board | | The Board of Directors of Cleveland-Cliffs Inc. |
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| | |
| | |
| CARES Act | | Coronavirus Aid, Relief, and Economic Security Act |
| | |
| | |
| CERCLA | | Comprehensive Environmental Response, Compensation and Liability Act |
| | |
Compensation Committee | | Compensation and Organization Committee of the Board1980 |
| COVID-19 | | A novel strain of coronavirus that the World Health Organization declared a global pandemic in March 2020 |
| Dodd-Frank Act | | Dodd-Frank Wall Street Reform and Consumer Protection Act |
DR-grade | | Direct Reduction-grade |
| | |
| EAF | | Electric Arc Furnacearc furnace |
| EBITDA | | Earnings before interest, taxes, depreciation and amortization |
EmpireEDC | | Empire Iron Mining PartnershipExport Development Canada |
| EPA | | U.S. Environmental Protection Agency |
ERISAEPS | | Employee Retirement Income Security Act of 1974, as amendedEarnings per share |
| | |
| Exchange Act | | Securities Exchange Act of 1934, as amended |
| FASB | | Financial Accounting Standards Board |
| Fe | | Iron |
FILO | | First-in, last-out |
Former ABL Facility | | Amended and Restated Syndicated Facility Agreement by and among Bank of America, N.A., as Administrative Agent, the Lenders that are parties thereto, as the Lenders, Cleveland-Cliffs Inc., as Parent and a Borrower, and the Subsidiaries of Parent party thereto, as Borrowers, dated as of March 30, 2015, as amended and restated as of February 28, 2018, and as further amended |
| GAAP | | Accounting principles generally accepted in the United States |
| GHG | | Greenhouse gas |
| HBI | | Hot Briquetted Ironbriquetted iron |
| Hibbing | | Iron ore mining property owned by Hibbing Taconite Company, an unincorporated joint venture between subsidiaries of Cliffs and U.S. Steel |
Hot-rolled coil steel priceHRC | | Estimated average annual daily market price for hot-rolledHot-rolled coil steel |
IRBsIRB | | Industrial Revenue BondsBond |
LIBORKote and Tek | | London Interbank Offered Rate |
LIFO | | Last-in, first-outI/N Kote L.P. (n/k/a Cleveland-Cliffs Kote L.P.) and I/N Tek L.P. (n/k/a Cleveland-Cliffs Tek L.P.), former joint ventures between subsidiaries of the former ArcelorMittal USA LLC and Nippon Steel Corporation |
| Long ton | | 2,240 pounds |
Merger | | The merger of Merger Sub with and into AK Steel, with AK Steel surviving the merger as a wholly owned subsidiary of Cliffs, subject to the terms and conditions set forth in the Merger Agreement, effective as of March 13, 2020 |
Merger Agreement | | Agreement and Plan of Merger, dated as of December 2, 2019, among Cliffs, AK Steel and Merger Sub |
| Merger Sub | | Pepper Merger Sub Inc., a direct, wholly owned subsidiary of Cliffs prior to the AK Steel Merger |
| Metric ton | | 2,205 pounds |
MMBtu | | Million British Thermal Units |
| MSHA | | U.S. Mine Safety and Health Administration |
| Net ton | | 2,000 pounds |
| | |
NorthshoreNPDES | | Northshore Mining CompanyNational Pollutant Discharge Elimination System, authorized by the Clean Water Act |
| | |
| OPEB | | Other postretirement benefits |
Platts 62% Priceprice | | Platts IODEX 62% Fe Fines cost and freightCFR North China |
| | |
PPIRCRA | | Producer Price IndicesResource Conservation and Recovery Act |
| | | | | | | | |
| Abbreviation or acronym | | Term |
Precision PartnersRI/FS | | PPHC Holdings, LLC (an indirect, wholly owned subsidiary of AK Steel) and its subsidiaries, collectively, unless stated otherwise or the context indicates otherwiseRemedial Investigation/Feasibility Study |
RCRASAAR | | Resource Conservation and Recovery ActSeasonally Adjusted Annualized Rate |
| SEC | | U.S. Securities and Exchange Commission |
| Section 232 | | Section 232 of the Trade Expansion Act of 1962, as amended |
| Securities Act | | Securities Act of 1933, as amended |
| SunCoke Middletown | | Middletown Coke Company, LLC, a subsidiary of SunCoke Energy, Inc. |
Tilden | | Tilden Mining Company L.C. |
| Topic 805 | | ASC Topic 805, Business Combinations |
| Topic 815 | | ASC Topic 815, Derivatives and Hedging |
| | |
| | |
TransactionTubular Components | | The purchaseCleveland-Cliffs Tubular Components LLC (f/k/a AK Tube LLC), an indirect, wholly owned subsidiary of substantially all of the operations of ArcelorMittal USA, subject to the terms and conditions set forth in the Transaction Agreement |
Transaction Agreement | | Transaction Agreement, by and between Cliffs and ArcelorMittal S.A., dated as of September 28, 2020 |
United Taconite | | United Taconite LLCAK Steel |
| U.S. | | United States of America |
| U.S. Steel | | Ontario Hibbing Company, a subsidiary of United StatesU.S. Steel Corporation and a participant in Hibbingits subsidiaries, collectively, unless stated otherwise or the context indicates otherwise |
| USMCA | | United States-Mexico-Canada Agreement |
| USW | | United Steelworkers |
| | |
| VIE | | Variable Interest Entityinterest entity |
PART I
| | | | | |
| Item 1. | Financial Statements |
Statements of Unaudited Condensed Consolidated Financial Position
Cleveland-Cliffs Inc. and Subsidiaries
| | | (In Millions) | | | (In Millions) |
| | September 30,
2020 | | December 31,
2019 | | March 31,
2021 | | December 31,
2020 |
| ASSETS | ASSETS | | | | ASSETS | | | |
| Current assets: | Current assets: | | Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 56.0 | | | $ | 352.6 | | Cash and cash equivalents | $ | 110 | | | $ | 112 | |
| Accounts receivable, net | Accounts receivable, net | 653.7 | | | 94.0 | | Accounts receivable, net | 1,659 | | | 1,169 | |
| Inventories | Inventories | 1,795.1 | | | 317.4 | | Inventories | 3,932 | | | 3,828 | |
| Income tax receivable, current | 9.0 | | | 58.6 | | |
| Other current assets | Other current assets | 115.0 | | | 75.3 | | Other current assets | 160 | | | 189 | |
| Total current assets | Total current assets | 2,628.8 | | | 897.9 | | Total current assets | 5,861 | | | 5,298 | |
| Non-current assets: | Non-current assets: | | Non-current assets: | |
| Property, plant and equipment, net | Property, plant and equipment, net | 4,550.7 | | | 1,929.0 | | Property, plant and equipment, net | 9,014 | | | 8,743 | |
| Goodwill | Goodwill | 144.0 | | | 2.1 | | Goodwill | 994 | | | 1,406 | |
| Intangible assets, net | 190.1 | | | 48.1 | | |
| Income tax receivable, non-current | 0 | | | 62.7 | | |
| Deferred income taxes | Deferred income taxes | 519.5 | | | 459.5 | | Deferred income taxes | 562 | | | 537 | |
| Right-of-use asset, operating lease | 207.7 | | | 11.7 | | |
| Other non-current assets | Other non-current assets | 240.1 | | | 92.8 | | Other non-current assets | 784 | | | 787 | |
| TOTAL ASSETS | TOTAL ASSETS | $ | 8,480.9 | | | $ | 3,503.8 | | TOTAL ASSETS | $ | 17,215 | | | $ | 16,771 | |
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | LIABILITIES AND EQUITY | | | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Accounts payable | Accounts payable | $ | 710.7 | | | $ | 193.2 | | Accounts payable | $ | 1,743 | | | $ | 1,575 | |
| Accrued liabilities | 279.4 | | | 126.3 | | |
| Accrued employment costs | | Accrued employment costs | 465 | | | 460 | |
| Pension and OPEB liabilities, current | | Pension and OPEB liabilities, current | 151 | | | 151 | |
| Other current liabilities | Other current liabilities | 224.0 | | | 89.9 | | Other current liabilities | 574 | | | 743 | |
| Total current liabilities | Total current liabilities | 1,214.1 | | | 409.4 | | Total current liabilities | 2,933 | | | 2,929 | |
| Non-current liabilities: | Non-current liabilities: | | Non-current liabilities: | |
| Long-term debt | Long-term debt | 4,309.8 | | | 2,113.8 | | Long-term debt | 5,734 | | | 5,390 | |
| Operating lease liability, non-current | 174.1 | | | 10.5 | | |
| Intangible liabilities, net | 65.9 | | | 0 | | |
| Pension and OPEB liabilities | 1,130.6 | | | 311.5 | | |
| Asset retirement obligations | 182.0 | | | 163.2 | | |
| Pension and OPEB liabilities, non-current | | Pension and OPEB liabilities, non-current | 3,916 | | | 4,113 | |
| Other non-current liabilities | Other non-current liabilities | 280.7 | | | 137.5 | | Other non-current liabilities | 1,175 | | | 1,260 | |
| TOTAL LIABILITIES | TOTAL LIABILITIES | 7,357.2 | | | 3,145.9 | | TOTAL LIABILITIES | 13,758 | | | 13,692 | |
| Commitments and contingencies (See Note 18) | Commitments and contingencies (See Note 18) | | Commitments and contingencies (See Note 18) | 0 | | 0 |
| Series B Participating Redeemable Preferred Stock - 0 par value | | Series B Participating Redeemable Preferred Stock - 0 par value | |
| Authorized, Issued and Outstanding - 583,273 shares | | Authorized, Issued and Outstanding - 583,273 shares | 738 | | | 738 | |
| Equity: | Equity: | | Equity: | |
| Common shares - par value $0.125 per share | Common shares - par value $0.125 per share | | Common shares - par value $0.125 per share | |
| Authorized - 600,000,000 shares (2019 - 600,000,000 shares); | | |
| Issued - 428,645,866 shares (2019 - 301,886,794 shares); | | |
| Outstanding - 399,229,917 shares (2019 - 270,084,005 shares) | 53.6 | | | 37.7 | | |
| Authorized - 600,000,000 shares (2020 - 600,000,000 shares); | | Authorized - 600,000,000 shares (2020 - 600,000,000 shares); | |
| Issued - 506,832,537 shares (2020 - 506,832,537 shares); | | Issued - 506,832,537 shares (2020 - 506,832,537 shares); | |
| Outstanding - 499,214,434 shares (2020 - 477,517,372 shares) | | Outstanding - 499,214,434 shares (2020 - 477,517,372 shares) | 63 | | | 63 | |
| Capital in excess of par value of shares | Capital in excess of par value of shares | 4,446.3 | | | 3,872.1 | | Capital in excess of par value of shares | 5,487 | | | 5,431 | |
| Retained deficit | Retained deficit | (3,052.5) | | | (2,842.4) | | Retained deficit | (2,948) | | | (2,989) | |
| Cost of 29,415,949 common shares in treasury (2019 - 31,802,789 shares) | (354.8) | | | (390.7) | | |
| Cost of 7,618,103 common shares in treasury (2020 - 29,315,165 shares) | | Cost of 7,618,103 common shares in treasury (2020 - 29,315,165 shares) | (93) | | | (354) | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | (282.0) | | | (318.8) | | Accumulated other comprehensive loss | (120) | | | (133) | |
| Total Cliffs shareholders' equity | Total Cliffs shareholders' equity | 810.6 | | | 357.9 | | Total Cliffs shareholders' equity | 2,389 | | | 2,018 | |
| Noncontrolling interest | Noncontrolling interest | 313.1 | | | 0 | | Noncontrolling interest | 330 | | | 323 | |
| TOTAL EQUITY | TOTAL EQUITY | 1,123.7 | | | 357.9 | | TOTAL EQUITY | 2,719 | | | 2,341 | |
| TOTAL LIABILITIES AND EQUITY | $ | 8,480.9 | | | $ | 3,503.8 | | |
| TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND EQUITY | | TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND EQUITY | $ | 17,215 | | | $ | 16,771 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Statements of Unaudited Condensed Consolidated Operations
Cleveland-Cliffs Inc. and Subsidiaries
| | | (In Millions, Except Per Share Amounts) | | | | (In Millions, Except Per Share Amounts) |
| | Three Months Ended
September 30, | | | Nine Months Ended
September 30, | | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 |
| Revenues | Revenues | $ | 1,646.0 | | | $ | 555.6 | | | $ | 3,063.2 | | | $ | 1,455.8 | | Revenues | | $ | 4,049 | | | $ | 359 | |
| Realization of deferred revenue | 0 | | | 0 | | | 34.6 | | | 0 | | |
| Operating costs: | Operating costs: | | Operating costs: | | |
| Cost of goods sold | Cost of goods sold | (1,525.4) | | | (400.7) | | | (3,088.9) | | | (1,007.0) | | Cost of goods sold | | (3,761) | | | (356) | |
| Selling, general and administrative expenses | Selling, general and administrative expenses | (59.6) | | | (25.5) | | | (149.2) | | | (82.2) | | Selling, general and administrative expenses | | (95) | | | (28) | |
| Acquisition-related costs | Acquisition-related costs | (7.5) | | | 0 | | | (68.4) | | | 0 | | Acquisition-related costs | | (13) | | | (42) | |
| Miscellaneous – net | Miscellaneous – net | (15.5) | | | (7.8) | | | (40.5) | | | (19.0) | | Miscellaneous – net | | (3) | | | (12) | |
| Total operating costs | Total operating costs | (1,608.0) | | | (434.0) | | | (3,347.0) | | | (1,108.2) | | Total operating costs | | (3,872) | | | (438) | |
| Operating income (loss) | Operating income (loss) | 38.0 | | | 121.6 | | | (249.2) | | | 347.6 | | Operating income (loss) | | 177 | | | (79) | |
| Other income (expense): | Other income (expense): | | Other income (expense): | | |
| Interest expense, net | Interest expense, net | (68.2) | | | (25.3) | | | (167.9) | | | (76.5) | | Interest expense, net | | (92) | | | (31) | |
| Gain (loss) on extinguishment of debt | Gain (loss) on extinguishment of debt | 0 | | | 0 | | | 132.6 | | | (18.2) | | Gain (loss) on extinguishment of debt | | (66) | | | 3 | |
| Other non-operating income | 10.0 | | | 0.3 | | | 31.2 | | | 1.3 | | |
| Net periodic benefit credits other than service cost component | | Net periodic benefit credits other than service cost component | | 47 | | | 6 | |
| | Total other expense | Total other expense | (58.2) | | | (25.0) | | | (4.1) | | | (93.4) | | Total other expense | | (111) | | | (22) | |
| Income (loss) from continuing operations before income taxes | Income (loss) from continuing operations before income taxes | (20.2) | | | 96.6 | | | (253.3) | | | 254.2 | | Income (loss) from continuing operations before income taxes | | 66 | | | (101) | |
| Income tax benefit (expense) | Income tax benefit (expense) | 22.4 | | | (4.8) | | | 98.5 | | | (23.1) | | Income tax benefit (expense) | | (9) | | | 51 | |
| Income (loss) from continuing operations | Income (loss) from continuing operations | 2.2 | | | 91.8 | | | (154.8) | | | 231.1 | | Income (loss) from continuing operations | | 57 | | | (50) | |
| Loss from discontinued operations, net of tax | (0.3) | | | (0.9) | | | 0 | | | (1.5) | | |
| Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | | 0 | | | 1 | |
| Net income (loss) | Net income (loss) | 1.9 | | | 90.9 | | | (154.8) | | | 229.6 | | Net income (loss) | | 57 | | | (49) | |
| Income attributable to noncontrolling interest | Income attributable to noncontrolling interest | (11.9) | | | 0 | | | (31.2) | | | 0 | | Income attributable to noncontrolling interest | | (16) | | | (3) | |
| Net income (loss) attributable to Cliffs shareholders | Net income (loss) attributable to Cliffs shareholders | $ | (10.0) | | | $ | 90.9 | | | $ | (186.0) | | | $ | 229.6 | | Net income (loss) attributable to Cliffs shareholders | | $ | 41 | | | $ | (52) | |
| | Earnings (loss) per common share attributable to Cliffs shareholders - basic | Earnings (loss) per common share attributable to Cliffs shareholders - basic | | Earnings (loss) per common share attributable to Cliffs shareholders - basic | | |
| Continuing operations | Continuing operations | $ | (0.02) | | | $ | 0.34 | | | $ | (0.51) | | | $ | 0.83 | | Continuing operations | | $ | 0.08 | | | $ | (0.18) | |
| Discontinued operations | Discontinued operations | 0 | | | 0 | | | 0 | | | (0.01) | | Discontinued operations | | 0 | | | 0 | |
| | $ | (0.02) | | | $ | 0.34 | | | $ | (0.51) | | | $ | 0.82 | | | | $ | 0.08 | | | $ | (0.18) | |
| Earnings (loss) per common share attributable to Cliffs shareholders - diluted | Earnings (loss) per common share attributable to Cliffs shareholders - diluted | | | | | | | | Earnings (loss) per common share attributable to Cliffs shareholders - diluted | | | | |
| Continuing operations | Continuing operations | $ | (0.02) | | | $ | 0.33 | | | $ | (0.51) | | | $ | 0.80 | | Continuing operations | | $ | 0.07 | | | $ | (0.18) | |
| Discontinued operations | Discontinued operations | 0 | | | 0 | | | 0 | | | 0 | | Discontinued operations | | 0 | | | 0 | |
| | $ | (0.02) | | | $ | 0.33 | | | $ | (0.51) | | | $ | 0.80 | | | | $ | 0.07 | | | $ | (0.18) | |
| Average number of shares (in thousands) | | | | | | | | |
| Basic | 399,399 | | | 269,960 | | | 365,245 | | | 278,418 | | |
| Diluted | 399,399 | | | 276,578 | | | 365,245 | | | 287,755 | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Statements of Unaudited Condensed Consolidated Comprehensive Income (Loss)
Cleveland-Cliffs Inc. and Subsidiaries
| | | (In Millions) | | | | (In Millions) |
| | Three Months Ended
September 30, | | | Nine Months Ended
September 30, | | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 |
| Net income (loss) | Net income (loss) | $ | 1.9 | | | $ | 90.9 | | | $ | (154.8) | | | $ | 229.6 | | Net income (loss) | | $ | 57 | | | $ | (49) | |
| Other comprehensive income: | | |
| Other comprehensive income (loss): | | Other comprehensive income (loss): | | |
| Changes in pension and OPEB, net of tax | Changes in pension and OPEB, net of tax | 6.6 | | | 5.8 | | | 18.2 | | | 17.3 | | Changes in pension and OPEB, net of tax | | 7 | | | 6 | |
| Changes in foreign currency translation | Changes in foreign currency translation | 1.6 | | | 0 | | | 1.4 | | | 0 | | Changes in foreign currency translation | | (1) | | | (1) | |
| Changes in derivative financial instruments, net of tax | Changes in derivative financial instruments, net of tax | 15.7 | | | 0.4 | | | 17.2 | | | 1.0 | | Changes in derivative financial instruments, net of tax | | 7 | | | (3) | |
| Total other comprehensive income | Total other comprehensive income | 23.9 | | | 6.2 | | | 36.8 | | | 18.3 | | Total other comprehensive income | | 13 | | | 2 | |
| Comprehensive income (loss) | Comprehensive income (loss) | 25.8 | | | 97.1 | | | (118.0) | | | 247.9 | | Comprehensive income (loss) | | 70 | | | (47) | |
| Comprehensive income attributable to noncontrolling interests | Comprehensive income attributable to noncontrolling interests | (11.9) | | | 0 | | | (31.2) | | | 0 | | Comprehensive income attributable to noncontrolling interests | | (16) | | | (3) | |
| Comprehensive income (loss) attributable to Cliffs shareholders | Comprehensive income (loss) attributable to Cliffs shareholders | $ | 13.9 | | | $ | 97.1 | | | $ | (149.2) | | | $ | 247.9 | | Comprehensive income (loss) attributable to Cliffs shareholders | | $ | 54 | | | $ | (50) | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Statements of Unaudited Condensed Consolidated Cash Flows
Cleveland-Cliffs Inc. and Subsidiaries
| | | (In Millions) | | | (In Millions) |
| | Nine Months Ended
September 30, | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
| OPERATING ACTIVITIES | OPERATING ACTIVITIES | | | | OPERATING ACTIVITIES | | | |
| Net income (loss) | Net income (loss) | $ | (154.8) | | | $ | 229.6 | | Net income (loss) | $ | 57 | | | $ | (49) | |
| Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: | | |
| Adjustments to reconcile net income (loss) to net cash used by operating activities: | | Adjustments to reconcile net income (loss) to net cash used by operating activities: | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | 183.9 | | | 63.1 | | Depreciation, depletion and amortization | 217 | | | 35 | |
| Amortization of inventory step-up | Amortization of inventory step-up | 74.0 | | | 0 | | Amortization of inventory step-up | 81 | | | 23 | |
| Changes in deferred revenue | | Changes in deferred revenue | (3) | | | (48) | |
| Deferred income taxes | Deferred income taxes | (89.9) | | | 22.7 | | Deferred income taxes | 10 | | | (48) | |
| Loss (gain) on extinguishment of debt | Loss (gain) on extinguishment of debt | (132.6) | | | 18.2 | | Loss (gain) on extinguishment of debt | 66 | | | (3) | |
| Loss (gain) on derivatives | (19.1) | | | 48.4 | | |
| Other | Other | (13.0) | | | 49.4 | | Other | (2) | | | 51 | |
| Changes in operating assets and liabilities, net of business combination: | Changes in operating assets and liabilities, net of business combination: | | Changes in operating assets and liabilities, net of business combination: | |
| Receivables and other assets | Receivables and other assets | 259.8 | | | 174.1 | | Receivables and other assets | (480) | | | 254 | |
| Inventories | Inventories | (4.2) | | | (147.0) | | Inventories | (172) | | | (267) | |
| | Pension and OPEB payments and contributions | | Pension and OPEB payments and contributions | (175) | | | (13) | |
| Payables, accrued expenses and other liabilities | Payables, accrued expenses and other liabilities | (157.3) | | | (70.4) | | Payables, accrued expenses and other liabilities | 22 | | | (99) | |
| Net cash provided (used) by operating activities | (53.2) | | | 388.1 | | |
| Net cash used by operating activities | | Net cash used by operating activities | (379) | | | (164) | |
| INVESTING ACTIVITIES | INVESTING ACTIVITIES | | INVESTING ACTIVITIES | |
| Purchase of property, plant and equipment | Purchase of property, plant and equipment | (378.9) | | | (460.7) | | Purchase of property, plant and equipment | (136) | | | (138) | |
| Acquisition of AK Steel, net of cash acquired | Acquisition of AK Steel, net of cash acquired | (869.3) | | | 0 | | Acquisition of AK Steel, net of cash acquired | 0 | | | (869) | |
| Other investing activities | Other investing activities | 8.0 | | | 11.2 | | Other investing activities | 1 | | | 0 | |
| Net cash used by investing activities | Net cash used by investing activities | (1,240.2) | | | (449.5) | | Net cash used by investing activities | (135) | | | (1,007) | |
| FINANCING ACTIVITIES | FINANCING ACTIVITIES | | FINANCING ACTIVITIES | |
| Repurchase of common shares | 0 | | | (252.9) | | |
| Proceeds from issuance of common shares | | Proceeds from issuance of common shares | 322 | | | 0 | |
| Proceeds from issuance of debt | Proceeds from issuance of debt | 1,762.9 | | | 720.9 | | Proceeds from issuance of debt | 1,000 | | | 716 | |
| Debt issuance costs | Debt issuance costs | (57.5) | | | (6.8) | | Debt issuance costs | (16) | | | (44) | |
| Repurchase of debt | (999.5) | | | (729.3) | | |
| Repayments of debt | | Repayments of debt | (902) | | | (430) | |
| Borrowings under credit facilities | Borrowings under credit facilities | 800.0 | | | 0 | | Borrowings under credit facilities | 1,158 | | | 800 | |
| Repayments under credit facilities | Repayments under credit facilities | (400.0) | | | 0 | | Repayments under credit facilities | (1,010) | | | 0 | |
| Dividends paid | (40.8) | | | (45.1) | | |
| | SunCoke Middletown distributions to noncontrolling interest owners | (47.6) | | | 0 | | |
| Other financing activities | Other financing activities | (23.3) | | | (53.7) | | Other financing activities | (40) | | | (37) | |
| Net cash provided (used) by financing activities | 994.2 | | | (366.9) | | |
| Decrease in cash and cash equivalents, including cash classified within other current assets related to discontinued operations | (299.2) | | | (428.3) | | |
| Less: decrease in cash and cash equivalents from discontinued operations, classified within other current assets | (2.6) | | | (4.4) | | |
| Net cash provided by financing activities | | Net cash provided by financing activities | 512 | | | 1,005 | |
| Net decrease in cash and cash equivalents | Net decrease in cash and cash equivalents | (296.6) | | | (423.9) | | Net decrease in cash and cash equivalents | (2) | | | (166) | |
| Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 352.6 | | | 823.2 | | Cash and cash equivalents at beginning of period | 112 | | | 353 | |
| Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 56.0 | | | $ | 399.3 | | Cash and cash equivalents at end of period | $ | 110 | | | $ | 187 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Statements of Unaudited Condensed Consolidated Changes in Equity
Cleveland-Cliffs Inc. and Subsidiaries
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | | | | | | | | | |
| Number
of
Common
Shares Outstanding | | Par Value of
Common
Shares Issued | | Capital in
Excess of
Par Value
of Shares | | Retained
Deficit | | Common
Shares
in
Treasury | | AOCI | | Non-controlling Interests | | Total |
| December 31, 2019 | 270.1 | | | $ | 37.7 | | | $ | 3,872.1 | | | $ | (2,842.4) | | | $ | (390.7) | | | $ | (318.8) | | | $ | 0 | | | $ | 357.9 | |
| Comprehensive income (loss) | — | | | — | | | — | | | (52.1) | | | — | | | 1.7 | | | 3.5 | | | (46.9) | |
| Stock and other incentive plans | 1.7 | | | — | | | (23.6) | | | — | | | 25.7 | | | — | | | — | | | 2.1 | |
| Acquisition of AK Steel | 126.8 | | | 15.9 | | | 601.7 | | | — | | | — | | | — | | | 329.8 | | | 947.4 | |
| Common share dividends ($0.06 per share) | — | | | — | | | — | | | (24.0) | | | — | | | — | | | — | | | (24.0) | |
| Net distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (5.5) | | | (5.5) | |
| March 31, 2020 | 398.6 | | | $ | 53.6 | | | $ | 4,450.2 | | | $ | (2,918.5) | | | $ | (365.0) | | | $ | (317.1) | | | $ | 327.8 | | | $ | 1,231.0 | |
| Comprehensive income (loss) | — | | | — | | | — | | | (123.9) | | | — | | | 11.2 | | | 15.8 | | | (96.9) | |
| Stock and other incentive plans | 0.6 | | | — | | | (6.6) | | | — | | | 9.1 | | | — | | | — | | | 2.5 | |
| Common share dividends | — | | | — | | | — | | | (0.1) | | | — | | | — | | | — | | | (0.1) | |
| Net distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (18.3) | | | (18.3) | |
| June 30, 2020 | 399.2 | | | $ | 53.6 | | | $ | 4,443.6 | | | $ | (3,042.5) | | | $ | (355.9) | | | $ | (305.9) | | | $ | 325.3 | | | $ | 1,118.2 | |
| Comprehensive income (loss) | — | | | — | | | — | | | (10.0) | | | — | | | 23.9 | | | 11.9 | | | 25.8 | |
| Stock and other incentive plans | 0 | | | — | | | 2.7 | | | — | | | 1.1 | | | — | | | — | | | 3.8 | |
| Net distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (24.1) | | | (24.1) | |
| September 30, 2020 | 399.2 | | | $ | 53.6 | | | $ | 4,446.3 | | | $ | (3,052.5) | | | $ | (354.8) | | | $ | (282.0) | | | $ | 313.1 | | | $ | 1,123.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| Number
of
Common
Shares Outstanding | | Par Value of
Common
Shares Issued | | Capital in
Excess of
Par Value
of Shares | | Retained
Deficit | | Common
Shares
in
Treasury | | AOCI | | Non-controlling Interests | | Total |
| December 31, 2020 | 478 | | | $ | 63 | | | $ | 5,431 | | | $ | (2,989) | | | $ | (354) | | | $ | (133) | | | $ | 323 | | | $ | 2,341 | |
| Comprehensive income | — | | | — | | | — | | | 41 | | | — | | | 13 | | | 16 | | | 70 | |
| Issuance of common stock | 20 | | | 0 | | | 78 | | | — | | | 244 | | | — | | | — | | | 322 | |
| Stock and other incentive plans | 1 | | | — | | | (22) | | | — | | | 17 | | | — | | | — | | | (5) | |
| Acquisition of ArcelorMittal USA - Measurement period adjustments | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
| Net distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (8) | | | (8) | |
| March 31, 2021 | 499 | | | $ | 63 | | | $ | 5,487 | | | $ | (2,948) | | | $ | (93) | | | $ | (120) | | | $ | 330 | | | $ | 2,719 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | | | | | | | | | |
| Number of
Common
Shares Outstanding | | Par Value of Common
Shares Issued | | Capital in
Excess of
Par Value
of Shares | | Retained
Deficit | | Common
Shares
in
Treasury | | AOCI | | | | Total |
| December 31, 2018 | 292.6 | | | $ | 37.7 | | | $ | 3,916.7 | | | $ | (3,060.2) | | | $ | (186.1) | | | $ | (283.9) | | | | | $ | 424.2 | |
| Comprehensive income (loss) | — | | | — | | | — | | | (22.1) | | | — | | | 8.4 | | | | | (13.7) | |
| Stock and other incentive plans | 1.7 | | | — | | | (56.5) | | | — | | | 46.5 | | | — | | | | | (10.0) | |
| Common share repurchases | (11.5) | | | — | | | — | | | — | | | (124.3) | | | — | | | | | (124.3) | |
| Common share dividends ($0.05 per share) | — | | | — | | | — | | | (14.5) | | | — | | | — | | | | | (14.5) | |
| March 31, 2019 | 282.8 | | | $ | 37.7 | | | $ | 3,860.2 | | | $ | (3,096.8) | | | $ | (263.9) | | | $ | (275.5) | | | | | $ | 261.7 | |
| Comprehensive income | — | | | — | | | — | | | 160.8 | | | — | | | 3.7 | | | | | 164.5 | |
| Stock and other incentive plans | 0.1 | | | — | | | 3.4 | | | — | | | 1.2 | | | — | | | | | 4.6 | |
| Common share repurchases | (12.9) | | | — | | | — | | | — | | | (128.6) | | | — | | | | | (128.6) | |
| Common share dividends ($0.06 per share) | — | | | — | | | — | | | (16.6) | | | — | | | — | | | | | (16.6) | |
| June 30, 2019 | 270.0 | | | $ | 37.7 | | | $ | 3,863.6 | | | $ | (2,952.6) | | | $ | (391.3) | | | $ | (271.8) | | | | | $ | 285.6 | |
| Comprehensive income | — | | | — | | | — | | | 90.9 | | | — | | | 6.2 | | | | | 97.1 | |
| Stock and other incentive plans | 0.1 | | | — | | | 4.1 | | | — | | | 0.4 | | | — | | | | | 4.5 | |
| Common share dividends ($0.10 per share) | — | | | — | | | — | | | (27.3) | | | — | | | — | | | | | (27.3) | |
| September 30, 2019 | 270.1 | | | $ | 37.7 | | | $ | 3,867.7 | | | $ | (2,889.0) | | | $ | (390.9) | | | $ | (265.6) | | | | | $ | 359.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| Number
of
Common
Shares Outstanding | | Par Value of Common
Shares Issued | | Capital in
Excess of
Par Value
of Shares | | Retained
Deficit | | Common
Shares
in
Treasury | | AOCI | | Non-controlling Interests | | Total |
| December 31, 2019 | 271 | | | $ | 37 | | | $ | 3,873 | | | $ | (2,842) | | | $ | (391) | | | $ | (319) | | | $ | 0 | | | $ | 358 | |
| Comprehensive income (loss) | — | | | — | | | — | | | (52) | | | — | | | 2 | | | 3 | | | (47) | |
| Stock and other incentive plans | 1 | | | — | | | (24) | | | — | | | 26 | | | — | | | — | | | 2 | |
| Acquisition of AK Steel | 127 | | | 16 | | | 602 | | | — | | | — | | | — | | | 330 | | | 948 | |
| Common stock dividends ($0.06 per share) | — | | | — | | | — | | | (24) | | | — | | | — | | | — | | | (24) | |
| Net distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | |
| March 31, 2020 | 399 | | | $ | 53 | | | $ | 4,451 | | | $ | (2,918) | | | $ | (365) | | | $ | (317) | | | $ | 327 | | | $ | 1,231 | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
Cleveland-Cliffs Inc. and Subsidiaries
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business, Consolidation and Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations, comprehensive income (loss), cash flows and changes in equity for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. The results of operations for the three and nine months ended September 30, 2020March 31, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 20202021 or any other future period. Due to the acquisition of AK Steel, certain balances have become material and are no longer being condensed in our Statements of Unaudited Condensed Consolidated Financial Position, such as balances for Right-of-use asset, operating lease and Operating lease liability, non-current. As a result, certain prior period amounts have been reclassified to conform with the current year presentation. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2020 and June 30, 2020.
Proposed acquisition of substantially all of the operations of ArcelorMittal USA
On September 28, 2020, we entered into a Transaction Agreement with ArcelorMittal S.A., pursuant to which Cliffs will acquire substantially all of the operations of ArcelorMittal USA for an aggregate purchase price of approximately $1.4 billion, consisting of (i) $505 million in cash, (ii) 78,186,671 of our common shares, par value $0.125 per share, and (iii) 583,273 shares of a new series of our Serial Preferred Stock, Class B, without par value, to be designated as the “Series B Participating Redeemable Preferred Stock” at closing. The cash portion of the purchase price is subject to customary working capital and purchase price adjustments.Business Operations
We expect to complete the Transaction in the fourth quarter of 2020. Completion of the Transaction is subject to various customary closing conditions, including the receipt of required regulatory approvals in identified jurisdictions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Act, and it is possible that factors outside of our control could result in the Transaction being completed at a later time or not at all. The Transaction Agreement also contains certain termination rights that may be exercised by either us or ArcelorMittal S.A. We plan to complete the Transaction as soon as reasonably practicable following the satisfaction or waiver of all applicable conditions.
Acquisition of AK Steel
On March 13, 2020, we consummated the Merger, pursuant to which, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub was merged with and into AK Steel, with AK Steel surviving the Merger as a wholly owned subsidiary of Cliffs. Refer to NOTE 3 - ACQUISITION OF AK STEEL for further information.
AK Steel is a leading North American producer of flat-rolled carbon, stainless and electrical steel products, primarily for the automotive, infrastructure and manufacturing markets. The acquisition of AK Steel has transformed us into aare vertically integrated producerfrom the mining of value-added iron ore and coal; to production of metallics and coke; through iron making, steelmaking, rolling and finishing; and to downstream tubular components, stamping and tooling. We have the unique advantage as a steel products.
COVID-19
In response to the COVID-19 pandemic, we made various operational changes to adjust to the demandproducer of being fully or partially self-sufficient with our production of raw materials for our products. Although steel andmanufacturing, which includes iron ore production have been considered “essential” bypellets, HBI and coking coal.
We are organized into four operating segments based on differentiated products, Steelmaking, Tubular, Tooling and Stamping, and European Operations. We primarily operate through one reportable segment – the states in which we operate, certain of our facilities and construction activities were temporarily idled during the second quarter of 2020. Most of these temporarily idled facilities were restarted during the second quarter, and the remaining operations were restarted during the third quarter.
Basis of Consolidation
The unaudited condensed consolidated financial statements consolidate our accounts and the accounts of our wholly owned subsidiaries, all subsidiaries in which we have a controlling interest and two variable interest entitiesVIEs for which we are the primary beneficiary. All intercompany transactions and balances are eliminated upon consolidation.
Reportable Segments
The acquisition of AK Steel has transformed us into a vertically integrated producer of value-added iron ore and steel products and we are organized according to our differentiated products in two reportable segments - the Steel and Manufacturing segment and the Mining and Pelletizing segment. Our new Steel and Manufacturing segment includes the assets acquired through the acquisition of AK Steel and our previously reported Metallics segment, and our Mining and Pelletizing segment includes our three active operating mines and our indefinitely idled mine.
Investments in Affiliates
We have investments in several businesses accounted for using the equity method of accounting. We review an investment for impairment when circumstances indicate that a loss in value below its carrying amount is other than temporary. Investees
As of March 31, 2021 and equity ownership percentages are presented below:
| | | | | | | | | | | | | | |
Investee | | Segment Reported Within | | Equity Ownership Percentage |
Combined Metals of Chicago, LLC | | Steel and Manufacturing | | 40.0% |
Hibbing Taconite Company | | Mining and Pelletizing | | 23.0% |
Spartan Steel Coating, LLC | | Steel and Manufacturing | | 48.0% |
We recorded a basis difference for Spartan SteelDecember 31, 2020, our investment in affiliates of $32.5$116 million as part of our acquisition of AK Steel. The basis difference relates to the excess of the fair value over the investee's carrying amount of property, plant and equipment and will be amortized over the remaining useful lives of the underlying$105 million, respectively, was classified in Other non-current assets.
Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC, which were updated and can be found in the unaudited condensed consolidated financial statements included in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2020 and June 30, 2020 filed with the SEC. There have been no material changes in our significant accounting policies and estimates from those disclosed therein.
Recent Accounting Pronouncements
Issued and Adopted
On March 2, 2020, the SEC issued a final rule that amended the disclosure requirements related to certain registered securities under SEC Regulation S-X, Rule 3-10, which required separate financial statements for subsidiary issuers and guarantors of registered debt securities unless certain exceptions are met. The final rule replaces the previous requirement under Rule 3-10 to provide condensed consolidating financial information in the registrant’s financial statements with a requirement to provide alternative financial disclosures (which include summarized financial information of the parent and any issuers and guarantors, as well as other qualitative disclosures) in either the registrant’s Management's Discussion and Analysis of Financial Condition and Results of Operations or its financial statements, in addition to other simplifications. The final rule is effective for filings on or after January 4, 2021, and early adoption is permitted. We elected to early adopt this disclosure update for the period ended March 31, 2020. As a result, we have excluded the footnote disclosures required under the previous Rule 3-10, and applied the final rule by including the summarized financial information and qualitative disclosures in Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q and Exhibit 22.1, hereto.
Recent Accounting Pronouncements
Issued and Not Effective
In August 2020, the Financial Accounting Standards BoardFASB issued Accounting Standards Update No.ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This update requires certain convertible instruments to be accounted for as a single liability measured at its amortized cost. Additionally, the update requires the use of the "if-converted" method, removing the treasury stock method, when calculating diluted shares. The two methods of adoption are the full and modified retrospective approaches. We expect to utilize the modified retrospective approach. Using this approach, the guidance shall be applied to transactions outstanding as of the beginning of the fiscal year in which the amendment is adopted. The final rule is effective for fiscal years beginning after December 15, 2021. Early adoption is permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are continuing to evaluateexpect the impactadoption of this update to decrease our financials and woulddiluted EPS unless the additional shares under the if-converted method are anti-dilutive. We expect to adopt the update at the required adoption date of January 1, 2022.
NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
Revenues
The following table represents our consolidated Revenues (excluding intercompany revenues) by market:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | |
| Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Steel and Manufacturing: | | | | | | | |
| Automotive | $ | 920.0 | | | $ | 0 | | | $ | 1,404.0 | | | $ | 0 | |
| Infrastructure and manufacturing | 198.8 | | | 0 | | | 446.2 | | | 0 | |
| Distributors and converters | 142.9 | | | 0 | | | 344.1 | | | 0 | |
| Total Steel and Manufacturing | 1,261.7 | | | 0 | | | 2,194.3 | | | 0 | |
| Mining and Pelletizing: | | | | | | | |
Steel producers1 | 384.3 | | | 555.6 | | | 903.5 | | | 1,455.8 | |
| Total revenues | $ | 1,646.0 | | | $ | 555.6 | | | $ | 3,097.8 | | | $ | 1,455.8 | |
| | | | | | | |
1 Includes Realization of deferred revenue of $34.6 million for the nine months ended September 30, 2020. | | | | | | | |
The following table represents our consolidated Revenues (excluding intercompany revenues) by product line:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | |
| Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Steel and Manufacturing: | | | | | | | |
| Carbon steel | $ | 821.2 | | | $ | 0 | | | $ | 1,391.6 | | | $ | 0 | |
| Stainless and electrical steel | 303.2 | | | 0 | | | 585.1 | | | 0 | |
| Tubular products, components and other | 137.3 | | | 0 | | | 217.6 | | | 0 | |
| Total Steel and Manufacturing | 1,261.7 | | | 0 | | | 2,194.3 | | | 0 | |
| Mining and Pelletizing: | | | | | | | |
Iron ore1 | 357.1 | | | 515.0 | | | 838.1 | | | 1,357.8 | |
| Freight | 27.2 | | | 40.6 | | | 65.4 | | | 98.0 | |
| Total Mining and Pelletizing | 384.3 | | | 555.6 | | | 903.5 | | | 1,455.8 | |
| Total revenues | $ | 1,646.0 | | | $ | 555.6 | | | $ | 3,097.8 | | | $ | 1,455.8 | |
| | | | | | | |
1 Includes Realization of deferred revenue of $34.6 million for the nine months ended September 30, 2020. | | | | | | | |
We sell to customers located primarily in the United States and to foreign customers, primarily in Canada, Mexico and Western Europe. Net revenues to customers located outside the United States were $265.0 million and $487.7 million for the three and nine months ended September 30, 2020, respectively, and $138.9 million and $318.3 million for the three and nine months ended September 30, 2019, respectively.
Allowance for Credit Losses
The following is a roll forward of our allowance for credit losses associated with Accounts receivable, net:
| | | (In Millions) | | | (In Millions) |
| | 2020 | | 2019 | | 2021 | | 2020 |
| Allowance for credit losses as of January 1 | Allowance for credit losses as of January 1 | $ | 0 | | | $ | 0 | | Allowance for credit losses as of January 1 | $ | (5) | | | $ | 0 | |
| Increase in allowance | Increase in allowance | 5.2 | | | 0 | | Increase in allowance | (1) | | | (1) | |
| Allowance for credit losses as of September 30 | $ | 5.2 | | | $ | 0 | | |
| Allowance for credit losses as of March 31 | | Allowance for credit losses as of March 31 | $ | (6) | | | $ | (1) | |
Inventories
The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position:
| | | | | | | | | | | |
| (In Millions) | | |
| September 30,
2020 | | December 31,
2019 |
| Product inventories | | | |
| Finished and semi-finished goods | $ | 940.5 | | | $ | 114.1 | |
| Work-in-process | 78.2 | | | 68.7 | |
| Raw materials | 382.3 | | | 9.4 | |
| Total product inventories | 1,401.0 | | | 192.2 | |
| Manufacturing supplies and critical spares | 394.1 | | | 125.2 | |
| Inventories | $ | 1,795.1 | | | $ | 317.4 | |
Deferred Revenue
The table below summarizes our deferred revenue balances:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | |
| Deferred Revenue (Current) | | | | Deferred Revenue (Long-Term) | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Opening balance as of January 1 | $ | 22.1 | | | $ | 21.0 | | | $ | 25.7 | | | $ | 38.5 | |
| Net decrease | (19.8) | | | (2.7) | | | (25.7) | | | (8.5) | |
| Closing balance as of September 30 | $ | 2.3 | | | $ | 18.3 | | | $ | 0 | | | $ | 30.0 | |
Prior to the Merger, our iron ore pellet sales agreement with Severstal, subsequently assumed by AK Steel, required supplemental payments to be paid by the customer during the period 2009 through 2013. Installment amounts received under this arrangement in excess of sales were classified as deferred revenue in the Statements of Consolidated Financial Position upon receipt of payment and the revenue was recognized over the term of the supply agreement, which had extended until 2022, in equal annual installments. As a result of the termination of that iron ore pellet sales agreement, we realized $34.6 million of deferred revenue, which was recognized within Realization of deferred revenue in the Statements of Unaudited Condensed Consolidated Operations, during the nine months ended September 30, 2020.
We have certain other sales agreements that require customers to pay in advance. Payments received pursuant to these agreements prior to revenue being recognized are recorded as deferred revenue in Other current liabilities.
Accrued Liabilities
The following table presents the detail of our Accrued liabilities in the Statements of Unaudited Condensed Consolidated Financial Position:
| | | | | | | | | | | |
| (In Millions) | | |
| September 30,
2020 | | December 31, 2019 |
| Accrued employment costs | $ | 146.6 | | | $ | 61.7 | |
| Accrued interest | 81.8 | | | 29.0 | |
| Accrued dividends | 1.0 | | | 17.8 | |
| Other | 50.0 | | | 17.8 | |
| Accrued liabilities | $ | 279.4 | | | $ | 126.3 | |
| | | | | | | | | | | |
| (In Millions) |
| March 31,
2021 | | December 31,
2020 |
| Product inventories | | | |
| Finished and semi-finished goods | $ | 2,296 | | | $ | 2,125 | |
| Raw materials | 1,372 | | | 1,431 | |
| Total product inventories | 3,668 | | | 3,556 | |
| Manufacturing supplies and critical spares | 264 | | | 272 | |
| Inventories | $ | 3,932 | | | $ | 3,828 | |
Cash Flow Information
A reconciliation of capital additions to cash paid for capital expenditures is as follows:
| | | (In Millions) | | | (In Millions) |
| | Nine Months Ended
September 30, | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
| Capital additions | Capital additions | $ | 333.0 | | | $ | 505.6 | | Capital additions | $ | 162 | | | $ | 158 | |
| Less: | Less: | | Less: | |
| Non-cash accruals | Non-cash accruals | (88.4) | | | 26.1 | | Non-cash accruals | 23 | | | (10) | |
| Right-of-use assets - finance leases | Right-of-use assets - finance leases | 42.5 | | | 29.3 | | Right-of-use assets - finance leases | 3 | | | 30 | |
| Grants | 0 | | | (10.5) | | |
| | Cash paid for capital expenditures including deposits | Cash paid for capital expenditures including deposits | $ | 378.9 | | | $ | 460.7 | | Cash paid for capital expenditures including deposits | $ | 136 | | | $ | 138 | |
Cash payments (receipts) for income taxes and interest are as follows:
| | | | | | | | | | | |
| (In Millions) | | |
| Nine Months Ended
September 30, | | |
| 2020 | | 2019 |
| Taxes paid on income | $ | 3.2 | | | $ | 0.1 | |
| Income tax refunds | (119.3) | | | (117.9) | |
Interest paid on debt obligations net of capitalized interest1 | 106.0 | | | 71.9 | |
| | | |
1 Capitalized interest was $38.0 million and $16.9 million for the nine months ended September 30, 2020 and 2019, respectively. | | | |
Non-Cash Investing and Financing Activities
| | | | | | | | | | | |
| (In Millions) | | |
| Nine Months Ended
September 30, | | |
| 2020 | | 2019 |
| Fair value of common shares issued for consideration for business combination | $ | 617.6 | | | $ | 0 | |
| Fair value of equity awards assumed from AK Steel acquisition | 3.9 | | | 0 | |
| | | | | | | | | | | |
| (In Millions) |
| Three Months Ended
March 31, |
| 2021 | | 2020 |
| Taxes paid on income | $ | 3 | | | $ | 0 | |
| Income tax refunds | (14) | | | (60) | |
Interest paid on debt obligations net of capitalized interest1 | 75 | | | 30 | |
| | | |
1 Capitalized interest was $1 million and $10 million for the three months ended March 31, 2021 and 2020, respectively. |
NOTE 3 - ACQUISITION OF AK STEELACQUISITIONS
Overview
On March 13,In 2020, pursuant to the Merger Agreement, we completed the acquisition ofacquired two major steelmakers, AK Steel in which we were the acquirer. As a result of the Merger, each share ofand ArcelorMittal USA, vertically integrating our legacy iron ore business with steel production. Our fully-integrated portfolio includes custom-made pellets and HBI; flat-rolled carbon steel, stainless, electrical, plate, tinplate and long steel products; and carbon and stainless steel tubing, hot and cold stamping and tooling. The AK Steel common stock issued and outstanding
immediately prior to the effective time of the Merger (other than excluded shares) was converted into the right to receive 0.400 Cliffs common shares and, if applicable, cash in lieu of any fractional Cliffs common shares.
The acquisition combined Cliffs, North America’s largesta producer of iron ore pellets, with AK Steel, a leading producer of innovative flat-rolled carbon, stainless and electrical steel products, to create a vertically integrated producer of value-added iron ore and steel products. The AM USA Transaction transformed us into a fully-integrated steel enterprise with the size and scale to expand product offerings and improve through-the cycle margins.
We now have a presence across the entire steel manufacturing process, from mining to pelletizing to the development and production of finished high value steel products. The combination is expected to create significant opportunities to generate additional value from market trends across the entire steel value chain and enable more consistent, predictable performance through normal market cycles. Together, Cliffs and AK Steel have a presence across the entire manufacturing process, from mining to pelletizing
Acquisition of ArcelorMittal USA
Overview
On December 9, 2020, pursuant to the developmentterms of the AM USA Transaction Agreement, we purchased ArcelorMittal USA from ArcelorMittal. In connection with the closing of the AM USA Transaction, as contemplated by the terms of the AM USA Transaction Agreement, ArcelorMittal’s former joint venture partner in Kote and productionTek exercised its put right pursuant to the terms of finished high value steel products, including Next Generation Advanced High Strength Steels for automotivethe Kote and other markets. We expect the combination will generate additional cost synergies, whichTek joint venture agreements. As a result, we have identifiedpurchased all of such joint venture partner’s interests in Kote and already set into motion savings of approximately $150 million, primarily from consolidating corporate functions, reducing duplicative overhead costs, and procurement and energy cost savings, as well as operational and supply chain efficiencies. The combined company is well positioned to provide high-value iron ore and steel solutions to customers primarily across North America.
Total net revenues for AK Steel for the most recent pre-acquisition year ended December 31, 2019 were $6,359.4 million.Tek. Following the acquisition,closing of the operating resultsAM USA Transaction, we own 100% of AK Steel are includedthe interests in our unaudited condensed consolidated financial statementsKote and are reported as partTek.
We incurred acquisition-related costs excluding severance costs of our Steel and Manufacturing segment. For$2 million for the three months ended September 30, 2020, AK Steel generated Revenues of $1,261.7 million and a loss of $30.4 million included within Net income (loss) attributable to Cliffs shareholders, which included $14.6 million and $2.4 million related to amortization of the fair value inventory step-up and severance costs, respectively. For the period subsequent to the acquisition (March 13, 2020 through September 30, 2020), AK Steel generated Revenues of $2,194.3 million and a loss of $292.0 million included within Net income (loss) attributable to Cliffs shareholders, which included $74.0 million and $35.1 million related to amortization of the fair value inventory step-up and severance costs, respectively.
Additionally, we incurred acquisition-related costs in connection with the acquisition of AK Steel, excluding severance costs, of $0.6 million and $25.6 million for the three and nine months endedSeptember 30, 2020, respectively,March 31, 2021, which were recorded in Acquisition-related costs on the Statements of Unaudited Condensed Consolidated Operations.
Refer to NOTE 7 - DEBT AND CREDIT FACILITIES for information regarding debt transactions executed in connection with the Merger.
The MergerAM USA Transaction was accounted for under the acquisition method of accounting for business combinations. The acquisition date fair value of the consideration transferred totaled $1.5 billion. The following tables summarize the consideration paid for AK Steel and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
The fair value of the total purchase consideration was determined as follows:
| | | | | |
| (In Millions) |
Fair value of Cliffs common shares issued for AK Steel outstanding common stock | $ | 617.6990 | |
Fair value of replacement equity awardsSeries B Participating Redeemable Preferred Stock issued | 3.9738 | |
Fair value of AK Steel debtsettlement of a pre-existing relationship | 913.6237 | |
| Cash consideration (subject to customary working capital adjustments) | 635 | |
| Total purchase consideration | $ | 1,535.12,600 | |
The fair value of Cliffs common shares issued for outstanding shares of AK Steel common stock and with respect to Cliffs common shares underlying converted AK Steel equity awards that vested upon completion of the Merger is calculated as follows:
| | | | | |
| (In Millions, Except Per Share Amounts) |
Number of shares of AK Steel common stock issued and outstanding | 316.9 | |
Exchange ratio | 0.400 | |
Number of Cliffs common shares issued to AK Steel stockholders | 126.8 78,186,671 | |
Price per shareClosing price of Cliffs common sharesshare as of December 9, 2020 | $ | 4.8712.66 | |
Fair value of Cliffs common shares issued for AK Steel outstanding common stock(in millions) | $ | 617.6990 | |
The fair value of AK Steel's debt included in the considerationCliffs Series B Participating Redeemable Preferred Stock issued is calculated as follows:
| | | | | |
| Number of Cliffs Series B Participating Redeemable Preferred Stock issued | 583,273 | |
| Redemption price per share as of December 9, 2020 | $ | 1,266 | |
| Fair value of Cliffs Series B Participating Redeemable Preferred Stock issued (in millions) | $ | 738 | |
The fair value of the estimated cash consideration is comprised of the following:
| | | | | |
| (In Millions) |
Credit FacilityCash consideration pursuant to the AM USA Transaction Agreement | $ | 590.0505 | |
7.50% Senior Secured Notes due July 2023Cash consideration for purchase of the remaining JV partner's interest of Kote and Tek | 323.6182 | |
Fair value of debt included inEstimated total cash consideration receivable | (52) | |
| Total estimated cash consideration | $ | 913.6635 | |
The cash portion of the purchase price is subject to customary working capital adjustments.
The fair value of the settlement of a pre-existing relationship is comprised of the following:
| | | | | |
| (In Millions) |
| Accounts receivable | $ | 97 | |
| Freestanding derivative asset from customer supply agreement | 140 | |
| Total fair value of settlement of a pre-existing relationship | $ | 237 | |
Valuation Assumption and Preliminary Purchase Price Allocation
We estimated fair values at March 13,December 9, 2020 for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed.assumed in connection with the AM USA Transaction. During the measurement period, we will continue to obtain information to assist in finalizing the fair value of assets acquired and liabilities assumed, which may differ materially from these preliminary estimates. If we determine any measurement period adjustments are material, we will apply those adjustments, including any related impacts to net income, in the reporting period in which the adjustments are determined. We are in the process of conducting a valuation of the assets acquired and liabilities assumed related to the acquisition,AM USA Transaction, most notably, inventories, including manufacturing supplies and critical spares, personal and real property, mineral reserves, leases, investments, deferred taxes, asset retirement obligations pension and OPEB liabilities and intangible assets and liabilities, and the final allocation will be made when completed, including the result of any identified goodwill. Accordingly, the provisional measurements noted below are preliminary and subject to modification in the future.
The preliminary purchase price allocation to assets acquired and liabilities assumed in the MergerAM USA Transaction was:
| | | (In Millions) | | | (In Millions) |
| | Initial Allocation of Consideration | | Measurement Period Adjustments | | Updated Preliminary Allocation | | Initial Allocation of Consideration | | Measurement Period Adjustments | | Updated Allocation |
| Cash and cash equivalents | Cash and cash equivalents | $ | 37.7 | | | $ | 2.0 | | | $ | 39.7 | | Cash and cash equivalents | $ | 35 | | | $ | 0 | | | $ | 35 | |
| Accounts receivable | 666.0 | | | (3.1) | | | 662.9 | | |
| Accounts receivable, net | | Accounts receivable, net | 349 | | | 0 | | | 349 | |
| Inventories | Inventories | 1,562.8 | | | (39.8) | | | 1,523.0 | | Inventories | 2,115 | | | 14 | | | 2,129 | |
| Other current assets | Other current assets | 67.5 | | | (15.4) | | | 52.1 | | Other current assets | 34 | | | (5) | | | 29 | |
| Property, plant and equipment | Property, plant and equipment | 2,184.4 | | | (20.1) | | | 2,164.3 | | Property, plant and equipment | 4,017 | | | 366 | | | 4,383 | |
| Intangible assets | 163.0 | | | (15.0) | | | 148.0 | | |
| Right of use asset, operating leases | 225.9 | | | (16.3) | | | 209.6 | | |
| Other non-current assets | Other non-current assets | 85.9 | | | 26.2 | | | 112.1 | | Other non-current assets | 158 | | | 8 | | | 166 | |
| Accounts payable | Accounts payable | (636.3) | | | (6.1) | | | (642.4) | | Accounts payable | (758) | | | 2 | | | (756) | |
| Accrued liabilities | (222.5) | | | 0.1 | | | (222.4) | | |
| Accrued employment costs | | Accrued employment costs | (271) | | | (3) | | | (274) | |
| Pension and OPEB liabilities, current | | Pension and OPEB liabilities, current | (109) | | | 0 | | | (109) | |
| Other current liabilities | Other current liabilities | (181.8) | | | 6.6 | | | (175.2) | | Other current liabilities | (398) | | | (2) | | | (400) | |
| Long-term debt | (1,179.4) | | | 0 | | | (1,179.4) | | |
| Deferred income taxes | (19.7) | | | (0.2) | | | (19.9) | | |
| Operating lease liability, non-current | (188.1) | | | 12.7 | | | (175.4) | | |
| Intangible liabilities | (140.0) | | | 69.5 | | | (70.5) | | |
| Pension and OPEB liabilities | (873.0) | | | 2.1 | | | (870.9) | | |
| Asset retirement obligations | (13.9) | | | (2.0) | | | (15.9) | | |
| Pension and OPEB liabilities, non-current | | Pension and OPEB liabilities, non-current | (3,195) | | | 0 | | | (3,195) | |
| Other non-current liabilities | Other non-current liabilities | (144.2) | | | (2.3) | | | (146.5) | | Other non-current liabilities | (598) | | | 35 | | | (563) | |
| Noncontrolling interest | | Noncontrolling interest | (13) | | | 1 | | | (12) | |
| Net identifiable assets acquired | Net identifiable assets acquired | 1,394.3 | | | (1.1) | | | 1,393.2 | | Net identifiable assets acquired | 1,366 | | | 416 | | | 1,782 | |
| Goodwill | Goodwill | 141.2 | | | 0.7 | | | 141.9 | | Goodwill | 1,230 | | | (412) | | | 818 | |
| Total net assets acquired | Total net assets acquired | $ | 1,535.5 | | | $ | (0.4) | | | $ | 1,535.1 | | Total net assets acquired | $ | 2,596 | | | $ | 4 | | | $ | 2,600 | |
During the second and third quarter of 2020,period subsequent to the AM USA Transaction, we made certain measurement period adjustments to the acquired assets and liabilities assumed due to clarification of information utilized to determine fair value during the measurement period.
The goodwill resulting from the acquisition of ArcelorMittal USA primarily represents the growth opportunities in the automotive, construction, appliances, infrastructure and machinery and equipment markets, as well as any synergistic benefits to be realized from the AM USA Transaction, and was assigned to our flat steel operations within our Steelmaking segment. Goodwill from the AM USA Transaction is expected to be deductible for U.S. federal income tax purposes.
Acquisition of AK Steel
Overview
On March 13, 2020, pursuant to the AK Steel Merger Agreement, we completed the acquisition of AK Steel, in which we were the acquirer. As a result of the AK Steel Merger, each share of AK Steel common stock issued and outstanding immediately prior to the effective time of the AK Steel Merger (other than excluded shares) was converted into the right to receive 0.400 Cliffs common shares and, if applicable, cash in lieu of any fractional Cliffs common shares.
The AK Steel Merger was accounted for under the acquisition method of accounting for business combinations. The acquisition date fair value of the consideration transferred totaled $1,535 million. The following tables summarize the consideration paid for AK Steel and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
The fair value of the total purchase consideration was determined as follows:
| | | | | |
| (In Millions) |
| Fair value of AK Steel debt | $ | 914 | |
Fair value of Cliffs common shares issued for AK Steel outstanding common stock1 | 618 | |
Other1 | 3 | |
| Total purchase consideration | $ | 1,535 | |
| |
1 Included as non-cash investing activities in Statements of Unaudited Condensed Consolidated Cash Flows for the three months ended March 31, 2020. |
The fair value of Cliffs common shares issued for outstanding shares of AK Steel common stock and with respect to Cliffs common shares underlying converted AK Steel equity awards that vested upon completion of the AK Steel Merger is calculated as follows:
| | | | | |
| (In Millions, Except Per Share Amounts) |
| Number of shares of AK Steel common stock issued and outstanding | 317 | |
| Exchange ratio | 0.400 | |
| Number of Cliffs common shares issued to AK Steel stockholders | 127 | |
| Price per share of Cliffs common shares | $ | 4.87 | |
| Fair value of Cliffs common shares issued for AK Steel outstanding common stock | $ | 618 | |
The fair value of AK Steel's debt included in the consideration is calculated as follows:
| | | | | |
| (In Millions) |
| Credit Facility | $ | 590 | |
| 7.50% Senior Secured Notes due July 2023 | 324 | |
| Fair value of debt included in consideration | $ | 914 | |
Valuation Assumption and Purchase Price Allocation
The allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed in connection with the AK Steel Merger is based on estimated fair values at March 13, 2020, and was finalized during the quarter ended March 31, 2021. The following is a summary of the purchase price allocation to assets acquired and liabilities assumed in the AK Steel Merger:
| | | | | | | | | | | | | | | | | |
| (In Millions) |
| Initial Allocation of Consideration | | Measurement Period Adjustments | | Final Allocation of Consideration as of March 31, 2021 |
| Cash and cash equivalents | $ | 38 | | | $ | 1 | | | $ | 39 | |
| Accounts receivable, net | 666 | | | (2) | | | 664 | |
| Inventories | 1,563 | | | (243) | | | 1,320 | |
| Other current assets | 68 | | | (16) | | | 52 | |
| Property, plant and equipment | 2,184 | | | 90 | | | 2,274 | |
| Deferred income taxes | 0 | | | 69 | | | 69 | |
| Other non-current assets | 475 | | | (4) | | | 471 | |
| Accounts payable | (636) | | | (8) | | | (644) | |
| Accrued employment costs | (94) | | | 1 | | | (93) | |
| Pension and OPEB liabilities, current | (75) | | | (3) | | | (78) | |
| Other current liabilities | (236) | | | 9 | | | (227) | |
| Long-term debt | (1,179) | | | 0 | | | (1,179) | |
| Pension and OPEB liabilities, non-current | (873) | | | 2 | | | (871) | |
| Other non-current liabilities | (507) | | | 72 | | | (435) | |
| Noncontrolling interest | 0 | | | (1) | | | (1) | |
| Net identifiable assets acquired | 1,394 | | | (33) | | | 1,361 | |
| Goodwill | 141 | | | 33 | | | 174 | |
| Total net assets acquired | $ | 1,535 | | | $ | 0 | | | $ | 1,535 | |
During the period subsequent to the AK Steel Merger, we made certain measurement period adjustments to the acquired assets and liabilities assumed due to clarification of $39.8 million resulted in a favorable impact of $0.2 million and $8.0 million, respectively,information utilized to Cost of goods sold fordetermine fair value during the three and nine months ended September 30, 2020.measurement period.
The goodwill resulting from the acquisition of AK Steel was assigned to Precision Partners, our downstream toolingTubular and stamping operations,Tooling and AK Tube, our tubing operations, that are reporting units included in the Steel and Manufacturing segment.Stamping operating segments. Goodwill is calculated as the excess of the purchase price over the net identifiable assets recognized and primarily represents the growth opportunities in lightweightinglight weighting solutions to automotive customers, as well as any synergistic benefits to be realizedrealized. Goodwill from the acquisition of AK Steel. None of the goodwillSteel Merger is not expected be deductible for income tax purposes.
The preliminary purchase price allocated to identifiable intangible assets and liabilities acquired was:
| | | (In Millions) | | Weighted Average Life (In Years) | | (In Millions) | | Weighted Average Life (In Years) |
| Intangible assets: | Intangible assets: | | | | Intangible assets: | | | |
| Customer relationships | Customer relationships | $ | 77.0 | | | 18 | Customer relationships | $ | 77 | | | 18 |
| Developed technology | Developed technology | 60.0 | | | 17 | Developed technology | 60 | | | 17 |
| Trade names and trademarks | Trade names and trademarks | 11.0 | | | 10 | Trade names and trademarks | 11 | | | 10 |
| Total identifiable intangible assets | Total identifiable intangible assets | $ | 148.0 | | | 17 | Total identifiable intangible assets | $ | 148 | | | 17 |
| Intangible liabilities: | Intangible liabilities: | | | Intangible liabilities: | | |
| Above-market supply contracts | Above-market supply contracts | $ | (70.5) | | | 12 | Above-market supply contracts | $ | (71) | | | 12 |
The above-market supply contracts relate to the long-term coke and energy supply agreements with SunCoke Energy, which includes SunCoke Middletown, a consolidated VIE. Refer to NOTE 16 - VARIABLE INTEREST ENTITIES for further information.
Pro Forma Results
The following table provides unaudited pro forma financial information, prepared in accordance with Topic 805, for the three and nine months ended September 30,March 31, 2020, and 2019, as if AK Steel had been acquired as of January 1, 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | |
| Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Revenues | $ | 1,646.0 | | | $ | 1,937.6 | | | $ | 4,265.1 | | | $ | 5,958.7 | |
| Net income (loss) attributable to Cliffs shareholders | (6.0) | | | 84.2 | | | (123.9) | | | 213.3 | |
| | | | | | | | | | | |
| | | | | | | (In Millions) |
| | | | | Three Months Ended
March 31, |
| | | | | | | 2020 |
| Revenues | | | | | | | $ | 1,526 | |
| Net loss attributable to Cliffs shareholders | | | | | | | (17) | |
The unaudited pro forma financial information has been calculated after applying our accounting policies and adjusting the historical results with pro forma adjustments, net of tax, that assume the acquisitionAK Steel Merger occurred on January 1, 2019. Significant pro forma adjustments include the following:
1.The elimination of intercompany revenues between Cliffs and AK Steel of $135.6 million and $394.8$68 million for the three and nine months ended September 30, 2020, respectively, and $153.5 million and $410.8 million for the three and nine months ended September 30, 2019, respectively.March 31, 2020.
2.The 2020 pro forma net lossincome was adjusted to exclude $14.6 million and $74.0$23 million of non-recurring inventory acquisition accounting adjustments incurred during the three and nine months ended September 30, 2020, respectively. The 2019 pro forma net income was adjusted to include $74.0 million of non-recurring inventory acquisition accounting adjustments for the nine months ended September 30, 2019.March 31, 2020.
3.The elimination of nonrecurring transaction costs incurred by Cliffs and AK Steel in connection with the AK Steel Merger of $0.7 million and $29.1$27 million for the three and nine months ended September 30, 2020, respectively.March 31, 2020.
4.Total other pro forma adjustments included expenseincome of $10.0$13 million for the three and nine months ended September 30,March 31, 2020, primarily due to increased interest expense, offset by reduced amortization expense, depreciation expense and pension and OPEB expense. Total other pro forma adjustments for the three and nine months ended September 30, 2019 included expense of $1.1 million and $7.0 million, respectively, primarily due to reduced interest and amortization expense, offset partially by additional depreciation expense and pension and OPEB expense.
5.The income tax impact of pro forma transaction adjustments that affect Net income (loss)loss attributable to Cliffs shareholders at a statutory rate of 24.3% resulted in an income tax benefitexpense of $5.6 million and $2.1$12 million for the three and nine months ended September 30, 2020, respectively, and an income tax benefit of $2.1 million and $4.5 million for the three and nine months ended September 30, 2019, respectively.March 31, 2020.
The unaudited pro forma financial information does not reflect the potential realization of synergies or cost savings, nor does it reflect other costs relating to the integration of the two companies.AK Steel. This unaudited pro forma financial information should not be considered indicative of the results that would have actually occurred if the acquisitionAK Steel Merger had been consummated on January 1, 2019, nor are they indicative of future results.
NOTE 4 - REVENUES
We generate our revenue through product sales, in which shipping terms generally indicate when we have fulfilled our performance obligations and transferred control of products to our customer. Our revenue transactions consist of a single performance obligation to transfer promised goods. Our contracts with customers usually define the mechanism for determining the sales price, which is generally fixed upon transfer of control, but the contracts generally do not impose a specific quantity on either party. Quantities to be delivered to the customer are generally determined at a point near the date of delivery through purchase orders or other written instructions we receive from the customer. Spot market sales are made through purchase orders or other written instructions. We consider our performance obligation to be complete and recognize revenue when control transfers in accordance with shipping terms.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring product. We reduce the amount of revenue recognized for estimated returns and other customer credits, such as discounts and volume rebates, based on the expected value to be realized. Payment terms are consistent with terms standard to the markets we serve. Sales taxes collected from customers are excluded from revenues.
Prior to the AM USA Transaction, we had a supply agreement with ArcelorMittal USA, which included supplemental revenue or refunds based on the HRC price in the year the iron ore was consumed in ArcelorMittal USA's blast furnaces. As control transferred prior to consumption, the supplemental revenue was recorded in
accordance with Topic 815. All sales occurring subsequent to the AM USA Transaction are intercompany and eliminated in consolidation. For the three months ended March 31, 2020, we had a derivative loss of $26 million included within Revenues related to Topic 815 for the supplemental revenue portion of the supply agreement.
The following table represents our Revenues by market:
| | | | | | | | | | | |
| (In Millions) |
| Three Months Ended
March 31, |
| 2021 | | 2020 |
| Steelmaking: | | | |
| Automotive | $ | 1,287 | | | $ | 102 | |
| Infrastructure and manufacturing | 954 | | | 39 | |
| Distributors and converters | 1,248 | | | 52 | |
| Steel producers | 430 | | 144 | |
| Total Steelmaking | 3,919 | | | 337 | |
| Other Businesses: | | | |
| Automotive | 105 | | | 16 | |
| Infrastructure and manufacturing | 10 | | | 4 | |
| Distributors and converters | 15 | | | 2 | |
| Total Other Businesses | 130 | | | 22 | |
| Total revenues | $ | 4,049 | | | $ | 359 | |
| | | |
The following table represents our Revenues by product line:
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars In Millions, Sales Volumes in Thousands) |
| Three Months Ended
March 31, |
| 2021 | | 2020 |
| Revenue | | Volume1 | | Revenue | | Volume1 |
| Steelmaking: | | | | | | | |
| Hot-rolled steel | $ | 895 | | | 1,182 | | | $ | 19 | | | 31 | |
| Cold-rolled steel | 632 | | | 748 | | | 28 | | | 40 | |
| Coated steel | 1,308 | | | 1,369 | | | 90 | | | 99 | |
| Stainless and electrical steel | 363 | | | 167 | | | 56 | | | 27 | |
| Plate steel | 244 | | | 275 | | | 0 | | | 0 | |
| Other steel products | 289 | | | 403 | | | 0 | | | 0 | |
| Iron products | 70 | | | 600 | | | 142 | | | 1,351 | |
| Other | 118 | | | N/A | | 2 | | | N/A |
| Total steelmaking | 3,919 | | | | | 337 | | | |
| Other Businesses: | | | | | | | |
| Other | 130 | | | N/A | | 22 | | | N/A |
| Total revenues | $ | 4,049 | | | | | $ | 359 | | | |
| | | | | | | |
1 All steel product volumes are stated in net tons. Iron product volumes are stated in long tons. |
NOTE 45 - SEGMENT REPORTING
Our Company is aWe are vertically integrated producerfrom the mining of value-added iron ore and coal; to production of metallics and coke; through iron making, steelmaking, rolling, finishing; and to downstream tubing, stamping and tooling. We are organized into 4 operating segments based on our differentiated products - Steelmaking, Tubular, Tooling and Stamping, and European Operations. Our previous Mining and Pelletizing segment is included within the Steelmaking operating segment as iron ore pellets are a primary raw material for our steel products. We have 1 reportable segment - Steelmaking. The operating segment results of our Tubular, Tooling and Stamping, and European Operations that do not constitute reportable segments are combined and disclosed in the Other Businesses category. Our operations are organized and managed in 2 operating segments according to our upstream and downstream operations. Our Steel and ManufacturingSteelmaking segment is a leadingthe largest flat-rolled steel producer of flat-rolled carbon, stainless and electrical steel products,supported by being the largest iron ore pellet producer in North America, primarily forserving the automotive, infrastructure and manufacturing, and distributors and converters markets. Our Steel and Manufacturing segment includes subsidiariesOther Businesses primarily include the operating segments that provide customer solutions with carbon and stainless steel tubing products, advanced-engineered solutions, tool design and build, hot- and cold-stamped steel components, and complex assemblies. Construction of our HBI production plant in Toledo, Ohio, included as part of our Steel and Manufacturing segment, is expected to be completed with production beginning in the fourth quarter of 2020. Our Mining and Pelletizing segment is a major supplier of iron ore pellets to the North American steel industry from our mines and pellet plants located in Michigan and Minnesota. All intercompanyintersegment transactions were eliminated in consolidation.
We evaluate performance on aan operating segment basis, as well as a consolidated basis, based on Adjusted EBITDA, which is a non-GAAP measure. This measure is used by management, investors, lenders and other external users of our financial statements to assess our operating performance and to compare operating performance to other companies in the steel and iron ore industries.industry. 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.
Our results by segment are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions, Except Sales Tons) | | | | | | |
| Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Sales volume (in thousands): | | | | | | | |
| Steel and Manufacturing (net tons) | 1,117 | | | 0 | | | 1,935 | | 0 | |
| | | | | | | |
| Mining and Pelletizing sales (long tons) | 4,907 | | | 5,750 | | | 11,800 | | 13,527 |
| Less: Intercompany sales (long tons) | (1,204) | | | (346) | | | (3,028) | | | (384) | |
| Mining and Pelletizing consolidated sales (long tons) | 3,703 | | | 5,404 | | | 8,772 | | | 13,143 | |
| | | | | | | |
| Revenues: | | | | | | | |
| Steel and Manufacturing net sales to external customers | $ | 1,261.7 | | | $ | 0 | | | $ | 2,194.3 | | | $ | 0 | |
| | | | | | | |
Mining and Pelletizing net sales1 | 520.3 | | | 590.6 | | | 1,238.7 | | | 1,494.8 | |
| Less: Intercompany sales | (136.0) | | | (35.0) | | | (335.2) | | | (39.0) | |
| Mining and Pelletizing net sales to external customers | 384.3 | | | 555.6 | | | 903.5 | | | 1,455.8 | |
| | | | | | | |
| Total revenues | $ | 1,646.0 | | | $ | 555.6 | | | $ | 3,097.8 | | | $ | 1,455.8 | |
| | | | | | | |
| Adjusted EBITDA: | | | | | | | |
| Steel and Manufacturing | $ | 33.3 | | | $ | (2.1) | | | $ | (81.8) | | | $ | (4.0) | |
| Mining and Pelletizing | 145.3 | | | 182.7 | | | 309.5 | | | 510.7 | |
| Corporate and eliminations | (52.3) | | | (36.5) | | | (160.7) | | | (93.0) | |
| Total Adjusted EBITDA | $ | 126.3 | | | $ | 144.1 | | | $ | 67.0 | | | $ | 413.7 | |
| | | | | | | |
1 Includes Realization of deferred revenue of $34.6 million for the nine months ended September 30, 2020. | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | (In Millions) |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Revenues: | | | | | | | |
| Steelmaking | | | | | $ | 3,919 | | | $ | 337 | |
| Other Businesses | | | | | 130 | | | 22 | |
| Total revenues | | | | | $ | 4,049 | | | $ | 359 | |
| | | | | | | |
| Adjusted EBITDA: | | | | | | | |
| Steelmaking | | | | | $ | 537 | | | $ | 44 | |
| Other Businesses | | | | | 11 | | | 2 | |
| Corporate and eliminations | | | | | (35) | | | (23) | |
| Total Adjusted EBITDA | | | | | $ | 513 | | | $ | 23 | |
| | | | | | | |
The following table provides a reconciliation of our consolidated Net income (loss) to total Adjusted EBITDA:
| | | (In Millions) | | | | (In Millions) |
| | Three Months Ended
September 30, | | | Nine Months Ended
September 30, | | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 |
| Net income (loss) | Net income (loss) | $ | 1.9 | | | $ | 90.9 | | | $ | (154.8) | | | $ | 229.6 | | Net income (loss) | | $ | 57 | | | $ | (49) | |
| Less: | Less: | | | | | Less: | | |
| Interest expense, net | Interest expense, net | (68.2) | | | (25.4) | | | (167.9) | | | (76.8) | | Interest expense, net | | (92) | | | (31) | |
| Income tax benefit (expense) | Income tax benefit (expense) | 22.4 | | | (4.8) | | | 98.5 | | | (23.1) | | Income tax benefit (expense) | | (9) | | | 51 | |
| Depreciation, depletion and amortization | Depreciation, depletion and amortization | (72.4) | | | (22.2) | | | (183.9) | | | (63.1) | | Depreciation, depletion and amortization | | (217) | | | (35) | |
| Total EBITDA | $ | 120.1 | | | $ | 143.3 | | | $ | 98.5 | | | $ | 392.6 | | |
| | | | 375 | | | (34) | |
| Less: | Less: | | | | | | | | Less: | | |
EBITDA of noncontrolling interests1 | EBITDA of noncontrolling interests1 | $ | 16.2 | | | $ | 0 | | | $ | 41.3 | | | $ | 0 | | EBITDA of noncontrolling interests1 | | 22 | | | 4 | |
| Gain (loss) on extinguishment of debt | Gain (loss) on extinguishment of debt | 0 | | | 0 | | | 132.6 | | | (18.2) | | Gain (loss) on extinguishment of debt | | (66) | | | 3 | |
| Severance costs | Severance costs | (2.4) | | | 0 | | | (38.3) | | | (1.7) | | Severance costs | | (11) | | | (19) | |
| Acquisition-related costs excluding severance costs | Acquisition-related costs excluding severance costs | (5.1) | | | 0 | | | (30.1) | | | 0 | | Acquisition-related costs excluding severance costs | | (2) | | | (23) | |
| Amortization of inventory step-up | Amortization of inventory step-up | (14.6) | | | 0 | | | (74.0) | | | 0 | | Amortization of inventory step-up | | (81) | | | (23) | |
| Impact of discontinued operations | Impact of discontinued operations | (0.3) | | | (0.8) | | | 0 | | | (1.2) | | Impact of discontinued operations | | 0 | | | 1 | |
| Total Adjusted EBITDA | Total Adjusted EBITDA | $ | 126.3 | | | $ | 144.1 | | | $ | 67.0 | | | $ | 413.7 | | Total Adjusted EBITDA | | $ | 513 | | | $ | 23 | |
| 1 EBITDA of noncontrolling interests includes $11.9 million and $31.2 million for income and $4.3 million and $10.1 million for depreciation, depletion and amortization for the three and nine months ended September 30, 2020, respectively. | | |
1 EBITDA of noncontrolling interests includes $16 million and $3 million for income and $6 million and $1 million for depreciation, depletion and amortization for the three months ended March 31, 2021 and 2020, respectively. | | 1 EBITDA of noncontrolling interests includes $16 million and $3 million for income and $6 million and $1 million for depreciation, depletion and amortization for the three months ended March 31, 2021 and 2020, respectively. |
The following summarizes our assets by segment:
| | | (In Millions) | | | (In Millions) |
| | September 30,
2020 | | December 31,
2019 | | March 31,
2021 | | December 31,
2020 |
| Assets: | Assets: | | | | Assets: | | | |
| Steel and Manufacturing | $ | 6,345.7 | | | $ | 913.6 | | |
| Mining and Pelletizing | 1,643.3 | | | 1,643.1 | | |
| Steelmaking | | Steelmaking | $ | 16,271 | | | $ | 15,849 | |
| Other Businesses | | Other Businesses | 295 | | | 239 | |
| Total segment assets | Total segment assets | 7,989.0 | | | 2,556.7 | | Total segment assets | 16,566 | | | 16,088 | |
| Corporate and Other (including discontinued operations) | 491.9 | | | 947.1 | | |
| Corporate | | Corporate | 649 | | | 683 | |
| Total assets | Total assets | $ | 8,480.9 | | | $ | 3,503.8 | | Total assets | $ | 17,215 | | | $ | 16,771 | |
The following table summarizes our capital additions by segment:
| | | (In Millions) | | | | (In Millions) |
| | Three Months Ended
September 30, | | | Nine Months Ended
September 30, | | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 |
Capital additions1: | Capital additions1: | | | | | | | | Capital additions1: | | | | |
| Steel and Manufacturing | $ | 88.0 | | | $ | 160.5 | | | $ | 266.8 | | | $ | 398.0 | | |
| Mining and Pelletizing | 13.3 | | | 22.1 | | | 64.9 | | | 104.5 | | |
| Corporate and Other | 1.0 | | | 2.1 | | | 1.3 | | | 3.1 | | |
| Steelmaking | | Steelmaking | | $ | 133 | | | $ | 154 | |
| Other Businesses | | Other Businesses | | 11 | | | 3 | |
| Corporate | | Corporate | | 18 | | | 1 | |
| Total capital additions | Total capital additions | $ | 102.3 | | | $ | 184.7 | | | $ | 333.0 | | | $ | 505.6 | | Total capital additions | | $ | 162 | | | $ | 158 | |
| 1 Refer to NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION for additional information. | 1 Refer to NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION for additional information. | | 1 Refer to NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION for additional information. |
NOTE 56 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the carrying value of each of the major classes of our depreciable assets:
| | | (In Millions) | | | (In Millions) |
| | September 30,
2020 | | December 31,
2019 | | March 31,
2021 | | December 31,
2020 |
| Land, land improvements and mineral rights | Land, land improvements and mineral rights | $ | 653.2 | | | $ | 582.2 | | Land, land improvements and mineral rights | $ | 1,241 | | | $ | 1,213 | |
| Buildings | Buildings | 454.4 | | | 157.8 | | Buildings | 1,004 | | | 703 | |
| Steel and Manufacturing equipment | 2,128.0 | | | 42.0 | | |
| Mining and Pelletizing equipment | 1,455.2 | | | 1,413.6 | | |
| Equipment | | Equipment | 7,877 | | | 6,786 | |
| Other | Other | 121.3 | | | 101.5 | | Other | 173 | | | 151 | |
| Construction-in-progress | 1,145.9 | | | 730.3 | | |
| Construction in progress | | Construction in progress | 407 | | | 1,364 | |
Total property, plant and equipment1 | Total property, plant and equipment1 | 5,958.0 | | | 3,027.4 | | Total property, plant and equipment1 | 10,702 | | | 10,217 | |
| Allowance for depreciation and depletion | Allowance for depreciation and depletion | (1,407.3) | | | (1,098.4) | | Allowance for depreciation and depletion | (1,688) | | | (1,474) | |
| Property, plant and equipment, net | Property, plant and equipment, net | $ | 4,550.7 | | | $ | 1,929.0 | | Property, plant and equipment, net | $ | 9,014 | | | $ | 8,743 | |
| 1 Includes right-of-use assets related to finance leases of $97.1 million and $49.0 million as of September 30, 2020 and December 31, 2019, respectively. | | |
1 Includes right-of-use assets related to finance leases of $365 million and $361 million as of March 31, 2021 and December 31, 2020, respectively. | | 1 Includes right-of-use assets related to finance leases of $365 million and $361 million as of March 31, 2021 and December 31, 2020, respectively. |
We recorded capitalized interest into property, plant and equipment of $14.7 million and $38.0 million during the three and nine months ended September 30, 2020, respectively, and $7.0 million and $16.9 million for the three and nine months ended September 30, 2019, respectively.
We recorded depreciation and depletion expense of $71.8$215 million and $182.5$36 million for the three and nine months ended September 30,March 31, 2021 and 2020, respectively, and $22.0 million and $62.5 million for the three and nine months ended September 30, 2019, respectively.
NOTE 67 - GOODWILL AND INTANGIBLE ASSETS AND LIABILITIES
Goodwill
The increasefollowing is a summary of Goodwill by segment:
| | | | | | | | | | | |
| (In Millions) |
| March 31,
2021 | | December 31,
2020 |
| Steelmaking | $ | 820 | | | $ | 1,232 | |
| Other Businesses | 174 | | | 174 | |
| Total goodwill | $ | 994 | | | $ | 1,406 | |
The decrease of $412 million in the balance of Goodwill in our Steelmaking segment as of September 30, 2020,March 31, 2021, compared to December 31, 2019,2020, is due to the preliminary assignmentchange in estimated identified goodwill as a result of $141.9 millionmeasurement period adjustments toGoodwill in 2020 based on the preliminary purchase price allocation for the acquisition of AK Steel. The carrying amount of goodwill relatedArcelorMittal USA. Refer to our Mining and Pelletizing segment was $2.1 million as of both September 30, 2020 and December 31, 2019.NOTE 3 - ACQUISITIONS for further details.
Intangible Assets and Liabilities
The following is a summary of our intangible assets and liabilities:
| | | (In Millions) | | | (In Millions) |
| | Classification1 | | Gross Amount | | Accumulated Amortization | | Net Amount | | March 31, 2021 | | December 31, 2020 |
| As of September 30, 2020 | | | | | | | | |
| Intangible assets: | | |
| | | Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
Intangible assets1: | | Intangible assets1: | | | | | | | | | | | | |
| Customer relationships | Customer relationships | Intangible assets, net | | $ | 77.0 | | | $ | (2.6) | | | $ | 74.4 | | Customer relationships | | $ | 77 | | | $ | (5) | | | $ | 72 | | | $ | 77 | | | $ | (3) | | | $ | 74 | |
| Developed technology | Developed technology | Intangible assets, net | | 60.0 | | | (2.1) | | | 57.9 | | Developed technology | | 60 | | | (4) | | | 56 | | | 60 | | | (3) | | | 57 | |
| Trade names and trademarks | Trade names and trademarks | Intangible assets, net | | 11.0 | | | (0.7) | | | 10.3 | | Trade names and trademarks | | 11 | | | (1) | | | 10 | | | 11 | | | (1) | | | 10 | |
| Mining permits | Mining permits | Intangible assets, net | | 72.2 | | | (24.7) | | | 47.5 | | Mining permits | | 72 | | | (25) | | | 47 | | | 72 | | | (25) | | | 47 | |
| Total intangible assets | Total intangible assets | | $ | 220.2 | | | $ | (30.1) | | | $ | 190.1 | | Total intangible assets | | $ | 220 | | | $ | (35) | | | $ | 185 | | | $ | 220 | | | $ | (32) | | | $ | 188 | |
| Intangible liabilities: | | | | | | | |
Intangible liabilities2: | | Intangible liabilities2: | | | | | | | | | | | | |
| Above-market supply contracts | Above-market supply contracts | Intangible liabilities, net | | $ | (70.5) | | | $ | 4.6 | | | $ | (65.9) | | Above-market supply contracts | | $ | (71) | | | $ | 8 | | | $ | (63) | | | $ | (71) | | | $ | 7 | | | $ | (64) | |
| | As of December 31, 2019 | | |
| Intangible assets: | | |
| Mining permits | Intangible assets, net | | $ | 72.2 | | | $ | (24.1) | | | $ | 48.1 | | |
| 1 Amortization of intangible liabilities related to above-market supply contracts and intangible assets related to mining permits is recognized in Cost of goods sold. Amortization of all other intangible assets is recognized in Selling, general and administrative expenses. | | |
1 Intangible assets are classified as Other non-current assets. Amortization related to mining permits is recognized in Cost of goods sold. Amortization of all other intangible assets is recognized in Selling, general and administrative expenses. | | 1 Intangible assets are classified as Other non-current assets. Amortization related to mining permits is recognized in Cost of goods sold. Amortization of all other intangible assets is recognized in Selling, general and administrative expenses. |
2 Intangible liabilities are classified as Other non-current liabilities. Amortization of all intangible liabilities is recognized in Cost of goods sold. | | 2 Intangible liabilities are classified as Other non-current liabilities. Amortization of all intangible liabilities is recognized in Cost of goods sold. |
Amortization expense related to intangible assets was $2.5$3 million and $6.0$1 million for the three and nine months ended September 30,March 31, 2021 and 2020, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2019, respectively.
Estimated future amortization expense related to intangible assets at September 30, 2020 is as follows:$7 million for the remainder of 2021 and $10 million annually for the years 2022 through 2026.
| | | | | | | | |
| | (In Millions) |
| Years ending December 31, | | |
| 2020 (remaining period of the year) | | $ | 2.5 | |
| 2021 | | 10.0 | |
| 2022 | | 10.0 | |
| 2023 | | 10.0 | |
| 2024 | | 10.0 | |
| 2025 | | 10.0 | |
| | |
Income from amortization related to the intangible liabilities was $1.9$1 million and $4.6$2 million for the three and nine months ended September 30,March 31, 2021 and 2020, respectively.
Estimated future income from amortization income related tois $6 million for the intangible liabilities at September 30, 2020 is as follows:
| | | | | | | | |
| | (In Millions) |
| Years ending December 31, | | |
| 2020 (remaining period of the year) | | $ | 2.0 | |
| 2021 | | 7.8 | |
| 2022 | | 7.8 | |
| 2023 | | 7.8 | |
| 2024 | | 7.8 | |
| 2025 | | 7.8 | |
| | |
NOTE 78 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | | | | | | | |
| September 30, 2020 | | | | | | | | | | | | |
| Debt Instrument | | Issuer1 | | Annual Effective Interest Rate | | Total Principal Amount | | Debt Issuance Costs | | Unamortized Premiums (Discounts) | | Total Debt |
| Senior Secured Notes: | | | | | | | | | | | | |
| 4.875% 2024 Senior Secured Notes | | Cliffs | | 5.00% | | $ | 394.5 | | | $ | (3.7) | | | $ | (1.5) | | | $ | 389.3 | |
| 9.875% 2025 Senior Secured Notes | | Cliffs | | 10.57% | | 955.2 | | | (8.1) | | | (25.8) | | | 921.3 | |
| 6.75% 2026 Senior Secured Notes | | Cliffs | | 6.99% | | 845.0 | | | (21.4) | | | (9.0) | | | 814.6 | |
| Senior Unsecured Notes: | | | | | | | | | | | | |
| 7.625% 2021 AK Senior Notes | | AK Steel | | 7.33% | | 33.5 | | | 0 | | | 0.1 | | | 33.6 | |
| 7.50% 2023 AK Senior Notes | | AK Steel | | 6.17% | | 12.8 | | | 0 | | | 0.5 | | | 13.3 | |
| 6.375% 2025 Senior Notes | | Cliffs | | 8.11% | | 64.3 | | | (0.2) | | | (4.6) | | | 59.5 | |
| 6.375% 2025 AK Senior Notes | | AK Steel | | 8.11% | | 38.4 | | | 0 | | | (2.7) | | | 35.7 | |
| 1.50% 2025 Convertible Senior Notes | | Cliffs | | 6.26% | | 296.3 | | | (3.7) | | | (53.0) | | | 239.6 | |
| 5.75% 2025 Senior Notes | | Cliffs | | 6.01% | | 396.2 | | | (2.6) | | | (4.1) | | | 389.5 | |
| 7.00% 2027 Senior Notes | | Cliffs | | 9.24% | | 88.0 | | | (0.3) | | | (9.6) | | | 78.1 | |
| 7.00% 2027 AK Senior Notes | | AK Steel | | 9.24% | | 56.3 | | | 0 | | | (6.0) | | | 50.3 | |
| 5.875% 2027 Senior Notes | | Cliffs | | 6.49% | | 555.5 | | | (4.3) | | | (18.6) | | | 532.6 | |
| 6.25% 2040 Senior Notes | | Cliffs | | 6.34% | | 262.7 | | | (1.8) | | | (2.8) | | | 258.1 | |
| IRBs due 2024 to 2028 | | AK Steel | | Various | | 92.0 | | | 0 | | | 2.3 | | | 94.3 | |
| ABL Facility | | Cliffs2 | | 2.77% | | 2,000.0 | | | — | | | — | | | 400.0 | |
| Total long-term debt | | | | | | | | | | | | $ | 4,309.8 | |
1 Unless otherwise noted, references in this column to "Cliffs" are to Cleveland-Cliffs Inc., and references to "AK Steel" are to AK Steel Corporation.
2 Refers to Cleveland-Cliffs Inc. as borrower under our ABL Facility.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | | | |
| Debt Instrument | | Issuer1 | | Annual Effective Interest Rate | | Total Principal Amount | | Debt Issuance Costs | | Unamortized Discounts | | Total Debt |
| Senior Secured Notes: | | | | | | | | | | | | |
| 4.875% 2024 Senior Notes | | Cliffs | | 5.00% | | $ | 400.0 | | | $ | (4.6) | | | $ | (1.8) | | | $ | 393.6 | |
| Senior Unsecured Notes: | | | | | | | | | | | | |
| 1.50% 2025 Convertible Senior Notes | | Cliffs | | 6.26% | | 316.3 | | | (4.6) | | | (65.0) | | | 246.7 | |
| 5.75% 2025 Senior Notes | | Cliffs | | 6.01% | | 473.3 | | | (3.6) | | | (5.5) | | | 464.2 | |
| 5.875% 2027 Senior Notes | | Cliffs | | 6.49% | | 750.0 | | | (6.3) | | | (27.3) | | | 716.4 | |
| 6.25% 2040 Senior Notes | | Cliffs | | 6.34% | | 298.4 | | | (2.2) | | | (3.3) | | | 292.9 | |
| Former ABL Facility | | Cliffs2 | | N/A | | 450.0 | | | N/A | | N/A | | 0 | |
| Total long-term debt | | | | | | | | | | | | $ | 2,113.8 | |
1 Unless otherwise noted, references in this column to "Cliffs" are to Cleveland-Cliffs Inc.
2 Refers to Cleveland-Cliffs Inc. and certain of its subsidiaries as borrowers under our Former ABL Facility.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| March 31, 2021 |
| Debt Instrument | | Issuer1 | | Annual Effective Interest Rate | | Total Principal Amount | | Unamortized
Debt Issuance Costs | | Unamortized Premiums (Discounts) | | Total Debt |
| Senior Secured Notes: | | | | | | | | | | | | |
| 9.875% 2025 Senior Secured Notes | | Cliffs | | 10.57% | | $ | 633 | | | $ | (5) | | | $ | (16) | | | $ | 612 | |
| 6.75% 2026 Senior Secured Notes | | Cliffs | | 6.99% | | 845 | | | (19) | | | (8) | | | 818 | |
| Senior Unsecured Notes: | | | | | | | | | | | | |
| 1.50% 2025 Convertible Senior Notes | | Cliffs | | 6.26% | | 296 | | | (3) | | | (47) | | | 246 | |
| 5.75% 2025 Senior Notes | | Cliffs | | 6.01% | | 396 | | | (2) | | | (4) | | | 390 | |
| 7.00% 2027 Senior Notes | | Cliffs | | 9.24% | | 73 | | | 0 | | | (7) | | | 66 | |
| 7.00% 2027 AK Senior Notes | | AK Steel | | 9.24% | | 56 | | | 0 | | | (6) | | | 50 | |
| 5.875% 2027 Senior Notes | | Cliffs | | 6.49% | | 556 | | | (4) | | | (17) | | | 535 | |
| 4.625% 2029 Senior Notes | | Cliffs | | 4.63% | | 500 | | | (9) | | | 0 | | | 491 | |
| 4.875% 2031 Senior Notes | | Cliffs | | 4.88% | | 500 | | | (9) | | | 0 | | | 491 | |
| 6.25% 2040 Senior Notes | | Cliffs | | 6.34% | | 263 | | | (2) | | | (3) | | | 258 | |
| IRBs due 2024 to 2028 | | AK Steel | | Various | | 92 | | | 0 | | | 2 | | | 94 | |
EDC Revolving Facilities3 | | * | | Various | | 80 | | | — | | | — | | | 53 | |
ABL Facility3 | | Cliffs2 | | 2.14% | | 3,500 | | | — | | | — | | | 1,630 | |
| Total long-term debt | | | | | | | | | | | | $ | 5,734 | |
| | | | | | | | | | | | |
| * Our subsidiaries, Fleetwood Metal Industries Inc. and The Electromac Group Inc., are the borrowers under the EDC Revolving Facilities. |
1 Unless otherwise noted, references in this column and throughout this NOTE 8 - DEBT AND CREDIT FACILITIES to "Cliffs" are to Cleveland-Cliffs Inc., and references to "AK Steel" are to AK Steel Corporation (n/k/a Cleveland-Cliffs Steel Corporation). |
2 Refers to Cleveland-Cliffs Inc. as borrower under our ABL Facility. |
3 The total principal amounts for the indicated credit facilities are stated at their respective maximum borrowing capacities. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| December 31, 2020 |
| Debt Instrument | | Issuer1 | | Annual Effective Interest Rate | | Total Principal Amount | | Unamortized
Debt Issuance Costs | | Unamortized
Premiums
(Discounts) | | Total Debt |
| Senior Secured Notes: | | | | | | | | | | | | |
| 4.875% 2024 Senior Notes | | Cliffs | | 5.00% | | $ | 395 | | | $ | (3) | | | $ | (1) | | | $ | 391 | |
| 9.875% 2025 Senior Secured Notes | | Cliffs | | 10.57% | | 955 | | | (8) | | | (25) | | | 922 | |
| 6.75% 2026 Senior Secured Notes | | Cliffs | | 6.99% | | 845 | | | (20) | | | (9) | | | 816 | |
| Senior Unsecured Notes: | | | | | | | | | | | | |
| 7.625% 2021 AK Senior Notes | | AK Steel | | 7.33% | | 34 | | | 0 | | | 0 | | | 34 | |
| 7.50% 2023 AK Senior Notes | | AK Steel | | 6.17% | | 13 | | | 0 | | | 0 | | | 13 | |
| 6.375% 2025 Senior Notes | | Cliffs | | 8.11% | | 64 | | | 0 | | | (4) | | | 60 | |
| 6.375% 2025 AK Senior Notes | | AK Steel | | 8.11% | | 29 | | | 0 | | | (2) | | | 27 | |
| 1.50% 2025 Convertible Senior Notes | | Cliffs | | 6.26% | | 296 | | | (4) | | | (49) | | | 243 | |
| 5.75% 2025 Senior Notes | | Cliffs | | 6.01% | | 396 | | | (3) | | | (4) | | | 389 | |
| 7.00% 2027 Senior Notes | | Cliffs | | 9.24% | | 73 | | | 0 | | | (8) | | | 65 | |
| 7.00% 2027 AK Senior Notes | | AK Steel | | 9.24% | | 56 | | | 0 | | | (6) | | | 50 | |
| 5.875% 2027 Senior Notes | | Cliffs | | 6.49% | | 556 | | | (4) | | | (18) | | | 534 | |
| 6.25% 2040 Senior Notes | | Cliffs | | 6.34% | | 263 | | | (2) | | | (3) | | | 258 | |
| IRBs due 2024 to 2028 | | AK Steel | | Various | | 92 | | | 0 | | | 2 | | | 94 | |
EDC Revolving Facility3 | | * | | 3.25% | | 40 | | | — | | | — | | | 18 | |
ABL Facility3 | | Cliffs2 | | 2.15% | | 3,500 | | | — | | | — | | | 1,510 | |
| Total debt | | | | | | | | | | | | 5,424 | |
| Less: current debt | | | | | | | | | | | | 34 | |
| Total long-term debt | | | | | | | | | | | | $ | 5,390 | |
| | | | | | | | | | | | |
| * Our subsidiaries, Fleetwood Metal Industries Inc. and The Electromac Group Inc., are the borrowers under the EDC Revolving Facility. |
1 Unless otherwise noted, references in this column and throughout this NOTE 8 - DEBT AND CREDIT FACILITIES to "Cliffs" are to Cleveland-Cliffs Inc., and references to "AK Steel" are to AK Steel Corporation (n/k/a Cleveland-Cliffs Steel Corporation). |
2 Refers to Cleveland-Cliffs Inc. as borrower under our ABL Facility. |
3 The total principal amounts for the indicated credit facilities are stated at their respective maximum borrowing capacities. |
4.625% 2029 Senior Notes
On February 17, 2021, we entered into an indenture among Cliffs, the guarantors party thereto and U.S. Bank National Association, as trustee, relating to the issuance by Cliffs of $500 million aggregate principal amount of 4.625% 2029 Senior Notes issued at par value.
The 4.625% 2029 Senior Notes were issued in private placement transactions exempt from the registration requirements of the Securities Act. The 4.625% 2029 Senior Notes bear interest at a rate of 4.625% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2021. The 4.625% 2029 Senior Notes will mature on March 1, 2029.
The 4.625% 2029 Senior Notes are unsecured senior obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated indebtedness. The 4.625% 2029 Senior Notes are guaranteed on a senior unsecured basis by our material direct and indirect wholly-owned domestic subsidiaries and, therefore, are structurally senior to any of our existing and future indebtedness that is not guaranteed by such guarantors and are structurally subordinated to all existing and future indebtedness and other liabilities of our subsidiaries that do not guarantee the 4.625% 2029 Senior Notes.
The 4.625% 2029 Senior Notes may be redeemed, in whole or in part, on not less than 10 nor more than 60 days’ prior notice sent to the holders of the notes. The following is a summary of redemption prices for our 4.625% 2029 Senior Notes:
| | | | | | | | | | | | | | | | | |
| Redemption Period | | Redemption Price1 | | Restricted Amount |
| Prior to March 1, 2024 - using the proceeds of equity issuance | | 104.625 | | % | | Up to 35% of original aggregate principal |
Prior to March 1, 20242 | | 100.000 | | | | |
| Beginning March 1, 2024 | | 102.313 | | | | |
| Beginning March 1, 2025 | | 101.156 | | | | |
| Beginning on March 1, 2026 and thereafter | | 100.000 | | | | |
| | | | | |
1 Plus accrued and unpaid interest, if any, up to, but excluding, the redemption date. |
2 Plus a "make-whole" premium. |
In addition, if a change in control triggering event, as defined in the indenture, occurs with respect to the 4.625% 2029 Senior Notes, we will be required to offer to repurchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to, but not including, the date of repurchase.
The terms of the 4.625% 2029 Senior Notes contain certain customary covenants; however, there are no financial covenants.
4.875% 2031 Senior Notes
On February 17, 2021, we entered into an indenture among Cliffs, the guarantors party thereto and U.S. Bank National Association, as trustee, relating to the issuance by Cliffs of $500 million aggregate principal amount of 4.875% 2031 Senior Notes issued at par value.
The 4.875% 2031 Senior Notes were issued in private placement transactions exempt from the registration requirements of the Securities Act. The 4.875% 2031 Senior Notes bear interest at a rate of 4.875% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2021. The 4.875% 2031 Senior Notes will mature on March 1, 2031.
The 4.875% 2031 Senior Notes are unsecured senior obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated indebtedness. The 4.875% 2031 Senior Notes are guaranteed on a senior unsecured basis by our material direct and indirect wholly-owned domestic subsidiaries and, therefore, are structurally senior to any of our existing and future indebtedness that is not guaranteed by such guarantors and are structurally subordinated to all existing and future indebtedness and other liabilities of our subsidiaries that do not guarantee the 4.875% 2031 Senior Notes.
The 4.875% 2031 Senior Notes may be redeemed, in whole or in part, on not less than 10 nor more than 60 days’ prior notice sent to the holders of the notes. The following is a summary of redemption prices for our 4.875% 2031 Senior Notes:
| | | | | | | | | | | | | | | | | |
| Redemption Period | | Redemption Price1 | | Restricted Amount |
| Prior to March 1, 2026 - using the proceeds of equity issuance | | 104.875 | | % | | Up to 35% of original aggregate principal |
Prior to March 1, 2026 2 | | 100.000 | | | | |
| Beginning March 1, 2026 | | 102.438 | | | | |
| Beginning March 1, 2027 | | 101.625 | | | | |
| Beginning March 1, 2028 | | 100.813 | | | | |
| Beginning on March 1, 2029 and thereafter | | 100.000 | | | | |
| | | | | |
1 Plus accrued and unpaid interest, if any, up to, but excluding, the redemption date. |
2 Plus a "make-whole" premium. |
In addition, if a change in control triggering event, as defined in the indenture, occurs with respect to the 4.875% 2031 Senior Notes, we will be required to offer to repurchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to, but not including, the date of repurchase.
The terms of the 4.875% 2031 Senior Notes contain certain customary covenants; however, there are no financial covenants.
Debt Extinguishments - 20202021
On April 24, 2020,March 11, 2021, we usedpurchased an aggregate principal amount of $322 million of the 9.875% 2025 Senior Secured Notes using the net proceeds from the offeringFebruary 11, 2021 issuance of 20 million common shares and cash on hand. On March 12, 2021, we fully redeemed the additional 9.875% 20254.875% 2024 Senior Secured Notes, to repurchase $736.4 million7.625% 2021 AK Senior Notes, 7.50% 2023 AK Senior Notes, 6.375% 2025 Senior Notes and 6.375% 2025 AK Senior Notes, which totaled an aggregate principal amount of our outstanding senior notes$535 million.
The following is a summary of various series, which resulted inthe debt reduction of $181.2 million. Duringextinguished and the second quarter ofrespective impact on extinguishment:
| | | | | | | | | | | | | | | |
| | | | | (In Millions) |
| | | Three Months Ended
March 31, 2021 |
| Debt Instrument | | | | | Debt Extinguished | | (Loss) on Extinguishment |
| 9.875% 2025 Senior Secured Notes | | | | | $ | 322 | | | $ | (42) | |
| 4.875% 2024 Senior Secured Notes | | | | | 395 | | | (14) | |
| 7.625% 2021 AK Senior Notes | | | | | 34 | | | 0 | |
| 7.50% 2023 AK Senior Notes | | | | | 13 | | | 0 | |
| 6.375% 2025 Senior Notes | | | | | 64 | | | (7) | |
| 6.375% 2025 AK Senior Notes | | | | | 29 | | | (3) | |
| | | | | $ | 857 | | | $ | (66) | |
Debt Extinguishments - 2020 we also repurchased an additional $11.2 million aggregate principal amount of our outstanding senior notes of various series with cash on hand. On June 1, 2020, we redeemed $7.3 million aggregate principal amount of our outstanding 2020 IRBs.
On March 13, 2020, in connection with the AK Steel Merger, we purchased $364.2$364 million aggregate principal amount of 7.625% 2021 AK Senior Notes and $310.7$311 million aggregate principal amount of 7.50% 2023 AK Senior Notes upon early settlement of tender offers made by Cliffs. The net proceeds from the offering of 6.75% 2026 Senior Secured Notes, along with a portion of the ABL Facility borrowings, were used to fund such purchases. As the 7.625% 2021 AK Senior Notes and 7.50% 2023 AK Senior Notes were recorded at fair value just prior to being purchased, there was no gain or loss on extinguishment. Additionally, in connection with the final settlement of the tender offers, on March 27, 2020, we purchased $8.5$9 million aggregate principal amount of the 7.625% 2021 AK Senior Notes and $56.5$56 million aggregate principal amount of the 7.50% 2023 AK Senior Notes with cash on hand.
The following is a summary of the debt extinguished and the respective gainimpact on extinguishment:
| | | | | | | | | | | | | | | | | | |
| | | | | | (In Millions) | | |
| | | | | | Nine Months Ended
September 30, 2020 | | |
| Debt Instrument | | | | | | Debt Extinguished | | Gain on Extinguishment |
| 7.625% 2021 AK Senior Notes | | | | | | $ | 372.7 | | | $ | 0.4 | |
| 7.50% 2023 AK Senior Notes | | | | | | 367.2 | | | 2.8 | |
| 4.875% 2024 Senior Secured Notes | | | | | | 5.5 | | | 0.5 | |
| 6.375% 2025 Senior Notes | | | | | | 167.5 | | | 21.3 | |
| 1.50% 2025 Convertible Senior Notes | | | | | | 20.0 | | | 1.3 | |
| 5.75% 2025 Senior Notes | | | | | | 77.1 | | | 16.3 | |
| 7.00% 2027 Senior Notes | | | | | | 247.3 | | | 28.4 | |
| 5.875% 2027 Senior Notes | | | | | | 194.5 | | | 48.7 | |
| 6.25% 2040 Senior Notes | | | | | | 35.7 | | | 12.9 | |
| | | | | | $ | 1,487.5 | | | $ | 132.6 | |
Debt Extinguishments - 2019
The following is a summary of the debt extinguished with cash and the respective loss on extinguishment:
| | | | | | | | | | | | | | | | | | |
| | | | | (In Millions) | | | |
| | | | | | Nine Months Ended
September 30, 2019 | | |
| Debt Instrument | | | | | | Debt Extinguished | | (Loss) on Extinguishment |
| 4.875% 2021 Senior Notes | | | | | | $ | 124.0 | | | $ | (5.3) | |
| 5.75% 2025 Senior Notes | | | | | | 600.0 | | | (12.9) | |
| | | | | | $ | 724.0 | | | $ | (18.2) | |
| | | | | | | | | | | | | | | |
| | | | | (In Millions) |
| | | Three Months Ended
March 31, 2020 |
| Debt Instrument | | | | | Debt Extinguished | | Gain on Extinguishment |
| 7.625% 2021 AK Senior Notes | | | | | $ | 373 | | | $ | 0 | |
| 7.50% 2023 AK Senior Notes | | | | | 367 | | | 3 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | $ | 740 | | | $ | 3 | |
ABL Facility
As of September 30, 2020,March 31, 2021, we were in compliance with the ABL Facility liquidity requirements and, therefore, the springing financial covenant requiring a minimum fixed charge coverage ratio of 1.0 to 1.0 was not applicable.
The following represents a summary of our borrowing capacity under the ABL Facility:
| | | | | | | | |
| | (In Millions) |
| | September 30,March 31,
20202021 |
Available borrowing base on ABL Facility1 | | $ | 1,715.23,500 | |
| Borrowings | | (400.0)(1,630) | |
Letter of credit obligations2 | | (192.2)(272) | |
| Borrowing capacity available | | $ | 1,123.01,598 | |
1 As of September 30, 2020, the ABL Facility has a maximum borrowing base of $2.0 billion. The available borrowing base is determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment.
| | |
1 As of March 31, 2021, the ABL Facility has a maximum borrowing base of $3.5 billion. The available borrowing base is determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment. |
2 2 We issued 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, IRBs and environmental obligations. |
Debt Maturities
The following represents a summary of our maturities of debt instruments based on the principal amounts outstanding at September 30, 2020:March 31, 2021:
| | | (In Millions) | | (In Millions) |
| | Maturities of Debt | | Maturities of Debt |
| 2020 (remaining period of year) | | $ | 0 | | |
| 2021 | | 33.5 | | |
| 2021 (remaining period of year) | | 2021 (remaining period of year) | | $ | 0 | |
| 2022 | 2022 | | 0 | | 2022 | | 0 | |
| 2023 | 2023 | | 12.8 | | 2023 | | 53 | |
| 2024 | 2024 | | 456.5 | | 2024 | | 62 | |
| 2025 | | 2025 | | 2,955 | |
| Thereafter | Thereafter | | 3,987.9 | | Thereafter | | 2,823 | |
| Total maturities of debt | Total maturities of debt | | $ | 4,490.7 | | Total maturities of debt | | $ | 5,893 | |
NOTE 89 - FAIR VALUE MEASUREMENTS
The following represents the assets and liabilities measured at fair value:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | |
| September 30, 2020 | | | | | | |
| Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| Assets: | | | | | | | |
| | | | | | | |
| Other current assets: | | | | | | | |
| Commodity contracts | $ | 0 | | | $ | 15.8 | | | $ | 0 | | | $ | 15.8 | |
| Customer supply agreement | 0 | | | 0 | | | 34.5 | | | 34.5 | |
| Provisional pricing arrangement | 0 | | | 0 | | | 26.9 | | | 26.9 | |
| Other non-current assets: | | | | | | | |
| Commodity contracts | 0 | | | 1.8 | | | 0 | | | 1.8 | |
| Total | $ | 0 | | | $ | 17.6 | | | $ | 61.4 | | | $ | 79.0 | |
| Liabilities: | | | | | | | |
| Other current liabilities: | | | | | | | |
| Commodity contracts | $ | 0 | | | $ | (8.7) | | | $ | 0 | | | $ | (8.7) | |
| Provisional pricing arrangement | 0 | | | 0 | | | (0.3) | | | (0.3) | |
| Foreign exchange contracts | 0 | | | (0.6) | | | 0 | | | (0.6) | |
| Other non-current liabilities: | | | | | | | |
| | | | | | | |
| Foreign exchange contracts | 0 | | | (0.1) | | | 0 | | | (0.1) | |
| Total | $ | 0 | | | $ | (9.4) | | | $ | (0.3) | | | $ | (9.7) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | |
| December 31, 2019 | | | | | | |
| Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| Assets: | | | | | | | |
| Cash equivalents - Commercial paper | $ | 0 | | | $ | 187.6 | | | $ | 0 | | | $ | 187.6 | |
| Other current assets: | | | | | | | |
| Customer supply agreement | 0 | | | 0 | | | 44.5 | | | 44.5 | |
| Provisional pricing arrangement | 0 | | | 0 | | | 1.3 | | | 1.3 | |
| Total | $ | 0 | | | $ | 187.6 | | | $ | 45.8 | | | $ | 233.4 | |
| Liabilities: | | | | | | | |
| Other current liabilities: | | | | | | | |
| Commodity contracts | $ | 0 | | | $ | (3.2) | | | $ | 0 | | | $ | (3.2) | |
| Provisional pricing arrangement | 0 | | | 0 | | | (1.1) | | | (1.1) | |
| Total | $ | 0 | | | $ | (3.2) | | | $ | (1.1) | | | $ | (4.3) | |
The valuation of financial assets and liabilities classified in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable. Level 2 assets include commercial paper and commodity hedge contracts. Our commodity hedge contracts primarily include those related to natural gas, electricity and zinc, and our foreign exchange contracts include Canadian dollars.
The Level 3 assets consist of a freestanding derivative instrument related to a certain supply agreement and derivative assets related to certain provisional pricing arrangements with our customers. The Level 3 liabilities consist of derivative liabilities related to certain provisional pricing arrangements with our customers.
The supply agreement included in our Level 3 assets contains provisions for supplemental revenue or refunds based on the hot-rolled coil steel price in the year the iron ore product is consumed in the customer’s blast furnaces. We account for these provisions as a derivative instrument at the time of sale and adjust the derivative instrument to fair value through Revenues each reporting period until the product is consumed and the amounts are settled.
The provisional pricing arrangements included in our Level 3 assets/liabilities specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate to be based on market inputs at a specified point in time in the future, per the terms of the supply agreements. The difference between the estimated final revenue rate at the date of sale and the estimated final revenue rate at the measurement date is characterized as a derivative and is required to be accounted for separately once control has transferred upon delivery. The derivative instruments are adjusted to fair value through Revenues each reporting period based upon current market data and forward-looking estimates provided by management until the final revenue rates are determined.
The following table illustrates information about quantitative inputs and assumptions for the derivative assets and derivative liabilities categorized in Level 3 of the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Qualitative/Quantitative Information About Level 3 Fair Value Measurements | | | | | | | | | | |
| | Fair Value at September 30, 2020
(In Millions) | | Balance Sheet
Location | | Valuation Technique | | Unobservable Input | | Range or Point Estimate (Weighted Average) |
| | | | | | | | | | |
| Customer supply agreement | | $ | 34.5 | | | Other current assets | | Market Approach | | Management's estimate of hot-rolled coil steel price per net ton | | $542 - $634 $(548) |
| Provisional pricing arrangements | | $ | 26.9 | | | Other current assets | | Market Approach | | Management's
estimate of Platts 62% Price per dry metric ton | | $104 - $123 ($105) |
| | | | | | | | Atlantic Basin Pellet Premium | | $30 |
| Provisional pricing arrangements | | $ | (0.3) | | | Other current liabilities | | Market Approach | | Management's
estimate of Platts 62% Price per dry metric ton | | $104 |
| | | | | | | | PPI Estimates | | 110 |
The following tables represent a reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | |
| Level 3 Assets | | | | | | |
| Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Beginning balance | $ | 35.3 | | | $ | 118.1 | | | $ | 45.8 | | | $ | 91.4 | |
| Total gains (losses) included in earnings | 29.5 | | | (6.5) | | | 43.3 | | | 83.1 | |
| Settlements | (3.4) | | | (38.8) | | | (27.7) | | | (101.7) | |
| Ending balance | $ | 61.4 | | | $ | 72.8 | | | $ | 61.4 | | | $ | 72.8 | |
| Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) on assets still held at the reporting date | $ | 27.8 | | | $ | (6.5) | | | $ | 40.4 | | | $ | 81.8 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | |
| Level 3 Liabilities | | | | | | |
| Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Beginning balance | $ | 0 | | | $ | 0 | | | $ | (1.1) | | | $ | 0 | |
| Total losses included in earnings | (0.3) | | | (34.4) | | | (0.9) | | | (39.7) | |
| Settlements | 0 | | | 4.2 | | | 1.7 | | | 9.5 | |
| Ending balance | $ | (0.3) | | | $ | (30.2) | | | $ | (0.3) | | | $ | (30.2) | |
| Total losses for the period included in earnings attributable to the change in unrealized losses on liabilities still held at the reporting date | $ | (0.3) | | | $ | (30.2) | | | $ | (0.3) | | | $ | (30.2) | |
The carrying values of certain financial instruments (e.g., Accounts receivable, net, Accounts payable and Other current liabilities) approximate fair value and, therefore, have been excluded from the table below. A summary of the carrying value and fair value of other financial instruments were as follows:
| | | (In Millions) | | | (In Millions) |
| | September 30, 2020 | | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 |
| | Classification | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Classification | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Long-term debt: | | | | | | | | | | |
| Senior Notes | Senior Notes | Level 1 | | $ | 3,815.5 | | | $ | 3,975.2 | | | $ | 2,113.8 | | | $ | 2,237.0 | | Senior Notes | Level 1 | | $ | 3,957 | | | $ | 4,674 | | | $ | 3,802 | | | $ | 4,446 | |
| IRBs due 2024 to 2028 | IRBs due 2024 to 2028 | Level 1 | | 94.3 | | | 90.2 | | | 0 | | | 0 | | IRBs due 2024 to 2028 | Level 1 | | 94 | | | 94 | | | 94 | | | 91 | |
| EDC Revolving Facilities - outstanding balance | | EDC Revolving Facilities - outstanding balance | Level 2 | | 53 | | | 53 | | | 18 | | | 18 | |
| ABL Facility - outstanding balance | ABL Facility - outstanding balance | Level 2 | | 400.0 | | | 400.0 | | | 0 | | | 0 | | ABL Facility - outstanding balance | Level 2 | | 1,630 | | | 1,630 | | | 1,510 | | | 1,510 | |
| Total long-term debt | Total long-term debt | | $ | 4,309.8 | | | $ | 4,465.4 | | | $ | 2,113.8 | | | $ | 2,237.0 | | Total long-term debt | | $ | 5,734 | | | $ | 6,451 | | | $ | 5,424 | | | $ | 6,065 | |
The fair value of long-term debt was determined using quoted market prices.
NOTE 910 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
We offer defined benefit pension plans, defined contribution pension plans and OPEB plans primarily consisting of retiree healthcare benefits, to most employees as part of a total compensation and benefits program. The defined benefit pension plans are noncontributory and benefits generally are based on a minimum formula or employees’ years of service and average earnings for a defined period prior to retirement.
As a result of the acquisition of AK Steel, we assumed the obligations under AK Steel's defined benefit pension plans and OPEB plans. Noncontributory pension and various healthcare and life insurance benefits are provided to a significant portion of our employees and retirees. AK SteelBenefits are also contributes toprovided through multiemployer pension plans according to collective bargaining agreements that coverfor certain union-represented employees and defined contribution pension plans. The AK Steel pension and OPEB plans were remeasured as of March 13, 2020.union members.
The following are the components of defined benefit pension and OPEB costs (credits):
Defined Benefit Pension Costs (Credits)
| | | (In Millions) | | | | (In Millions) |
| | Three Months Ended
September 30, | | | Nine Months Ended
September 30, | | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 |
| Service cost | Service cost | $ | 5.4 | | | $ | 4.6 | | | $ | 16.0 | | | $ | 12.9 | | Service cost | | $ | 14 | | | $ | 5 | |
| Interest cost | Interest cost | 19.6 | | | 8.9 | | | 42.7 | | | 26.2 | | Interest cost | | 26 | | | 8 | |
| Expected return on plan assets | Expected return on plan assets | (36.7) | | | (13.7) | | | (91.9) | | | (41.0) | | Expected return on plan assets | | (90) | | | (18) | |
| Amortization: | Amortization: | | Amortization: | | |
| Prior service costs | 0.2 | | | 0.3 | | | 0.7 | | | 0.9 | | |
| | Net actuarial loss | Net actuarial loss | 7.3 | | | 5.9 | | | 20.6 | | | 17.7 | | Net actuarial loss | | 8 | | | 7 | |
| Net periodic benefit cost (credit) | Net periodic benefit cost (credit) | $ | (4.2) | | | $ | 6.0 | | | $ | (11.9) | | | $ | 16.7 | | Net periodic benefit cost (credit) | | $ | (42) | | | $ | 2 | |
OPEB Costs (Credits)
| | | (In Millions) | | | | (In Millions) |
| | Three Months Ended
September 30, | | | Nine Months Ended
September 30, | | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 |
| Service cost | Service cost | $ | 1.4 | | | $ | 0.5 | | | $ | 3.3 | | | $ | 1.3 | | Service cost | | $ | 13 | | | $ | 1 | |
| Interest cost | Interest cost | 4.4 | | | 2.3 | | | 10.9 | | | 7.0 | | Interest cost | | 18 | | | 2 | |
| Expected return on plan assets | Expected return on plan assets | (4.5) | | | (4.2) | | | (13.6) | | | (12.6) | | Expected return on plan assets | | (10) | | | (5) | |
| Amortization: | Amortization: | | Amortization: | | |
| Prior service credits | Prior service credits | (0.5) | | | (0.5) | | | (1.5) | | | (1.5) | | Prior service credits | | 0 | | | (1) | |
| Net actuarial loss | Net actuarial loss | 0.8 | | | 1.3 | | | 2.2 | | | 3.8 | | Net actuarial loss | | 1 | | | 1 | |
| Net periodic benefit cost (credit) | Net periodic benefit cost (credit) | $ | 1.6 | | | $ | (0.6) | | | $ | 1.3 | | | $ | (2.0) | | Net periodic benefit cost (credit) | | $ | 22 | | | $ | (2) | |
Based on funding requirements, we made defined benefit pension contributions of $146 million and $4 million for the three months ended March 31, 2021 and 2020, respectively. As a result of the CARES Act enacted on March 27, 2020, we have deferred $118 million of 2020 pension contributions, starting in the second quarter of 2020.which were paid on January 4, 2021. Based on prior funding requirements, we made defined benefit pension contributions of $0.9 million and $4.9 million for the three and nine months ended September 30, 2020, respectively, compared to defined benefit pension contributions of $5.6 million and $12.3 million for the three and nine months ended September 30, 2019, respectively. OPEB contributions for our voluntary employee benefit association trust plans are typically made on an annual basis in the first quarter of each year, but due to plan funding requirements being met, 0 OPEB contributions for our voluntary employee benefit association trust plans were required or made for the three and nine months ended September 30, 2020March 31, 2021 and 2019.2020.
NOTE 1011 - INCOME TAXES
Our 20202021 estimated annual effective tax rate before discrete items as of September 30, 2020March 31, 2021 is 35.5%19%. The estimated annual effective tax rate differs from the U.S. statutory rate of 21.0%21% primarily due to the deduction for percentage depletion in excess of cost depletion related to our Mining and Pelletizing segment operations, as well as non-deductible transaction costs, executive officers' compensation, global intangible low-taxed income and income of noncontrolling interests for which no tax is recognized.depletion. The 20192020 estimated annual effective tax rate before discrete items as of September 30, 2019March 31, 2020 was 9.6%47%. The increasedecrease in the estimated annual effective tax rate before discrete items is driven by the change in the mix of income, as well as transaction costs and other acquisition-related charges that were incurred only in 2020.
For the three and nine months ended September 30, 2020, we recorded discrete items that resulted in an income tax benefit of $5.0 million and $8.6 million, respectively. The discrete adjustments are primarily related to the release of uncertain tax positions due to favorable resolution of an international audit issue. The discrete adjustments also include interest on uncertain tax positions and the refunds received during the year of amounts sequestered by the Internal Revenue Service on previously filed AMT credit refund claims. For the three and nine months ended September 30, 2019, we recorded discrete items that resulted in an income tax benefit of $0.5 million and $1.3 million, respectively.income.
NOTE 1112 - ASSET RETIREMENT OBLIGATIONS
The following is a summary of our asset retirement obligations:
| | | (In Millions) | | | (In Millions) |
| | September 30,
2020 | | December 31,
2019 | | March 31,
2021 | | December 31,
2020 |
Asset retirement obligations1 | Asset retirement obligations1 | $ | 186.4 | | | $ | 165.3 | | Asset retirement obligations1 | $ | 310 | | | $ | 342 | |
| Less current portion | 4.4 | | | 2.1 | | |
| Less: current portion | | Less: current portion | 12 | | | 7 | |
| Long-term asset retirement obligations | Long-term asset retirement obligations | $ | 182.0 | | | $ | 163.2 | | Long-term asset retirement obligations | $ | 298 | | | $ | 335 | |
| 1 Includes $158 million and $190 million related to our active operations as of March 31, 2021 and December 31, 2020, respectively. | | 1 Includes $158 million and $190 million related to our active operations as of March 31, 2021 and December 31, 2020, respectively. |
1 Includes $33.7 million and $22.0 million related to our active operations as of September 30, 2020 and December 31, 2019, respectively.
The accrued closure obligation is predominantlyprovides for contractual and legal obligations related to our indefinitely idled and closed iron ore mining operations and provides for contractual and legal obligations associated with the eventual closure of thoseour active operations. Additionally, we have included in our asset retirement obligation $16.7 million for our integrated steel facilities and other operations acquired in the Merger. The closure date for each of our active mine sites was determined based on the exhaustion date of the remaining iron oremineral reserves and the amortization of the related asset and accretion of the liability is recognized over the estimated mine lives. The closure date and expected timing of the capital requirements to meet our obligations for our indefinitely idled or closed mines is determined based on the unique circumstances of each property. For indefinitely idled or closed mines, the accretion of the liability is recognized over the anticipated timing of remediation. As the majority of our asset retirement obligations at our steelmaking operations have indeterminate settlement dates, asset retirement obligations have been recorded at present values using estimated ranges of the economic lives of the underlying assets.
The following is a roll forward of our asset retirement obligation liability:
| | | (In Millions) | | | (In Millions) |
| | 2020 | | 2019 | | 2021 | | 2020 |
| Asset retirement obligation as of January 1 | Asset retirement obligation as of January 1 | $ | 165.3 | | | $ | 172.4 | | Asset retirement obligation as of January 1 | $ | 342 | | | $ | 165 | |
| Increase from AK Steel acquisition | 16.7 | | | 0 | | |
| Increase (decrease) from Acquisitions | | Increase (decrease) from Acquisitions | (34) | | | 14 | |
| Accretion expense | Accretion expense | 7.8 | | | 7.6 | | Accretion expense | 3 | | | 2 | |
| Remediation payments | Remediation payments | (3.4) | | | (0.5) | | Remediation payments | (1) | | | 0 | |
| Asset retirement obligation as of September 30 | $ | 186.4 | | | $ | 179.5 | | |
| Asset retirement obligation as of March 31 | | Asset retirement obligation as of March 31 | $ | 310 | | | $ | 181 | |
The decrease from Acquisitions for the three months ended March 31, 2021, relates to measurement period adjustments as a result of the preliminary purchase price allocation of the AM USA Transaction.
NOTE 1213 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIESCAPITAL STOCK
The following table presents the fair valueUnderwritten Public Offering
On February 11, 2021, we sold 20 million of our derivative instrumentscommon shares and 40 million common shares were sold by an affiliate of ArcelorMittal, in an underwritten public offering. In each case, shares were sold at a price per share of $16.12. Prior to this sale, ArcelorMittal held approximately 78 million common shares, which were issued as a part of the classification of eachconsideration in the Statements of Unaudited Condensed Consolidated Financial Position:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Derivatives designated as hedging instruments under Topic 815: | | | | Derivatives not designated as hedging instruments under Topic 815: | | |
| Derivative Asset (Liability) | | September 30,
2020 | | December 31,
2019 | | September 30,
2020 | | December 31,
2019 |
| Other current assets: | | | | | | | | |
| Customer supply agreement | | $ | 0 | | | $ | 0 | | | $ | 34.5 | | | $ | 44.5 | |
| Provisional pricing arrangements | | 0 | | | 0 | | | 26.9 | | | 1.3 | |
| Commodity contracts | | 7.9 | | | 0 | | | 7.9 | | | 0 | |
| Other non-current assets: | | | | | | | | |
| Commodity contracts | | 1.8 | | | 0 | | | 0 | | | 0 | |
| Other current liabilities: | | | | | | | | |
| Provisional pricing arrangements | | 0 | | | 0 | | | (0.3) | | | (1.1) | |
| Commodity contracts | | (1.8) | | | (3.2) | | | (6.9) | | | 0 | |
| Foreign exchange contracts | | (0.6) | | | 0 | | | 0 | | | 0 | |
| Other non-current liabilities: | | | | | | | | |
| | | | | | | | |
| Foreign exchange contracts | | (0.1) | | | 0 | | | 0 | | | 0 | |
Derivatives Designated as Hedging Instruments - Cash Flow Hedges
Exchange rate fluctuations affect a portion of revenues and operating costs that are denominated in foreign currencies, and we use forward currency and currency option contracts to reduce our exposure to certain of these currency price fluctuations. Contracts to purchase Canadian dollars are designated as cash flow hedges for accounting purposes, and we record the gains and losses for the derivatives and premiums paid for option contracts in Accumulated other comprehensive loss until we reclassify them into Cost of goods sold when we recognize the associated underlying operating costs.
We are exposed to fluctuations in market prices of raw materials and energy sources. We may use cash-settled commodity swaps and options to hedge the market risk associatedconnection with the purchase of certain of our raw materials and energy requirements. Our hedging strategy is to reduce the effect on earningsAM USA Transaction. We did not receive any proceeds from the price volatilitysale of these various commodity exposures, including timing differences between when we incur raw material commodity costs and when we receive sales surchargesthe 40 million common shares sold on behalf of ArcelorMittal. We used the net proceeds from our customers basedthe offering, plus cash on those raw materials. Independent of any hedging activities, price changes in any of these commodity markets could negatively affect operating costs.
The following table presents the notionalhand, to redeem $322 million aggregate principal amount of our outstanding hedge contracts:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | (In Millions) | | | |
| | | | September 30, 2020 | | | December 31, 2019 |
| | Unit of Measure | | Maturity Dates | Notional Amount | | Notional Amount |
| Commodity contracts: | | | | | | | |
| Natural gas | | MMBtu | | October 2020 - December 2021 | 29.7 | | | 20.1 | |
| Diesel | | Gallons | | — | 0 | | | 0.8 | |
| Zinc | | Pounds | | October 2020 - December 2021 | 10.9 | | | 0 | |
| Electricity | | Megawatt hours | | October 2020 - December 2021 | 0.8 | | | 0 | |
| Foreign exchange contracts: | | | | | | | |
| | | | | | | |
| Canadian dollars | | CAD | | October 2020 - December 2021 | C$ | 38.8 | | | C$ | 0 | |
Estimated gains before tax expected to be reclassified into Cost of goods sold within the next 12 months for our existing derivatives that qualify as cash flow hedges are presented below:
| | | | | | | | |
| | (In Millions) |
Hedge: | | Estimated Gains |
Natural gas | | $ | 10.8 | |
Zinc | | 2.3 | |
Electricity | | 1.1 | |
Canadian dollars | | 0.2 | |
Derivatives Not Designated as Hedging Instruments
Customer Supply Agreement
A supply agreement with one customer provides for supplemental revenue or refunds to the customer based on the hot-rolled coil steel price at the time the iron ore product is consumed in the customer’s blast furnaces. The supplemental pricing is characterized as a freestanding derivative instrument and is required to be accounted for separately once control transfers to the customer. The derivative instrument, which is finalized based on a future price, is adjusted to fair value through Revenues each reporting period based upon current market data and forward-looking estimates provided by management until the pellets are consumed and the amounts are settled.
Provisional Pricing Arrangements
Certain of our supply agreements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate based on certain market inputs at a specified period in time in the future, per the terms of the supply agreements. Market inputs are tied to indexed price adjustment factors that are integral to the iron ore supply contracts and vary based on the agreement. The pricing mechanisms typically include adjustments based upon changes in the Platts 62% Price, Atlantic Basin Pellet Premium, Platts international indexed freight rates and changes in specified PPI. The pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. The price adjustment factors have been evaluated to determine if they qualify as embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host sales contract and are integral to the host sales contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments.
Revenue is recognized generally upon delivery to our customers. Revenue is measured at the point that control transfers and represents the amount of consideration we expect to receive in exchange for transferring goods. Changes in the expected revenue rate from the date that control transfers through final settlement of contract terms is recorded in accordance with Topic 815 and is characterized as a derivative instrument and accounted for separately. Subsequently, the derivative instruments are adjusted to fair value through Revenues each reporting period based upon current market data and forward-looking estimates provided by management until the final revenue rate is determined.
The following summarizes the effect of our derivatives that are not designated as hedging instruments in the Statements of Unaudited Condensed Consolidated Operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | (In Millions) | | | | | | |
| Derivatives Not Designated as Hedging Instruments | | Location of Gain (Loss) Recognized in Income on Derivatives | | Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| | | | | | | | | | |
| | | | 2020 | | 2019 | | 2020 | | 2019 |
| Customer supply agreements | | Revenues | | $ | 8.8 | | | $ | 7.6 | | | $ | 14.4 | | | $ | 82.2 | |
| Provisional pricing arrangements | | Revenues | | 20.4 | | | (48.5) | | | 28.0 | | | (38.8) | |
| | | | | | | | | | |
| Commodity contracts | | Cost of goods sold | | 3.9 | | | 0 | | | (0.8) | | | 0 | |
| Total | | | | $ | 33.1 | | | $ | (40.9) | | | $ | 41.6 | | | $ | 43.4 | |
Refer to NOTE 8 - FAIR VALUE MEASUREMENTS for additional information.
NOTE 13 - SHAREHOLDERS' EQUITY9.875% 2025 Senior Secured Notes.
Acquisition of AK Steel
As more fully described in NOTE 3 - ACQUISITION OF AK STEEL,ACQUISITIONS, we acquired AK Steel on March 13, 2020. At the effective time of the AK Steel Merger, each share of AK Steel common stock issued and outstanding prior to the effective time of the AK Steel Merger was converted into, and became exchangeable for, 0.400 Cliffs common shares, par value $0.125 per share. We issued a total of 126.8127 million Cliffs common shares in connection with the AK Steel Merger at a fair value of $617.6$618 million. Following the closing of the AK Steel Merger, AK Steel's common stock was de-listed from the New York Stock Exchange.
Acquisition of ArcelorMittal USA
As more fully described in NOTE 3 - ACQUISITIONS, we acquired ArcelorMittal USA on December 9, 2020. Pursuant to the terms of the AM USA Transaction Agreement, we issued 78,186,671 common shares and 583,273 shares of a new series of our Serial Preferred Stock, Class B, without par value, designated as the “Series B Participating Redeemable Preferred Stock,” in each case to an indirect, wholly owned subsidiary of ArcelorMittal as part of the consideration paid by us in connection with the closing of the AM USA Transaction.
Preferred Stock
We have 3,000,000 shares of Serial Preferred Stock, Class A, without par value, of which, none are issued or outstanding. We also have 4,000,000 shares of Serial Preferred Stock, Class B, without par value, authorized, of which, 583,273 shares are issued and outstanding as described above.
Dividends
The below table summarizes our recent dividend activity: activity during 2020:
| | | | | | | | | | | | | | | | | | | | |
| Declaration Date | | Record Date | | Payment Date | | Dividend Declared per Common Share1 |
| 2/18/2020 | | 4/3/2020 | | 4/15/2020 | | $ | 0.06 | |
| 12/2/2019 | | 1/3/2020 | | 1/15/2020 | | 0.06 | |
9/3/2019 | | 10/4/2019 | | 10/15/2019 | | 0.10 | |
5/31/2019 | | 7/5/2019 | | 7/15/2019 | | 0.06 | |
2/19/2019 | | 4/5/2019 | | 4/15/2019 | | 0.05 | |
10/18/2018 | | 1/4/2019 | | 1/15/2019 | | 0.05 | |
1 The dividend declared on September 3, 2019 included a special cash dividend of $0.04 per common share.
Subsequent to the dividend paid on April 15, 2020, our Board temporarily suspended future dividends as a result of the COVID-19 pandemic in order to preserve cash during this time of economic uncertainty.
Preferred Stock
We have 3,000,000 shares of Serial Preferred Stock, Class A, without par value, authorized and 4,000,000 shares of Serial Preferred Stock, Class B, without par value, authorized; 0 preferred shares are issued or outstanding. Pursuant to the terms of the Transaction Agreement, we agreed to issue ArcelorMittal S.A. 583,273 shares of a new series of our Serial Preferred Stock, Class B, without par value, to be designated as the "Series B Participating Redeemable Preferred Stock" at closing of the pending Transaction.
Share Repurchase Program
In November 2018, our Board authorized a program to repurchase outstanding common shares in the open market or in privately negotiated transactions, up to a maximum of $200 million, excluding commissions and fees. In April 2019, our Board increased the common share repurchase authorization by an additional $100 million, excluding commissions and fees. During the nine months ended September 30, 2019, we repurchased 24.4 million common shares at a cost of $252.9 million in the aggregate, including commissions and fees. The share repurchase program was effective until December 31, 2019.
NOTE 14 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables reflect the changes in Accumulated other comprehensive loss related to Cliffs shareholders’ equity:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | |
| Postretirement Benefit Liability,
net of tax | | Foreign Currency Translation | | Derivative Financial Instruments, net of tax | | Accumulated Other Comprehensive Loss |
| December 31, 2019 | $ | (315.7) | | | $ | 0 | | | $ | (3.1) | | | $ | (318.8) | |
| Other comprehensive loss before reclassifications | 0 | | | (0.9) | | | (5.2) | | | (6.1) | |
| Net loss reclassified from accumulated other comprehensive loss | 5.6 | | | 0 | | | 2.2 | | | 7.8 | |
| March 31, 2020 | $ | (310.1) | | | $ | (0.9) | | | $ | (6.1) | | | $ | (317.1) | |
| Other comprehensive income before reclassifications | 0.4 | | | 0.7 | | | 1.4 | | | 2.5 | |
| Net loss reclassified from accumulated other comprehensive loss | 5.6 | | | 0 | | | 3.1 | | | 8.7 | |
| June 30, 2020 | $ | (304.1) | | | $ | (0.2) | | | $ | (1.6) | | | $ | (305.9) | |
| Other comprehensive income before reclassifications | 0.4 | | | 1.6 | | | 12.2 | | | 14.2 | |
| Net loss reclassified from accumulated other comprehensive loss | 6.2 | | | 0 | | | 3.5 | | | 9.7 | |
| September 30, 2020 | $ | (297.5) | | | $ | 1.4 | | | $ | 14.1 | | | $ | (282.0) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | |
| (In Millions) | | | | |
| Postretirement Benefit Liability, net of tax | | Derivative Financial Instruments, net of tax | | Accumulated Other Comprehensive Loss |
| December 31, 2018 | $ | (281.1) | | | $ | (2.8) | | | $ | (283.9) | |
| Other comprehensive income before reclassifications | 0.2 | | | 2.5 | | | 2.7 | |
| Net loss reclassified from accumulated other comprehensive loss | 5.5 | | | 0.2 | | | 5.7 | |
| March 31, 2019 | $ | (275.4) | | | $ | (0.1) | | | $ | (275.5) | |
| Other comprehensive income (loss) before reclassifications | 0.3 | | | (2.3) | | | (2.0) | |
| Net loss reclassified from accumulated other comprehensive loss | 5.5 | | | 0.2 | | | 5.7 | |
| June 30, 2019 | $ | (269.6) | | | $ | (2.2) | | | $ | (271.8) | |
| Other comprehensive income (loss) before reclassifications | 0.3 | | | (0.5) | | | (0.2) | |
| Net loss reclassified from accumulated other comprehensive loss | 5.5 | | | 0.9 | | | 6.4 | |
| September 30, 2019 | $ | (263.8) | | | $ | (1.8) | | | $ | (265.6) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| Postretirement Benefit Liability,
net of tax | | Foreign Currency Translation | | Derivative Financial Instruments, net of tax | | Accumulated Other Comprehensive Loss |
| December 31, 2020 | $ | (135) | | | $ | 3 | | | $ | (1) | | | $ | (133) | |
| Other comprehensive income (loss) before reclassifications | 0 | | | (1) | | | 8 | | | 7 | |
| Net (gain) loss reclassified from accumulated other comprehensive loss | 7 | | | 0 | | | (1) | | | 6 | |
| March 31, 2021 | $ | (128) | | | $ | 2 | | | $ | 6 | | | $ | (120) | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| Postretirement Benefit Liability, net of tax | | Foreign
Currency Translation | | Derivative Financial Instruments, net of tax | | Accumulated Other Comprehensive Loss |
| December 31, 2019 | $ | (316) | | | $ | 0 | | | $ | (3) | | | $ | (319) | |
| Other comprehensive loss before reclassifications | 0 | | | (1) | | | (5) | | | (6) | |
| Net loss reclassified from accumulated other comprehensive loss | 6 | | | 0 | | | 2 | | | 8 | |
| March 31, 2020 | $ | (310) | | | $ | (1) | | | $ | (6) | | | $ | (317) | |
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The following table reflects the details about Accumulated other comprehensive loss components related toreclassified from Cliffs shareholders’ equity:
| | | (In Millions) | | | | | (In Millions) | |
| Details about Accumulated Other Comprehensive Loss Components | Details about Accumulated Other Comprehensive Loss Components | | Amount of (Gain)/Loss Reclassified into Income, Net of Tax | | | Affected Line Item in the Statement of Unaudited Condensed Consolidated Operations | Details about Accumulated Other Comprehensive Loss Components | | | Amount of (Gain)/Loss Reclassified into Income, Net of Tax | | Affected Line Item in the Statement of Unaudited Condensed Consolidated Operations |
| | Three Months Ended
September 30, | | | Nine Months Ended
September 30, | | | | | | Three Months Ended
March 31, | | Affected Line Item in the Statement of Unaudited Condensed Consolidated Operations |
| | 2020 | | 2019 | | 2020 | | 2019 | | | Affected Line Item in the Statement of Unaudited Condensed Consolidated Operations | Details about Accumulated Other Comprehensive Loss Components | | | 2021 | | 2020 | | Affected Line Item in the Statement of Unaudited Condensed Consolidated Operations |
| Amortization of pension and OPEB liability: | Amortization of pension and OPEB liability: | | | | | | | | | | | Amortization of pension and OPEB liability: | | | | | | | |
| Prior service credits | | $ | (0.3) | | | $ | (0.2) | | | $ | (0.8) | | | $ | (0.6) | | | Other non-operating income | |
| | Net actuarial loss | Net actuarial loss | | 8.1 | | | 7.2 | | | 22.8 | | | 21.5 | | | Other non-operating income | Net actuarial loss | | | $ | 9 | | | $ | 7 | | | Other non-operating income |
| | 7.8 | | | 7.0 | | | 22.0 | | | 20.9 | | | Total before taxes | |
| Income tax benefit | | Income tax benefit | | | (2) | | | (1) | | | Income tax benefit (expense) |
| Net of taxes | | Net of taxes | | | $ | 7 | | | $ | 6 | | |
| | (1.6) | | | (1.5) | | | (4.6) | | | (4.4) | | | Income tax benefit (expense) | | | | | | |
| $ | 6.2 | | | $ | 5.5 | | | $ | 17.4 | | | $ | 16.5 | | | Net of taxes | |
| | Unrealized loss on derivative financial instruments: | | |
| Changes in derivative financial instruments: | | Changes in derivative financial instruments: | | | |
| Commodity contracts | Commodity contracts | | $ | 4.5 | | | $ | 1.2 | | | $ | 11.2 | | | $ | 1.7 | | | Cost of goods sold | Commodity contracts | | | $ | (1) | | | $ | 3 | | | Cost of goods sold |
| (1.0) | | | (0.3) | | | (2.4) | | | (0.4) | | | Income tax benefit (expense) | |
| $ | 3.5 | | | $ | 0.9 | | | $ | 8.8 | | | $ | 1.3 | | | Net of taxes | |
| Income tax benefit | | Income tax benefit | | | 0 | | | (1) | | | Income tax benefit (expense) |
| Net of taxes | | Net of taxes | | | $ | (1) | | | $ | 2 | | |
| | Total reclassifications for the period, net of tax | Total reclassifications for the period, net of tax | | $ | 9.7 | | | $ | 6.4 | | | $ | 26.2 | | | $ | 17.8 | | | Total reclassifications for the period, net of tax | | | $ | 6 | | | $ | 8 | | |
NOTE 15 - RELATED PARTIES
We have certain co-owned joint ventures with companies from the steel and mining industries, including integrated steel companies, their subsidiaries and other downstream users of steel and iron ore products. In addition,
Hibbing is a co-owned joint venture in which we haveown 85.3% and U.S. Steel owns 14.7% as of March 31, 2021. As a result of the AM USA Transaction, we acquired an additional 62.3% ownership stake in the Hibbing mine and became the majority owner and mine manager. Prior to the AM USA Transaction, ArcelorMittal was a related party due to its ownership interest in Hibbing. As such, for the three months ended March 31, 2020, certain long-term contracts and from time to time, enter into other sales agreements with these parties, and as a result, generateArcelorMittal resulted in Revenues from related parties. As of March 31, 2020, we owned 23% of Hibbing.
Hibbing is a co-owned joint venture with companies that are integrated steel producers or their subsidiaries. The following is a summary of the mine ownership of the co-owned iron ore mine at September 30, 2020:
| | | | | | | | | | | | | | | | | | | | |
| Mine | | Cleveland-Cliffs Inc. | | ArcelorMittal USA | | U.S. Steel |
| Hibbing | | 23.0% | | 62.3% | | 14.7% |
The tables below summarize our material related party transactions:
Revenues from related parties were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars In Millions) | | | | | | |
| Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Revenue from related parties | $ | 294.9 | | | $ | 293.5 | | | $ | 587.5 | | | $ | 792.8 | |
Revenues1 | $ | 1,646.0 | | | $ | 555.6 | | | $ | 3,097.8 | | | $ | 1,455.8 | |
Related party revenues as a percent of Revenues1 | 17.9 | % | | 52.8 | % | | 19.0 | % | | 54.5 | % |
| Purchases from related parties | $ | 8.2 | | | $ | 0 | | | $ | 20.4 | | | $ | 0 | |
1 Includes Realization of deferred revenue of $34.6 million for the nine months ended September 30, 2020. | | | | | | | | | | | | | | | |
| | | | | (In Millions) |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Revenue from related parties | | | | | $ | 77 | | | $ | 11 | |
| Revenues | | | | | $ | 4,049 | | | $ | 359 | |
| Related party revenues as a percent of Revenues | | | | | 2 | % | | 3 | % |
| Purchases from related parties | | | | | $ | 27 | | | $ | 3 | |
The following table presents the classification of related party assets and liabilities in the Statements of Unaudited Condensed Consolidated Financial Position:
| | | | | | | | | | | | | | |
| | (In Millions) | | |
| Balance Sheet Location | | September 30,
2020 | | December 31,
2019 |
| Accounts receivable, net | | $ | 91.6 | | | $ | 31.1 | |
| Other current assets | | 58.5 | | | 44.5 | |
| Accounts payable | | (1.2) | | | 0 | |
| Other current liabilities | | (1.7) | | | (2.0) | |
Other current assets
A supply agreement with one customer provides for supplemental revenue or refunds to the customer based on the hot-rolled coil steel price at the time the product is consumed in the customer’s blast furnaces. The supplemental pricing is characterized as a freestanding derivative. Additionally, the customer also has certain provisional pricing arrangements where the difference between the estimated final revenue rate at the date of sale and the estimated final revenue rate at the measurement date is characterized as a derivative and is required to be accounted for separately once control has transferred upon delivery. Refer to NOTE 12 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information. | | | | | | | | | | | | | | |
| | (In Millions) |
| Balance Sheet Location of Assets (Liabilities) | | March 31,
2021 | | December 31,
2020 |
| Accounts receivable, net | | $ | 30 | | | $ | 2 | |
| | | | |
| Accounts payable | | (9) | | | (6) | |
| | | | |
NOTE 16 - VARIABLE INTEREST ENTITIES
SunCoke Middletown
We purchase all the coke and electrical power generated from SunCoke Middletown’s plant under long-term supply agreements. SunCoke Middletown is a VIE because weagreements and have committed to purchase all the expected production from the facility through 2032 and2032. We consolidate SunCoke Middletown as a VIE because we are the primary beneficiary. Therefore, we consolidate SunCoke Middletown’s financial results with our financial results, even though we havebeneficiary despite having no ownership interest in SunCoke Middletown. SunCoke Middletown had income before income taxes of $11.8$17 million and $31.3$4 million for the three and nine months ended September 30,March 31, 2021 and 2020, respectively, that was included in our consolidated income before income taxes.
The assets of the consolidated VIE can only be used to settle the obligations of the consolidated VIE and not obligations of the Company. The creditors of SunCoke Middletown do not have recourse to the assets or general credit of the Company to satisfy liabilities of the VIE. The consolidated balance sheet asStatements of September 30, 2020Unaudited Condensed Consolidated Financial Position includes the following amounts for SunCoke Middletown:
| | | | | |
| (In Millions) |
| September 30,
2020 |
Cash and cash equivalents | $ | 0.3 | |
Inventories | 22.5 | |
Property, plant and equipment, net | 305.4 | |
Accounts payable | (10.0) | |
Other assets (liabilities), net | (5.6) | |
Noncontrolling interests | (312.6) | |
| | | | | | | | | | | |
| (In Millions) |
| March 31,
2021 | | December 31,
2020 |
| Cash and cash equivalents | $ | 4 | | | $ | 5 | |
| Inventories | 22 | | | 21 | |
| Property, plant and equipment, net | 304 | | | 308 | |
| Accounts payable | (12) | | | (15) | |
| Other assets (liabilities), net | 1 | | | (10) | |
| Noncontrolling interests | (319) | | | (309) | |
NOTE 17 - EARNINGS PER SHARE
The following table summarizes the computation of basic and diluted earnings per share:
| | | (In Millions, Except Per Share Amounts) | | | | (In Millions, Except Per Share Amounts) |
| | Three Months Ended
September 30, | | | Nine Months Ended
September 30, | | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 |
| Income (loss) from continuing operations | Income (loss) from continuing operations | $ | 2.2 | | | $ | 91.8 | | | $ | (154.8) | | | $ | 231.1 | | Income (loss) from continuing operations | | $ | 57 | | | $ | (50) | |
| Income from continuing operations attributable to noncontrolling interest | Income from continuing operations attributable to noncontrolling interest | (11.9) | | | 0 | | | (31.2) | | | 0 | | Income from continuing operations attributable to noncontrolling interest | | (16) | | | (3) | |
| Net income (loss) from continuing operations attributable to Cliffs shareholders | Net income (loss) from continuing operations attributable to Cliffs shareholders | (9.7) | | | 91.8 | | | (186.0) | | | 231.1 | | Net income (loss) from continuing operations attributable to Cliffs shareholders | | 41 | | | (53) | |
| Loss from discontinued operations, net of tax | (0.3) | | | (0.9) | | | 0 | | | (1.5) | | |
| Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | | 0 | | | 1 | |
| Net income (loss) attributable to Cliffs shareholders | Net income (loss) attributable to Cliffs shareholders | $ | (10.0) | | | $ | 90.9 | | | $ | (186.0) | | | $ | 229.6 | | Net income (loss) attributable to Cliffs shareholders | | $ | 41 | | | $ | (52) | |
| | Weighted average number of shares: | Weighted average number of shares: | | Weighted average number of shares: | | |
| Basic | Basic | 399.4 | | | 270.0 | | | 365.2 | | | 278.4 | | Basic | | 490 | | 298 |
| Redeemable preferred shares | | Redeemable preferred shares | | 58 | | 0 |
| Convertible senior notes | Convertible senior notes | 0 | | | 3.7 | | | 0 | | | 5.8 | | Convertible senior notes | | 19 | | 0 |
| Employee stock plans | Employee stock plans | 0 | | | 2.9 | | | 0 | | | 3.6 | | Employee stock plans | | 4 | | 0 |
| Diluted | Diluted | 399.4 | | | 276.6 | | | 365.2 | | | 287.8 | | Diluted | | 571 | | 298 |
| | Earnings (loss) per common share attributable to Cliffs shareholders - basic: | | |
Earnings (loss) per common share attributable to Cliffs shareholders - basic1: | | Earnings (loss) per common share attributable to Cliffs shareholders - basic1: | | |
| Continuing operations | Continuing operations | $ | (0.02) | | | $ | 0.34 | | | $ | (0.51) | | | $ | 0.83 | | Continuing operations | | $ | 0.08 | | | $ | (0.18) | |
| Discontinued operations | Discontinued operations | 0 | | | 0 | | | 0 | | | (0.01) | | Discontinued operations | | 0 | | | 0 | |
| | $ | (0.02) | | | $ | 0.34 | | | $ | (0.51) | | | $ | 0.82 | | | | $ | 0.08 | | | $ | (0.18) | |
| | Earnings (loss) per common share attributable to Cliffs shareholders - diluted: | Earnings (loss) per common share attributable to Cliffs shareholders - diluted: | | Earnings (loss) per common share attributable to Cliffs shareholders - diluted: | | |
| Continuing operations | Continuing operations | $ | (0.02) | | | $ | 0.33 | | | $ | (0.51) | | | $ | 0.80 | | Continuing operations | | $ | 0.07 | | | $ | (0.18) | |
| Discontinued operations | Discontinued operations | 0 | | | 0 | | | 0 | | | 0 | | Discontinued operations | | 0 | | | 0 | |
| | $ | (0.02) | | | $ | 0.33 | | | $ | (0.51) | | | $ | 0.80 | | | | $ | 0.07 | | | $ | (0.18) | |
| 1 For the three months ended March 31, 2021, basic earnings per share is calculated by dividing Net income (loss) attributable to Cliffs shareholders, less $4 million of earnings attributed to Series B Participating Redeemable Preferred Stock, by the weighted average number of basic common shares outstanding during the period presented. | | 1 For the three months ended March 31, 2021, basic earnings per share is calculated by dividing Net income (loss) attributable to Cliffs shareholders, less $4 million of earnings attributed to Series B Participating Redeemable Preferred Stock, by the weighted average number of basic common shares outstanding during the period presented. |
The following table summarizesFor the three months ended March 31, 2020, we had 2 million shares related to employee stock plans that have beenwere excluded from the diluted earnings per shareEPS calculation as they were anti-dilutive:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | |
| Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Shares related to employee stock plans | 1.8 | | | 0 | | | 1.6 | | | 0 | |
anti-dilutive. There was 0 dilution during the three and nine months ended September 30,March 31, 2020 related to the common share equivalents for the convertible senior notes as our common shares average price did not rise above the conversion price.
NOTE 18 - COMMITMENTS AND CONTINGENCIES
Purchase Commitments
HBI production plant
In 2017, we began to incur capital commitments related toWe purchase portions of the constructionprincipal raw materials required for our steel manufacturing operations under annual and multi-year agreements, some of which have minimum quantity requirements. We also use large volumes of natural gas, electricity and industrial gases in our steel manufacturing operations. We negotiate most of our HBI production plant in Toledo, Ohio; however, due to the COVID-19 pandemic, we temporarily halted construction in March 2020. In June 2020, we resumed constructionpurchases of chrome, industrial gases and now expect to complete the project and begin production in the fourth quartera portion of 2020. In total, to complete the project, we expect to spend approximately $1 billion on the HBI production plant, excluding capitalized interest,our electricity under multi-year agreements. Our purchases of which $940.2 million was paid ascoke are made under annual or multi-year agreements with periodic price adjustments. We typically purchase coal under annual fixed-price agreements. We also purchase certain transportation services under multi-year contracts with minimum quantity requirements.
Contingencies
We are currently the subject of, or party to, various claims and legal proceedings incidental to our current and historical operations. These claims and legal proceedings are subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include monetary damages, additional funding requirements or an injunction. If an unfavorable ruling were to occur, there exists the possibility of a material adverse effect on the financial position and results of operations for the period in which the ruling occurs or future periods. However, based on currently available information we do not believe that any pending claims or legal proceedings will result in a material adverse effect in relation to our consolidated financial statements.
Environmental Contingencies
Although we believe our operating practices have been consistent with prevailing industry standards, hazardous materials may have been released at operating sites or third-party sites in the past, including operating sites that we no longer own. If we reasonably can, we estimate potential remediation expenditures for those sites where future remediation efforts are probable based on identified conditions, regulatory requirements or contractual obligations arising from the sale of a business or facility. For sites involving government required investigations, we typically make an estimate of potential remediation expenditures only after the investigation is complete and when we better understand the nature and scope of the remediation. In general, the material factors in these estimates include the costs associated with investigations, delineations, risk assessments, remedial work, governmental response and oversight, site monitoring, and preparation of reports to the appropriate environmental agencies.
The following is a summary of our environmental obligations:
| | | (In Millions) | | | (In Millions) |
| | September 30,
2020 | | December 31,
2019 | | March 31,
2021 | | December 31,
2020 |
| Environmental obligations | Environmental obligations | $ | 40.9 | | | $ | 2.0 | | Environmental obligations | $ | 134 | | | $ | 135 | |
| Less current portion | 6.4 | | | 0.3 | | |
| Less: current portion | | Less: current portion | 20 | | | 18 | |
| Long-term environmental obligations | Long-term environmental obligations | $ | 34.5 | | | $ | 1.7 | | Long-term environmental obligations | $ | 114 | | | $ | 117 | |
We cannot predict the ultimate costs for each site with certainty because of the evolving nature of the investigation and remediation process. Rather, to estimate the probable costs, we must make certain assumptions. The most significant of these assumptions is for the nature and scope of the work that will be necessary to investigate and remediate a particular site and the cost of that work. Other significant assumptions include the cleanup technology that will be used, whether and to what extent any other parties will participate in paying the investigation and remediation costs, reimbursement of past response costs and future oversight costs by governmental agencies, and the reaction of the governing environmental agencies to the proposed work plans. Costs for future investigation and remediation are not discounted to their present value, unless the amount and timing of the cash disbursements are readily known. To the extent that we have been able to reasonably estimate future liabilities, we do not believe that there is a reasonable possibility that we will incur a loss or losses that exceed the amounts we accrued for the environmental matters discussed below that would, either individually or in the aggregate, have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, since we recognize amounts in the consolidated financial statements in accordance with GAAP that exclude potential losses that are not probable or that may not be currently estimable, the ultimate costs of these environmental matters may be higher than the liabilities we currently have recorded in our consolidated financial statements.
Except as we expressly note below, we do not currently anticipate any material effect on our consolidated financial position, results of operations or cash flows as a result of compliance with current environmental regulations. Moreover, because all domestic steel and iron ore producers operate under the same federal environmental regulations, we do not believe that we are more disadvantaged than our domestic competitors by our need to comply with these regulations. Some foreign competitors may benefit from less stringent environmental requirements in the countries where they produce, resulting in lower compliance costs for them and providing those foreign competitors with a cost advantage on their products.
AccordingPursuant to RCRA, which governs the treatment, handling and disposal of hazardous waste, the EPA and authorized state environmental agencies may conduct inspections of RCRA-regulated facilities to identify areas where there have been releases of hazardous waste or hazardous constituents into the environment and may order the facilities to take corrective action to remediate such releases. Likewise, the EPA or the states may require closure or post-closure care of residual, industrial and hazardous waste management units, including, but not limited to, landfills and deep injection wells. Environmental regulators mayhave the authority to inspect all of our major iron ore and steelmaking facilities. While we cannot predict the future actions of these regulators, it is possible that they may identify conditions in future inspections of these facilities whichthat they believe require corrective action.
Under authority fromPursuant to CERCLA, the EPA and state environmental authorities have conducted site investigations at certainsome of our facilities and other third-party facilities, portions of which previously may have been used for disposal of materials that are currently regulated. The results of these investigations are still pending, and we could be directed to spend funds for remedial activities at the former disposal areas. Because of the uncertain status of these
investigations, however, we cannot reliablyreasonably predict whether or when such spending might be required or its magnitude.
On April 29, 2002, AK Steel entered a mutually agreed-upon administrative order onwith the consent withof the EPA pursuant to Section 122 of CERCLA to perform a Remedial Investigation/Feasibility Study (“RI/FS”)FS of the Hamilton Plantplant site located in New Miami, Ohio. The plant ceased operations in 1990 and all of its former structures have been demolished. AK Steel submitted the investigation portion of the RI/FS and completed supplemental studies. We currently have accrued $0.7 million for the remaining cost of the RI/FS. Until the RI/FS is complete, we cannot reliablyreasonably estimate the additional costs, if any, we may incur for potentially required remediation of the site or when we may incur them.
EPA Administrative Order In Re: Ashland Coke
On September 26, 2012, the EPA issued an order under Section 3013 of RCRA requiring a plan to be developed for investigation of four areas at the Ashland Works coke plant. The Ashland Works coke plant ceased operations in 2011 and all of its former structures have been demolished and removed. In 1981, AK Steel acquired the plant from Honeywell International Corporation (as successor to Allied Corporation), who had managed the coking operations there for approximately 60 years. In connection with the sale of the coke plant, Honeywell agreed to indemnify AK Steel against certain claims and obligations that could arise from the investigation, and we intend to pursue such indemnification from Honeywell, if necessary. We cannot reliablyreasonably estimate how long it will take to complete the site investigation. On March 10, 2016, the EPA invited AK Steel to participate in settlement discussions regarding an enforcement action. Settlement discussions between the parties are ongoing, though whether the parties will reach agreement and any such agreement’s terms are uncertain. We currently have accrued $1.4 million for the projected cost of the investigation and known remediation. Until the site investigation is complete, we cannot reliablyreasonably estimate the costs, if any, we may incur for potential additional required remediation of the site or when we may incur them.
On May 12, 2014, the Michigan DepartmentBurns Harbor Water Issues
In August 2019, ArcelorMittal Burns Harbor LLC (n/k/a Cleveland-Cliffs Burns Harbor LLC) suffered a loss of Environment, Great Lakes, and Energy (“EGLE”) (previously the Michigan Department of Environmental Quality) issued to Dearborn Works an Air Permit to Install No. 182-05C (the “PTI”) to increase the emission limits for the blast furnace cooling water recycle system, which led to the discharge of cyanide and other emission sources. The PTI was issued as a correction to a prior permit to install that did not include certain information during the prior permitting process. On July 10, 2014, the South Dearborn Environmental Improvement Association (“SDEIA”), Detroiters Working for Environmental Justice, Original United Citizens of Southwest Detroit and the Sierra Club filed a Claim of Appealammonia in excess of the PTIBurns Harbor plant's NPDES permit limits. Since that time, the facility has taken numerous steps to prevent recurrence and maintain compliance with its NPDES permit. Since the August 2019 event, we have been engaged in settlement discussions with the U.S. Department of Justice, the EPA and the State of Michigan, Wayne County CircuitIndiana to resolve any alleged violations of environmental laws or regulations. Also, ArcelorMittal Burns Harbor LLC was served with a subpoena on December 5, 2019, from the United States District Court for the Northern District of Indiana relating to the August 2019 event and has responded to the subpoena requests. In addition, the plaintiffs in Environmental Law & Policy Center et al. v. ArcelorMittal Burns Harbor LLC et al. (U.S. District Court, N.D. Indiana Case No. 14-008887-AA. The appellants19-cv-473), which was filed on December 20, 2019,have alleged violations resulting from the August 2019 event and EGLE required the intervention of Severstal Dearborn, LLC (later merged into AK Steel Corporation) in this action as an additional appellee. The appellants allege multiple deficiencies with the PTI and the permitting process. On July 2, 2019, the Circuit Court dismissed the PTI appeal and ruled that EGLE appropriately issued the permit modification. The appellants have appealed that decision. Until the appeal is resolved,other Clean Water Act claims. Although we cannot determine what the ultimate permit limits will be. Until the permit limits are determined and final, we cannot reliablyaccurately estimate the costs we may incur, ifamount of civil penalty, the cost of any or when we may incur them.
On August 21, 2014, the SDEIA filed a Complaint under the Michigan Environmental Protection Act (“MEPA”) in the State of Michigan, Wayne County Circuit Court, Case No. 14-010875-CE. The plaintiffs allege that the air emissions from Dearborn Works are impacting the air, water and other natural resources, as well as the public trust in
such resources. The plaintiffs are requesting, among other requestedinjunctive relief that the court assess and determine the sufficiency of the PTI’s limitations. On October 15, 2014, the court ordered a stay of the proceedings until a final order is issued in Wayne County Circuit Court Case No. 14-008887-AA (discussed above). When the proceedings resume, we intend to vigorously contest these claims. Until the claims in this complaint are resolved, we cannot reliably estimaterequirements, or the costs we may incur, if any, or when we may incur them.
On November 18, 2019, November 26, 2019, and March 16, 2020, EGLE issued Notices of Violations (“NOVs”) with respect to the basic oxygen furnace electrostatic precipitator at Dearborn Works alleging violations of manganese, lead and opacity limits. We are investigating these claims and will work with EGLE to attempt to resolve them. We intendthird-party claims, including potential natural resource damages claims, they are likely to vigorously contest any claims which cannot be resolved through a settlement. Until a settlement is reached with EGLE orexceed the claims of the NOVs are otherwise resolved, we cannot reliably estimate the costs, if any, associated with any potentially required work.reporting threshold in total.
In addition to the foregoing matters, we are or may be involved in proceedings with various regulatory authorities that may require us to pay fines, comply with more rigorous standards or other requirements or incur capital and operating expenses for environmental compliance. We believe that the ultimate disposition of theany such proceedings will not have, individually or in the aggregate, a material adverse effect on our consolidated financial condition, results of operations or cash flows.
Tax Matters
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained when challenged by the taxing authorities. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective tax rate in a given period could be materially affected. An unfavorable tax settlement would require use of our cash and result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution. Refer to NOTE 11 - INCOME TAXES for further information.
Other Contingencies
In addition to the matters discussed above, there are various pending and potential claims against us and our subsidiaries involving product liability, commercial, employee benefits and other matters arising in the ordinary course of business. Because of the considerable uncertainties whichthat exist for any claim, it is difficult to reliably or accurately estimate what the amount of a loss would be if a claimant prevails. If material assumptions or factual understandings we rely on to evaluate exposure for these contingencies prove to be inaccurate or otherwise change, we may be required to record a liability for an adverse outcome. If, however, we have reasonably evaluated potential future liabilities for all of these contingencies, including those described more specifically above, it is our opinion, unless we otherwise noted, that the ultimate liability from these contingencies, individually andor in the aggregate, should not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
NOTE 19 - SUBSEQUENT EVENTS
We have evaluated subsequent events through the date of financial statement issuance.
| | | | | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Management's Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and other factors that may affect our future results. We believe it is important to read our Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2020 and June 30, 2020, as well as other publicly available information.
Overview
Cleveland-Cliffs is the largest flat-rolled steel producer in North America. Founded in 1847 Cleveland-Cliffs is amongas a mine operator, we are also the largest vertically integrated producersproducer of differentiated iron ore and steelpellets in North America. With anIn 2020, we acquired two major steelmakers, AK Steel and ArcelorMittal USA, vertically integrating our legacy iron ore business with quality-focused steel production and emphasis on non-commoditized products, we are uniquely positioned to supply both customized iron orethe automotive end market. Our fully integrated portfolio includes custom-made pellets and steel solutions to a quality-focused customer base. AK Steel, a wholly-owned subsidiary of Cleveland-Cliffs, is a leading producer ofHBI; flat-rolled carbon steel, stainless, electrical, plate, tinplate and electricallong steel products. The AK Tubeproducts; and Precision Partners businesses provide customer solutions with carbon and stainless steel tubing, products, die designhot and tooling,cold stamping and hot- and cold-stamped components. In 2020, we expect to be the sole producer of HBI in the Great Lakes region.tooling. Headquartered in Cleveland, Ohio, we employ approximately 11,00025,000 people across our mining, steel and steeldownstream manufacturing operations in the United States and Canada.
Economic Overview
The fundamentals for our business have rebounded strongly since the COVID-19 pandemic disruption that occurred during 2020. The price for domestic HRC, the most significant index in driving our revenues and profitability, currently is at an all-time high, as a direct result of favorable supply-demand dynamics following the pandemic. The HRC index averaged $1,201 per net ton for the first quarter of 2021, 105% higher than the same period last year.
The dramatic increase in the HRC price is a result of both supply and demand factors. Healthy consumer balance sheets have driven strong demand for light vehicles and consumer goods, such as HVAC products and appliances. In addition, demand from machinery and equipment producers has remained robust. On September 28, 2020, we entered into the Transaction Agreementsupply side, spot steel availability remains very limited as steel production in the U.S. has not recovered from the facility shutdowns that occurred during the early pandemic period. Import penetration has grown slightly but remains lower than its prior five-year average due to healthy demand globally as well as trade restrictions such as the Section 232 tariffs.
Along with ArcelorMittal S.A., pursuantthese supply-demand factors, pricing for HRC has also risen due to which Cliffs will acquire substantially allthe rise in price of the operationssteelmaking input costs both domestically and globally, most notably for iron units. The price of ArcelorMittal USA. Upon completion of the Transaction, we will be the largestbusheling scrap, a necessary input for flat-rolled steel producerproduction in North America. We will also beEAFs in the largest iron ore pellet producer in North America.U.S., averaged $535 per long ton during the first quarter of 2021, a 70% increase from the prior-year period. We expect the price of busheling scrap to completeremain elevated due to decreasing prime scrap generation from original equipment manufacturers and the Transactiongrowth of EAF capacity in the fourth quarterU.S., along with a push for expanded EAF production in China. As we are fully-integrated and have primarily a blast furnace footprint, the rising prices for busheling scrap in the U.S. bolster our competitive advantage, as we source the majority of 2020, subject toour iron feedstock from our stable-cost mining and pelletizing operations in Minnesota and Michigan. The rising price of busheling scrap should also benefit the receiptprofitability of regulatory approvalsour HBI sold externally, and the satisfaction of other customary closing conditions. We believe the transaction will transform us into a more efficient and flexible fully-integrated steel system, increasing our exposure in severalprovide greater cost savings potential for HBI used internally.
desirable end markets and creating a more resilient balance sheet. Unless otherwise noted, discussionThe price of our business and resultsiron ore has also risen dramatically over the past year, which along with strong demand, has been an important factor in rising steel prices globally. The Platts 62% Price averaged $167 per metric ton in the first quarter of operations in this Quarterly Report on Form 10-Q refers to our continuing operations on a stand-alone basis without giving effect2021, an 88% increase compared to the Transaction.same period in 2020. While playing a role in increased prices of steel, we also directly benefit from higher iron ore prices for the portion of iron ore pellets we sell to third parties.
Throughout 2020, the COVID-19 pandemic negatively disrupted, to varying degrees, effectively all of the end markets that we serve. As a result, we saw decreased demand for our steel and raw material products from the industrial markets that were impacted, most notably the automotive industry. However, during the third quarter of 2020, our business conditions rapidly improved as automotive customers have now resumed effectively full production in their previously idled facilities, and we have resumed operations at all of our temporarily idled facilities.
The largest market for our steel products is the automotive industry in North America, which makes light vehicle production a key driver of demand. In the first nine monthsquarter of 2020,2021, North American light vehicle production was approximately 9.23.6 million units, a 26%5% reduction from the prior year’s comparable period. The reduction is a result of automotive plants shutting down throughout the United States in responseprimarily due to the COVID-19 pandemic, withglobal semiconductor shortage. In addition to the most severe impact occurringsemiconductor shortage, production in North America has also experienced weather‐related and other supply chain disruptions, including a petrochemical shortage. In light of these production outages, we have been able to redirect certain volumes intended for this end market to the spot market, where demand is strong and pricing is at an all-time high.
During the first quarter of 2021, light vehicle sales in the secondU.S. saw a SAAR of approximately 16.7 million units with 3.7 million passenger cars and 13.0 million light trucks sold. The first quarter average represents an 11% increase over the first quarter of 2020. DuringHowever, the third quartermost recent sales data from March reflected an increase in sales to a SAAR of 2020, automotive production recovered dramatically17.9 million units, the highest sales rate in response41 months, leaving dealer inventories at multi-year lows.
Competitive Strengths
As the largest flat-rolled steel producer in North America, we benefit from having the size and scale necessary in a competitive, capital intensive business. Our sizeable operating footprint provides us with the operational leverage, flexibility and cost performance to increased demand from dealers, whose inventories had become severely depleted due toachieve competitive margins throughout the shutdowns.business cycle. We expectalso have a unique vertically integrated profile, which begins at the industry to continue to operate at a healthy pace due to continued strong consumer light vehicle demand.
In our Steelmining stage and Manufacturing segment, we also sell ourgoes all the way through the manufacturing of steel products, toincluding stamping, tooling and tubing. This positioning gives us both lower and more predictable costs throughout the infrastructure,supply chain and more control over both our manufacturing electrical power, distributorsinputs and converters markets, which have shown signsour end product destination.
Our legacy business of improvement, but not to the levelproducing iron ore pellets, our primary steelmaking raw material input, is another competitive advantage. Mini-mills (producers using EAFs) now comprise about 70% of the automotive recovery. Shipments to the distributors and converters markets, for example, remained slower than normal for most of the third quarter of 2020 due to lower than normal demand and high inventories which resultedsteel production in a reduced hot-rolled coil pricing average.
For our Mining and Pelletizing segment, the key driver of our business is demand for raw materials from U.S. steelmakers. During the first eight months of 2020, the U.S. produced approximately 47 million metric tons of crude steel,Their primary iron input is scrap metal, which is 20% lower than the same period in 2019, representing about 4% of total global crude steel production. U.S. total steel capacity utilization was approximately 66% in the first nine months of 2020, which is an approximate 18% decrease from the same period in 2019.
The price for domestic hot-rolled coil steel, an important attribute in the pricing forhas unpredictable and often volatile pricing. By controlling our iron ore pelletspellet supply, our primary steelmaking raw material feedstock can be secured at a stable and certainpredictable cost, and not subject to factors outside of our control.
We are also the largest supplier of automotive-grade steel products, averaged $526 per net tonin the U.S. Compared to other steel end markets, automotive steel is generally higher quality and more operationally and technologically intensive to produce. As such, it often generates higher through-the-cycle margins, making it a desirable end market for the first nine monthssteel industry. With our continued technological innovation, as well as leading delivery performance, we expect to remain the leader in supplying this industry.
We offer the most comprehensive flat-rolled steel product selection in the industry, along with several complementary products and services. A sampling of 2020, 16% lower thanthis offering includes advanced high-strength steel, hot-dipped galvanized, aluminized, galvalume, electrogalvanized, galvanneal, HRC, cold-rolled coil, plate, tinplate, grain oriented electrical steel, non-oriented electrical steel, stainless steels, tool & die, stamped components, rail and slabs. Across the same period last year. The price of hot-rolled coil steel was negatively impacted by lower demand related toquality spectrum and the COVID-19 pandemic. However, we are encouraged thatsupply chain, our customers can frequently find the price has recovered dramatically since August 2020 to above $650 per net ton, as a result of improved supply-demand fundamentals.solutions they need from our product selection.
The two other important indices that impact pricing in our Mining and Pelletizing segmentWe are the Platts 62% Pricefirst and the Atlantic Basin Pellet Premium. The Platts 62% Price averaged $100 per metric tononly producer of HBI in the first nine monthsGreat Lakes region. Construction of 2020, a 6% increase compared to the same period in 2019. The Platts 62% Price continued its strong performanceour Toledo, Ohio, direct reduction plant was completed in the thirdfourth quarter of 2020, as Chinese demand for2020. From this modern plant, we produce a high-quality scrap and pig iron ore remains strong. The Atlantic Basin Pellet Premium averaged $29 per metric ton for the first nine months of 2020, a 54% decrease comparedalternative. Ore-based metallics that compete with our HBI generally have to the same period in 2019, as weaknessbe imported from locations like Russia, Ukraine and Brazil. With increasing tightness in the steelscrap market outside of China has driven reduced demandand our own internal needs for higher quality raw materials.
For the threescrap and nine months ended September 30, 2020,metallics, we expect our consolidated Revenues, including Realization of deferred revenue of $34.6 millionToledo direct reduction plant to support healthy Steelmaking margins for the nine months ended September 30, 2020, were $1,646.0 million and $3,097.8 million, respectively. For the three and nine months ended September 30, 2019, our consolidated Revenues were $555.6 million and $1,455.8 million, respectively. For the three and nine months ended September 30, 2020, we had net loss from continuing operations attributable to Cliffs shareholders of $0.02 and $0.51 per diluted share, respectively, and consolidated Adjusted EBITDA of $126.3 million and $67.0 million, respectively. For the three and nine months ended September 30, 2019, we had net income from continuing operations attributable to Cliffs shareholders of $0.33 and $0.80 per diluted share, respectively, and consolidated Adjusted EBITDA of $144.1 million and $413.7 million, respectively. See "– Results of Operations – Segment Information" below for a reconciliation of our consolidated Net Income (loss) to Adjusted EBITDA.
Strategy
Our key strategic initiatives include:
Optimizing ourOur Fully-Integrated Steelmaking Footprint
Upon expected completion of the Transaction to acquire substantially all of the operations of ArcelorMittal USA, Cliffs will beWe have transformed into a fully-integrated steel enterprise with the size and scale to achieve improved through-the-cycle margins. The Transaction will form us intomargins and are the largest flat-rolled steel producer in North America with combined 2019 shipments of approximately 17 million net tons. The pendingAmerica.
Now that the AM USA Transaction is consistent withcompleted, our U.S.-centric strategy and furthersfocus is on the integration of these facilities within our commitment to environmentally and socially conscious steelmaking, providing self-sufficiency in environmentally friendly HBI and pellets, and expands our relationship with our union partners.
The Transaction includes six steelmaking facilities, eight finishing facilities, two iron ore mining and pelletizing operations, and three coal and cokemaking operations.footprint. These assets build upon our existing high-end steelmaking and raw material capabilities, and also open up new markets to us. Once the Transaction is completed, our focus will be on the integration of these facilities within the Cliffs footprint. The combination will provideprovides us the additional scale and technical capabilities necessary in a
competitive and increasingly quality-focused marketplace. We have ample opportunities to implement improvements in logistics, procurement, utilization and quality.
We expect the AM USA Transaction to improve our production capabilities, flexibility, and cost performance. We have identifiedtargeted approximately $150 million of potential cost synergies through asset optimization, economies of scale, and duplicative overhead savings. The Transactiontransaction also enhances optionality for future production of merchant pig iron,provided us additional access to complement our HBI offering innon-automotive industries with pricing correlated to the metallics space.U.S. HRC index, which currently is at an all-time high.
Maximizing ourOur Commercial Strengths
With the Acquisitions completed, acquisition of AK Steel and the expected completion of the Transaction to acquire substantially all of the operations of ArcelorMittal USA, we will be positioned to enhancenow have enhanced our offering ofto a full suite of flat steel products encompassing all steps of the iron ore and steel manufacturing process. We will enhancehave increased our industry-leading market share in the automotive industry,sector, where our portfolio of high-end products will deliver a broad range of differentiated solutions for this highly sought after customer base.
Both beforeWe believe we have the broadest flat steel product offering in North America, and after the expected completioncan meet customer needs from a variety of end markets and quality specifications. We have several finishing and downstream facilities with advanced technological capabilities.
We are also proponents of the acquisition of substantially all of the operations of ArcelorMittal USA, our product offering is expected to place heavy emphasis on the high-quality end of the spectrum, compared to other suppliers“value over volume” approach in terms of steel supply. We take our leadership role in the domesticindustry very seriously and global marketplace. Since 2015, AK Steel has de-emphasized the marketing of commodity-gradeintend to manage our steel such as hot-rolled coil and focused on high-end applications and solutions, emphasizing niche products primarily for the automotive industry, which is well known for its extremely selective buying behavior. The AK Steel expertise, equipment capabilities and delivery reliability differentiate us from what most U.S.-based steelmakers are capable of offering. It also allows for the abilityoutput in a responsible manner.
Expanding to minimize the pricing influence of volatile market indices with more focus on fixed-price agreements.
We also produce iron ore pellets, the most advanced and sophisticated iron ore product in the marketplace. The major global iron ore producers primarily sell iron ore fines, a commodity-grade product that makes up the vast majority of the seaborne iron ore trade. Our pellets are iron ore fines that have been further processed into homogenous feedstock that allow for enhanced efficiency within a blast furnace, offering steelmakers improved productivity and environmental performance. The sophisticated and tailor-made nature of our pellets allows us to charge a premium when compared to other iron ore products available in the marketplace. Upon the expected completion of the ArcelorMittal USA acquisition, we expect to transfer the vast majority of our pellets on an intercompany basis.New Markets
Our Toledo HBI productiondirect reduction plant when operational, will allowallows us to offer another unique, high-quality product to discerning raw material buyers. EAF steelmakers primarily use scrap for their iron feedstock, and our HBI will offeroffers a sophisticated alternative with less impurities, allowing theother steelmakers to increase the quality of their respective end steelend-steel products and reduce reliance on imported metallics.
Expanding our Customer Base and Product Offering
The completed acquisition of both AK SteelAcquisitions provide other potential outlets for HBI, as it can also be used in our integrated steel operations to increase productivity and the pending acquisition of substantially all of the operations of ArcelorMittal USA position ushelp to benefit from a largerreduce carbon footprint, allowing for more cost efficient and more diverse base of customers, with less overall emphasis on commodity-linked contracts, particularly the Platts 62% Price and Atlantic Basin Pellet Premium. This expansion of our customer base into the automotive industry, as well as other steel consuming manufacturers, is expected to create resiliency by broadening our exposure to several diversified end steel markets. We will now generally supply more
advanced steel products than EAF steelmakers, who have gained market share from other blast furnaces on less advanced commodity-grade steels.environmentally friendly steelmaking.
We are also seeking to expand our customer base with the rapidly growing and attractivedesirable electric vehicle market. At this time, we believe the North American automotive industry is approaching a monumental inflection point, with the adoption of electrical motors in passenger vehicles. As this market grows, it will require more advanced steel applications to meet the needs of electric vehicle producers and consumers. With our unique technical capabilities, we believe we are positioned better than any other North American steelmaker to supply the steel and parts necessary to fill these needs.
Additionally, althoughImproving Financial Flexibility
Given the cyclicality of our business, it is important to us to be in the financial position to easily withstand any negative demand or pricing pressure we may encounter. As such, our top priority for the allocation of our free cash flow is to improve our balance sheet via the reduction of long-term debt. During the COVID-19 pandemic, we were able to issue secured debt to provide insurance capital through the uncertain industry conditions that the pandemic caused. Now that business conditions have improved and we expect to generate healthy free cash flow during 2021, we have the ability to lower our long-term debt balance.
We anticipate that the current strong market environment will provide us ample opportunities to reduce our debt with our own free cash flow generation. We will also continue to review the composition of our debt, as we are interested in both extending our average maturity profile and increasing our ratio of unsecured debt to secured debt, which we demonstrated by executing a different customer base comparedseries of favorable debt and equity capital markets transactions during February 2021. These actions will better prepare us to other blast furnace steelmakers, we cannot ignore the ongoing shift of steelmaking sharenavigate more easily through potentially volatile industry conditions in the U.S. away fromfuture.
Enhance our Environmental Sustainability
As we transform, our commitment to operating our business in a more environmentally responsible manner remains constant. One of the blast furnace producers to the EAF steelmakers. Over the past 25 years, the market share of EAFs has nearly doubled. However, as EAFs have moved to higher-value steel products, they require more high-quality iron ore-based metallics instead of lower-grade scrap as raw material feedstock.most important issues impacting our industry, our stakeholders and our planet is climate change. As a result, of this trend, onewe are continuing Cliffs’ proactive approach by committing to reduce GHG emissions 25% from 2017 levels by 2030. This goal represents combined Scope 1 (direct) and Scope 2 (indirect) GHG emission reductions across all of our top strategic priorities will be to become a critical supplier of the EAF market by providing these specialized metallics.
Once operational, we expect our HBI production plant to partially replace the over three million metric tons of ore-based metallics that are imported into the Great Lakes region every year from Russia, Ukraine, Brazil and Venezuela, as well as the nearly 20 million metric tons of scrap used in the Great Lakes area every year. The Toledo site is in close proximity to over 20 EAFs, giving us a natural competitive freight advantage over import competitors. Not only will our HBI production plant create another outlet for our high-margin pellets, but it also presents an attractive economic opportunity for us. As the only producer of DR-grade pellets in the Great Lakes region and with access to abundant, low-cost natural gas, we will be in a unique position to serve clients in the area and grow our customer base.
The completed acquisition of AK Steel and pending acquisition of substantially all of the operations of ArcelorMittal USA provide other potential outlets for HBI as it can also be used in integrated steel operations to increase productivity and reduce carbon footprint, allowing for more cost efficient and environmentally friendly steelmaking.
Strengthening our Legacy Mining and Pelletizing Business
We are the market-leading iron ore producer in the U.S., supplying differentiated iron ore pellets to major North American blast furnace steel production facilities. We have the unique advantage of being a low-cost, high-quality, iron ore pellet producer with significant transportation and logistics advantages to serve the Great Lakes steel market.
We recognize the importance of our current strong position in the North American blast furnace steel industry, and one of our top priorities is to enhance our Mining and Pelletizing business by continually evaluating opportunities to preserve our customer base, expand our production capacity and increase ore reserve life.
The acquisition of AK Steel is central to providing stability to our Mining and Pelletizing business, as sales to AK Steel accounted for 29% of our iron ore product revenue for the year ended December 31, 2019. The acquisition of AK Steel ensures pellet volume commitments for approximately 6 million long tons of pellets annually in a normalized environment to complement our existing long-term minimum volume pellet offtake agreements with other key integrated steel producers and pellets to be eventually consumed at our Toledo HBI production plant.
The pending Transaction to acquire substantially all of the operations of ArcelorMittal USA would further secure this business by integrating our largest external pellet customer into our business. This is expected to ensure pellet volume commitments of approximately 7 to 9 million long tons annually in a normalized environment. The pending Transaction will also add to our pellet footprint by approximately 8 million long tons of annual capacity, including ArcelorMittal USA’s majority share of the Hibbing mine as well as the Minorca mine. The pellet production from these two mines is also expected to supply pellets to our own blast furnace operations.
Third Quarter 2020 Prior to setting this goal with our newly acquired steel assets, we exceeded our previous 26% GHG reduction target at our legacy facilities six years ahead of our 2025 goal. In 2019, we reduced our combined Scope 1 and Scope 2 GHG emissions by 42% on a mass basis from 2005 baseline levels. Our goal is to further reduce those emissions in coming years.
Additionally, many of our steel assets have improved plant and energy efficiency through participation in programs like the U.S. Department of Energy’s Better Plants program and the EPA’s Energy Star program. With our longstanding focus on plant and energy efficiency, we aim to build on our previous successes across our newly integrated enterprise.
Our GHG reduction commitment is based on executing the following five strategic priorities:
•Developing domestically sourced, high quality iron ore feedstock and utilizing natural gas in the production of HBI;
•Implementing energy efficiency and clean energy projects;
•Investing in the development of carbon capture technology;
•Enhancing our GHG emissions transparency and sustainability focus; and
•Supporting public policies that facilitate GHG reduction in the domestic steel industry.
Recent Developments
Labor Agreements
On September 28, 2020,April 12, 2021, we entered intoreached a tentative agreement with the Transaction Agreement with ArcelorMittal S.A., pursuant to which CliffsUSW for a new 53-month labor contract for our Mansfield Works employees that is effective as of April 1, 2021. The new contract will acquire substantially all of the operations of ArcelorMittal USA for an aggregate purchase price ofcover approximately $1.4 billion, consisting of (i) $505300 USW-represented workers.
Financing Transactions
On February 11, 2021, we sold 20 million in cash, (ii) 78,186,671 of our common shares par value $0.125and 40 million common shares were sold by an affiliate of ArcelorMittal, in an underwritten public offering. In each case, shares were sold at a price per share and (iii) 583,273of $16.12. Prior to this sale, ArcelorMittal held approximately 78 million common shares, ofwhich were issued as a new series of our Serial Preferred Stock, Class B, without par value, to be designated as the “Series B Participating Redeemable Preferred Stock” at closing. The cash portionpart of the purchase price is subject to customary working capital and purchase price adjustments.
consideration in connection with the AM USA Transaction. We expect to completedid not receive any proceeds from the Transaction in the fourth quarter of 2020. Completionsale of the Transaction is subject to various customary closing conditions, including the receipt40 million common shares sold on behalf of required regulatory approvals in identified jurisdictions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Act, and it is possible that factors outside of our control could result in the Transaction being completed at a later time or not at all. The Transaction Agreement also contains certain termination rights that may be exercised by either us or ArcelorMittal S.A.ArcelorMittal. We plan to complete the Transaction as soon as reasonably practicable following the satisfaction or waiver of all applicable conditions.
COVID-19
In December 2019, COVID-19 surfaced in Wuhan, China, and has since spread to other countries, including the United States. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. Efforts to contain the spread of COVID-19 intensified throughout 2020, and many countries, including the United States, took steps to restrict travel, temporarily close businesses and issue quarantine orders. It remains unclear how long and to what degree of severity the economic impact of the COVID-19 pandemic will be felt.
On March 27, 2020, President Trump signed into law the CARES Act. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, AMT credit refunds, modifications toused the net interest deduction limitations and technical correctionsproceeds from the offering, plus cash on hand, to tax depreciation methods for qualified improvement property. We have evaluated the impact the CARES Act will have on our business and are receiving liquidity relief due to our ability to accelerate the receipt of approximately $60 million of AMT credit refunds, originally receivable in 2021 and 2022 but instead were collected in July 2020, and defer pension contributions and employer social security payments of approximately $90 million.
We continue to utilize stringent social distancing procedures in our operating facilities, including checking employees’ temperatures and symptoms before entering the workplace each day and deep cleaning our operational facilities. Although we continue to utilize these measures, the outbreak of COVID-19 has heightened the risk that a significant portion of our workforce will suffer illness or otherwise be unable to perform their ordinary work functions.
Although steel and iron ore production have been considered “essential” by the states in which we operate, certain of our facilities and construction activities were temporarily idled during the second quarter of 2020 due primarily to temporarily reduced product demand. Most of these temporarily idled facilities were restarted during the second quarter, and the remaining operations were restarted during the third quarter.
We cannot predict whether our operations will experience additional disruptions in the future. We may also continue to experience supply chain disruptions or operational issues with our vendors, as our suppliers and contractors face similar challenges related to the COVID-19 pandemic. Because the impact of the COVID-19 pandemic continues to evolve, we cannot currently predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted.
To mitigate the impact of the COVID-19 pandemic, we took a number of steps throughout 2020 to solidify our liquidity position, including issuing $520redeem $322 million aggregate principal amount of secured debt, adding our outstanding 9.875% 2025 Senior Secured Notes.
On February 17, 2021, we issued $500 million aggregate principal amount of 4.625% 2029 Senior Notes and $500 million aggregate principal amount of 4.875% 2031 Senior Notes in an offering that was exempt from the registration requirements of the Securities Act. We used the net proceeds from the notes offering to redeem all of the outstanding 4.875% 2024 Senior Secured Notes and 6.375% 2025 Senior Notes issued by Cleveland-Cliffs Inc. and all of the outstanding 7.625% 2021 AK Senior Notes, 7.50% 2023 AK Senior Notes and 6.375% 2025 AK Senior Notes issued by AK Steel Corporation (n/k/a $150 million FILO tranche toCleveland-Cliffs Steel Corporation), and pay fees and expenses in connection with such redemptions, and reduce borrowings under our ABL facility, idling several facilities both temporarily and permanently, temporarily deferring our Chief Executive Officer’s compensation by 40%, temporarily deferring salaries by upFacility.
Refer to 20%, temporarily deferring other salaried employee benefits, and temporarily suspending capital expenditures. Lastly, our Board has suspended future dividends, which is a typical cash obligation of approximately $100 million on an annualized basis.
In light of the sudden onset and unknown impact and duration of the COVID-19 pandemic, our previously released guidanceNOTE 8 - DEBT AND CREDIT FACILITIES for the fiscal year ending December 31, 2020, should not be relied upon.further detail.
Results of Operations - Consolidated
Overview
The following is a summary of our consolidated results of operations forFor the three and nine months ended September 30, 2020 and 2019:
Revenues
The following table presents our sales volumes andMarch 31, 2021, we had RevenuesNet income by reportable segment:of $57 million, compared to a
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions, Except Sales Tons) | | | | | | |
| Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Sales volume (in thousands): | | | | | | | |
| Steel and Manufacturing (net tons) | 1,117 | | | — | | | 1,935 | | — | |
| | | | | | | |
| Mining and Pelletizing sales (long tons) | 4,907 | | | 5,750 | | 11,800 | | 13,527 |
| Less: Intercompany sales (long tons) | (1,204) | | | (346) | | | (3,028) | | | (384) | |
| Mining and Pelletizing consolidated sales (long tons) | 3,703 | | | 5,404 | | | 8,772 | | | 13,143 | |
| | | | | | | |
| Revenues: | | | | | | | |
| Steel and Manufacturing net sales to external customers | $ | 1,261.7 | | | $ | — | | | $ | 2,194.3 | | | $ | — | |
| | | | | | | |
Mining and Pelletizing net sales1 | 520.3 | | | 590.6 | | | 1,238.7 | | | 1,494.8 | |
| Less: Intercompany sales | (136.0) | | | (35.0) | | | (335.2) | | | (39.0) | |
| Mining and Pelletizing net sales to external customers | 384.3 | | | 555.6 | | | 903.5 | | | 1,455.8 | |
| | | | | | | — | |
| Total revenues | $ | 1,646.0 | | | $ | 555.6 | | | $ | 3,097.8 | | | $ | 1,455.8 | |
1Net loss Includes Realization of deferred revenue of $34.6$49 million for the nine months ended September 30, 2020.
prior-year period. Our Revenues increased by $1,090.4 million, or 196.3%, diluted EPS and Adjusted EBITDA for the three months ended September 30,March 31, 2021 and 2020 comparedwere as follows:
See "— Results of Operations — Adjusted EBITDA" below for a reconciliation of our Net income (loss) to Adjusted EBITDA.
Revenues
During the prior-year period.three months ended March 31, 2021, our consolidated Revenues, including Realization were $4.0 billion, an increase of deferred revenue, increased by $1,642.0 million, or 112.8%, for the nine months ended September 30, 2020,$3.7 billion, compared to the prior-year period. The increase for the three months ended September 30, 2020 was primarily due to the addition of revenues3.9 million net tons of steel shipments from our new Steel and ManufacturingSteelmaking segment as a result of the AK Steel acquisition, which was completed on March 13, 2020, and an increase in the realized revenue rates within the Mining and Pelletizing segment, which were partially offsetAcquisitions.
Revenues by a decrease in the sales volumes within the Mining and Pelletizing segment. Product Line
The increase for the nine months ended September 30, 2020 was due to the addition of revenues fromfollowing represents our new Steel and Manufacturing segment as a result of the AK Steel acquisition, which was completed on March 13, 2020, and was partially offsetRevenues by a decrease in the sales volumes and realized revenue rates within the Mining and Pelletizing segment.product line:
Refer to “– Results of Operations – Segment Information" for additional information regarding the specific factors that impacted revenue during the period.
Revenues by Market
The following table represents our consolidated Revenues and percentage of revenues to each of the markets we supply:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| Three Months Ended March 31, |
| 2021 | | 2020 |
| Revenue | | % | | Revenue | | % |
| Automotive | $ | 1,392 | | | 34 | % | | $ | 118 | | | 33 | % |
| Infrastructure and Manufacturing | 964 | | | 24 | % | | 43 | | | 12 | % |
| Distributors and Converters | 1,263 | | | 31 | % | | 54 | | | 15 | % |
| Steel Producers | 430 | | | 11 | % | | 144 | | | 40 | % |
| Total revenues | $ | 4,049 | | | | | $ | 359 | | | |
| | | | | | | |
Operating Costs
The following is a summaryCost of Total operating costs:goods sold
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | | | | | |
| Three Months Ended
September 30, | | | | | | Nine Months Ended
September 30, | | | | |
| 2020 | | 2019 | | Variance
Favorable/
(Unfavorable) | | 2020 | | 2019 | | Variance Favorable/ (Unfavorable) |
| Cost of goods sold | $ | (1,525.4) | | | $ | (400.7) | | | $ | (1,124.7) | | | $ | (3,088.9) | | | $ | (1,007.0) | | | $ | (2,081.9) | |
| Selling, general and administrative expenses | (59.6) | | | (25.5) | | | (34.1) | | | (149.2) | | | (82.2) | | | (67.0) | |
| Acquisition-related costs | (7.5) | | | — | | | (7.5) | | | (68.4) | | | — | | | (68.4) | |
| Miscellaneous – net: | | | | | | | | | | | |
| Empire idle costs | (3.7) | | | (5.5) | | | 1.8 | | | (10.7) | | | (14.8) | | | 4.1 | |
| HBI production plant startup costs | (8.0) | | | (2.0) | | | (6.0) | | | (23.0) | | | (3.9) | | | (19.1) | |
| Other | (3.8) | | | (0.3) | | | (3.5) | | | (6.8) | | | (0.3) | | | (6.5) | |
| Total Miscellaneous – net | (15.5) | | | (7.8) | | | (7.7) | | | (40.5) | | | (19.0) | | | (21.5) | |
| Total operating costs | $ | (1,608.0) | | | $ | (434.0) | | | $ | (1,174.0) | | | $ | (3,347.0) | | | $ | (1,108.2) | | | $ | (2,238.8) | |
Cost of goods sold
The increasesincreased by $3.4 billion for the three and nine months ended September 30, 2020, wereMarch 31, 2021, as compared to the prior-year period, primarily due to the addition of activity from the Steel and Manufacturing segment3.9 million net tons of $1,239.4 million and $2,345.9 million, respectively, which was unfavorably impacted by temporary idle related costs of approximately $39 million and $149 million, respectively,steel shipments resulting from the COVID-19 pandemic. Cost of goods sold for the three and nine months ended September 30, 2020 was partially offset by decreases at the Mining and Pelletizing segment of $31.5 million and $45.7 million, respectively, primarily due to a decrease in sales volumes. Mining and Pelletizing segment Cost of goods sold for the three and nine months ended September 30, 2020 included temporary idle related costs of approximately $14 million and $63 million, respectively, resulting from the COVID-19 pandemic.Acquisitions.
Refer to “– Results of Operations – Segment Information” for additional information regarding the specific factors that impacted our operating results during the period.
Selling, general and administrative expenses
As a result of the Acquisitions, ourWe had additional Selling, general and administrative expenses forincreased by $67 million during the three and nine months ended September 30, 2020 for costs incurred relatedMarch 31, 2021, as compared to AK Steel, which were partially offset by lower incentive compensation costs.the prior-year period.
Acquisition-related costs
The Acquisition-related costs of $13 millionfor the three and nine months ended September 30, 2020, includeMarch 31, 2021, includes severance of $2.4$11 million and $38.3other various third-party expenses related to the Acquisitions of $2 million. The Acquisition-related costs of $42 million respectively.for the three months ended March 31, 2020, includes severance of $19 million and $23 million of other various third-party expenses related to the AK Steel Merger. Refer to NOTE 3 - ACQUISITION OF AK STEELACQUISITIONS for further information on the acquisition.Acquisitions.
TableMiscellaneous – net decreased by $9 million for the three months ended March 31, 2021, as compared to the prior-year period, which was primarily due to expenses incurred at our Toledo direct reduction plant recorded in Miscellaneous – net prior to start of Contentsproduction in December 2020.
Other Income (Expense)
The following is a summary of Total otherInterest expense,: net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | | | | | |
| Three Months Ended
September 30, | | | | | | Nine Months Ended
September 30, | | | | |
| 2020 | | 2019 | | Variance
Favorable/
(Unfavorable) | | 2020 | | 2019 | | Variance Favorable/ (Unfavorable) |
| Interest expense, net | $ | (68.2) | | | $ | (25.3) | | | $ | (42.9) | | | $ | (167.9) | | | $ | (76.5) | | | $ | (91.4) | |
| Gain (loss) on extinguishment of debt | — | | | — | | | — | | | 132.6 | | | (18.2) | | | 150.8 | |
| Other non-operating income (expense): | | | | | | | | | | | |
| Net periodic benefit credits (costs) other than service costs component | 9.3 | | | (0.3) | | | 9.6 | | | 29.9 | | | (0.4) | | | 30.3 | |
| Other | 0.7 | | | 0.6 | | | 0.1 | | | 1.3 | | | 1.7 | | | (0.4) | |
| Total other expense | $ | (58.2) | | | $ | (25.0) | | | $ | (33.2) | | | $ | (4.1) | | | $ | (93.4) | | | $ | 89.3 | |
The increases in Interest expense, net wereincreased by $61 million for the three months ended March 31, 2021, as compared to the prior-year period, primarily due to the incremental debt associatedthat we incurred in connection with the acquisition of AK Steel. These increases were partially offset by an increaseSteel Merger, along with borrowings on the ABL Facility, and a decrease in capitalized interest primarily relatedduring the current year due to constructionthe completion of the HBI productionToledo direct reduction plant.
Gain (loss) on extinguishment of debt
The gainloss on extinguishment of debt of $66 million for the ninethree months ended September 30, 2020March 31, 2021, primarily relates to the repurchase of $747.6$322 million in aggregate principal amount of 9.875% 2025 Senior Secured Notes using the net proceeds from the issuance of 20 million common shares. Additionally, we repurchased $535 million in aggregate principal amount of our outstanding senior notes of various series using the net proceeds from the additional $555.2 million 9.875% 2025 Senior Secured Notes issuance and other sources of cash. The nine months ended September 30, 2020 were also impacted by the purchase of $56.5 million aggregate principal amount of 7.50% 2023 AK4.625% 2029 Senior Notes and $8.5 million aggregate principal amount of 7.625% 2021 AK4.875% 2031 Senior Notes, pursuant to tender offers.along with cash on hand. Refer to NOTE 78 - DEBT AND CREDIT FACILITIES for further details.
Net periodic benefit credits (costs) other than service cost component were
The increase of $41 million in Net periodic benefit credits other than service cost component primarily duerelates to an increase in the expected return on pension and voluntary employee benefit association trust assets due toacquired as a result of the acquisition of AK Steel pension assets and increased asset values for the plans held in 2019.Acquisitions. Refer to NOTE 910 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further detail on the components of net periodic benefit credits (costs) other than service cost component.details.
Income Taxes
Our effective tax rate is impacted by permanent items, primarily depletion. It also is affected by discrete items that may occur in any given period, but are not consistent from period to period. The following represents a summary of our tax provision and corresponding effective rates:
| | | (In Millions, Except Percentages) | | | | (In Millions) |
| | Three Months Ended
September 30, | | | Nine Months Ended
September 30, | | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | Variance | | 2020 | | 2019 | | Variance | | | 2021 | | 2020 |
| Income tax benefit (expense) | Income tax benefit (expense) | $ | 22.4 | | | $ | (4.8) | | | $ | 27.2 | | | $ | 98.5 | | | $ | (23.1) | | | $ | 121.6 | | Income tax benefit (expense) | | $ | (9) | | | $ | 51 | |
| Effective tax rate | Effective tax rate | 110.9 | % | | 5.0 | % | | 105.9 | % | | 38.9 | % | | 9.1 | % | | 29.8 | % | Effective tax rate | | 14 | % | | 51 | % |
The difference in the effective rate and income tax expense from the comparable prior-year periodsperiod primarily relates to the mix of income and certain non-deductible transaction related items, as well as discrete items recorded in each period.
Our 20202021 estimated annual effective tax rate before discrete items is 35.5%19%. This estimated annual effective tax rate differs from the U.S. statutory rate of 21%, primarily due to the deduction for percentage depletion in excess of cost depletion related to our Mining and Pelletizing segment operations, as well as non-deductible transaction costs, executive officers' compensation, global intangible low-taxed income and income of noncontrolling interests for which no tax is recognized.depletion. The 20192020 estimated annual effective tax rate before discrete items at September 30, 2019March 31, 2020 was 9.6%47%. The increasedecrease in the estimated annual effective tax rate before discrete items is driven by the change in the mix of income, as well as transaction costs and other acquisition-related charges that were incurred only in 2020.
For the three and nine months ended September 30, 2020, we recorded discrete items that resulted in an income tax benefit of $5.0 million and $8.6 million, respectively. The discrete adjustments are primarily related to the release of uncertain tax positions due to favorable resolution of an international audit issue. The discrete adjustments also include interest on uncertain tax positions and the refunds received during the year of amounts sequestered by the Internal Revenue Service on previously filed AMT credit refund claims. For the three and nine months ended September 30, 2019, we recorded discrete items that resulted in an income tax benefit of $0.5 million and $1.3 million, respectively.income.
Results of Operations - Segment Information
Adjusted EBITDA
We evaluate performance on a segment basis, as well as a consolidated basis, based on Adjusted EBITDA, which is a non-GAAP measure. This measure is used by management, investors, lenders and other external users of our financial statements to assess our operating performance and to compare operating performance to other companies in the steel and iron ore industries,industry, although it is not necessarily comparable to similarly titled measures used by other companies. 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 consolidated Net income (loss) to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | |
| Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Net income (loss) | $ | 1.9 | | | $ | 90.9 | | | $ | (154.8) | | | $ | 229.6 | |
| Less: | | | | | | | |
| Interest expense, net | (68.2) | | | (25.4) | | | (167.9) | | | (76.8) | |
| Income tax benefit (expense) | 22.4 | | | (4.8) | | | 98.5 | | | (23.1) | |
| Depreciation, depletion and amortization | (72.4) | | | (22.2) | | | (183.9) | | | (63.1) | |
| EBITDA | $ | 120.1 | | | $ | 143.3 | | | $ | 98.5 | | | $ | 392.6 | |
| Less: | | | | | | | |
EBITDA of noncontrolling interests1 | $ | 16.2 | | | $ | — | | | $ | 41.3 | | | $ | — | |
| Gain (loss) on extinguishment of debt | — | | | — | | | 132.6 | | | (18.2) | |
| Severance costs | (2.4) | | | — | | | (38.3) | | | (1.7) | |
| Acquisition-related costs excluding severance costs | (5.1) | | | — | | | (30.1) | | | — | |
| Amortization of inventory step-up | (14.6) | | | — | | | (74.0) | | | — | |
| Impact of discontinued operations | (0.3) | | | (0.8) | | | — | | | (1.2) | |
| Adjusted EBITDA | $ | 126.3 | | | $ | 144.1 | | | $ | 67.0 | | | $ | 413.7 | |
1 EBITDA of noncontrolling interests includes $11.9 million and $31.2 million for income and $4.3 million and $10.1 million for depreciation, depletion and amortization for the three and nine months ended September 30, 2020, respectively.
The following table provides a reconciliation of our Net income (loss) to Adjusted EBITDA:
| | | | | | | | | | | | | | | |
| | | | | (In Millions) |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Net income (loss) | | | | | $ | 57 | | | $ | (49) | |
| Less: | | | | | | | |
| Interest expense, net | | | | | (92) | | | (31) | |
| Income tax benefit (expense) | | | | | (9) | | | 51 | |
| Depreciation, depletion and amortization | | | | | (217) | | | (35) | |
| Total EBITDA | | | | | $ | 375 | | | $ | (34) | |
| Less: | | | | | | | |
EBITDA of noncontrolling interests1 | | | | | $ | 22 | | | $ | 4 | |
| Gain (loss) on extinguishment of debt | | | | | (66) | | | 3 | |
| Severance costs | | | | | (11) | | | (19) | |
| Acquisition-related costs excluding severance costs | | | | | (2) | | | (23) | |
| Amortization of inventory step-up | | | | | (81) | | | (23) | |
| Impact of discontinued operations | | | | | — | | | 1 | |
| Total Adjusted EBITDA | | | | | $ | 513 | | | $ | 23 | |
| | | | | | | |
1 EBITDA of noncontrolling interests includes $16 million and $3 million for income and $6 million and $1 million for depreciation, depletion and amortization for the three months ended March 31, 2021 and 2020, respectively. |
The following table provides a summary of our Adjusted EBITDA by segment:
| | | (In Millions) | | | | (In Millions) |
| | Three Months Ended
September 30, | | | Nine Months Ended
September 30, | | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | | | 2021 | | 2020 |
| Adjusted EBITDA: | Adjusted EBITDA: | | | | | | | | | | | | Adjusted EBITDA: | | | | |
| Steel and Manufacturing | $ | 33.3 | | | $ | (2.1) | | | $ | 35.4 | | | $ | (81.8) | | | $ | (4.0) | | | $ | (77.8) | | |
| Mining and Pelletizing | 145.3 | | | 182.7 | | | (37.4) | | | 309.5 | | | 510.7 | | | (201.2) | | |
| Steelmaking | | Steelmaking | | $ | 537 | | | $ | 44 | |
| Other Businesses | | Other Businesses | | 11 | | | 2 | |
| Corporate and eliminations | Corporate and eliminations | (52.3) | | | (36.5) | | | (15.8) | | | (160.7) | | | (93.0) | | | (67.7) | | Corporate and eliminations | | (35) | | | (23) | |
| Total Adjusted EBITDA | Total Adjusted EBITDA | $ | 126.3 | | | $ | 144.1 | | | $ | (17.8) | | | $ | 67.0 | | | $ | 413.7 | | | $ | (346.7) | | Total Adjusted EBITDA | | $ | 513 | | | $ | 23 | |
Adjusted EBITDA from the Steel and Manufacturingour Steelmaking segment increased by $493 million for the three months ended September 30, 2020 was positively impacted by pent-up demand from the COVID-19 pandemic, which helped boost automotive production during the third quarter. Despite the positive third quarter results, Adjusted EBITDA for the nine months ended September 30, 2020 was negative as the second quarter of 2020 was unfavorably impacted by decreased customer demand resulting from the COVID-19 pandemic. As a result of the COVID-19 pandemic, we incurred temporary idle related costs resulting from production curtailments of approximately $39 million and $149 million for the three and nine months ended September 30, 2020, respectively. Additionally, Cost of goods sold as a percentage of Revenues for the nine months ended September 30, 2020 was unfavorably impacted by product sales mix primarily due to the COVID-19 pandemic, which resulted in lower sales volumes to automotive customers in the second quarter during the height of the COVID-19 stay-at-home orders and shutdowns.
Adjusted EBITDA from the Mining and Pelletizing segment for the three months ended September 30, 2020 decreased $37.4 million,March 31, 2021, compared to the prior-year period, primarily due to lower Revenues of $70.3 million, which was partially offset by lower Cost of goods sold of $31.5 million.period. The lower Revenuesresults were driven primarily by a decrease in sales volume of 0.8 million long tons due to reduced customer demand associated with the COVID-19 pandemic, which was partially offset by an increase in the average year-to-date realized product revenue rate, predominantly due to Platts 62% Price and lower index freight rates. The lower Cost of goods sold was primarily drivenfavorably impacted by the decrease in sales volume, which was partially offset by idle costs, excluding idle depreciation, depletion and amortization expense, of $12 million as a result of the temporary idling of operations in response to reduced customer demand driven by the COVID-19 pandemic.
Adjusted EBITDA from the Mining and Pelletizing segment for the nine months ended September 30, 2020 decreased $201.2 million, comparedoperating results related to the prior-year period, primarily due to lower Revenues of $256.1 million, which was partially offset by lower Cost of goods sold of $45.7 million. The lower Revenues were driven primarily by a decrease in sales volume of 1.7 million long tons and a decrease in the average year-to-date realized product revenue rate, predominantly due to lower Atlantic Basin Pellet Premiums and a decrease in the hot-rolled coil steel price. The lower Cost of goods sold was primarily driven by the decrease in sales volume, which was partially offset by idle costs, excluding idle depreciation, depletion and amortization expense, of $52 million as a result of the temporary idling of operations in response to reduced customer demand driven by the COVID-19 pandemic.acquired steelmaking operations.
Adjusted EBITDA from Corporate and eliminations for the three months ended September 30, 2020 and 2019 includes intercompany profit eliminations for iron ore sales from the Mining and Pelletizing segmentprimarily relates to the Steel and Manufacturing segment of $28.6 million and $10.9 million, respectively. Additionally, Adjusted EBITDA from Corporate and eliminations for the three months ended September 30, 2020 and 2019 includes corporate and allocated Selling, general and administrative expenses of $22.9 million and $24.6 million, respectively.at our Corporate headquarters.
Adjusted EBITDA from Corporate and eliminations
Steelmaking
The following is a summary of our Steelmaking segment results included in our consolidated financial statements for the ninethree months ended September 30,March 31, 2021 and 2020. The results for the three months ended March 31, 2021, include full period results for all Steelmaking operations. The results for the three months ended March 31, 2020, include AK Steel operations subsequent to March 13, 2020, and 2019 includes intercompany profit eliminations for iron ore salesour results from theoperations previously reported as part of our Mining and Pelletizing segment.
The following is a summary of our Steelmaking segment operating results:
| | | | | | | | | | | |
| Three Months Ended
March 31, |
| 2021 | | 2020 |
| Operating Results - In Millions | | | |
| Revenues | $ | 3,919 | | | $ | 337 | |
| Cost of goods sold | $ | (3,644) | | | $ | (335) | |
| Selling Price - Per Ton | | | |
| Average net selling price per net ton of steel products | $ | 900 | | | $ | 980 | |
The average net selling price per ton for the three months ended March 31, 2021, reflects changes in mix associated with the first full quarter of ownership of ArcelorMittal USA, reducing the overall contribution of higher-priced coated, stainless and electrical steel products.
The following table represents our Steelmaking segment Revenues by product line:
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars In Millions,
Sales Volumes In Thousands) |
| Three Months Ended
March 31, |
| 2021 | | 2020 |
| Revenue | | Volume1 | | Revenue | | Volume1 |
| Hot-rolled steel | $ | 895 | | | 1,182 | | | $ | 19 | | | 31 | |
| Cold-rolled steel | 632 | | | 748 | | | 28 | | | 40 | |
| Coated steel | 1,308 | | | 1,369 | | | 90 | | | 99 | |
| Stainless and electrical steel | 363 | | | 167 | | | 56 | | | 27 | |
| Plate Steel | 244 | | | 275 | | | — | | | — | |
| Other steel products | 289 | | | 403 | | | — | | | — | |
| Iron products | 70 | | | 600 | | | 142 | | | 1,351 | |
| Other | 118 | | | N/A | | 2 | | | N/A |
| Total | $ | 3,919 | | | | | $ | 337 | | | |
| | | | | | | |
1 All steel product volumes are stated in net tons. Iron product volumes are stated in long tons. |
Operating Results
Steelmaking revenues for the three months ended March 31, 2021, increased by $3,582 million compared to the prior-year period due to the addition of sales following the Acquisitions. The three months ended March 31, 2021 included results of the operations acquired in the Acquisitions for a full quarter, compared to the three months ended March 31, 2020, which included the operating results from AK Steel during the period of March 13, 2020 through March 31, 2020. Results for the three months ended March 31, 2021 were impacted positively by the increase in the price for domestic HRC, which is the most significant index in driving our revenues and Manufacturing segmentprofitability. The HRC index averaged $1,201 per net ton for the first quarter of $90.32021, 105% higher than the same period last year and currently at an all-time high as a direct result of favorable supply-demand dynamics following the pandemic.
Cost of goods sold for the three months ended March 31, 2021, increased by $3,309 million and $12.5 million, respectively. Additionally,compared to the prior-year period predominantly due to additional sales resulting from the Acquisitions.
As a result, Adjusted EBITDA from Corporate and eliminationswas $537 million for the ninethree months ended September 30,March 31, 2021, compared to $44 million for the prior-year period. Refer to "— Results of Operations" above for additional information.
Production
During the first three months of 2021, we produced 4.8 million net tons of raw steel, 6.9 million long tons of iron ore products and 0.7 million net tons of coke. Our Columbus and Monessen facilities acquired through the AM USA Transaction are temporarily idled due to impacts of the COVID-19 pandemic. We anticipate restarting our Columbus facility during the second quarter of 2021. During the first three months of 2020, we produced 0.3 million net tons of raw steel and 2019 includes corporate and allocated Selling, general and administrative expenses4.8 million long tons of $67.6 million and $77.4 million, respectively.iron ore pellets.
Steel and Manufacturing
The following is a summary of Steel and Manufacturing segment results included in our consolidated financial results for the three and nine months ended September 30, 2020. These results include the AK Steel operations within our Steel and Manufacturing segment subsequent to March 13, 2020.
Flat-Rolled Steel Shipments by Product Category
The following is a summary of the Steel and Manufacturing segment operating results:
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2020 | | September 30, 2020 |
| Volumes - In Thousands of Net Tons | | | |
| Flat-rolled steel shipments | 1,117 | | 1,935 |
| Operating Results - In Millions | | | |
| Revenues | $ | 1,261.7 | | | $ | 2,194.3 | |
| Cost of goods sold | $ | (1,239.4) | | | $ | (2,345.9) | |
Adjusted EBITDA1 | $ | 33.3 | | | $ | (81.8) | |
| Selling Price - Per Net Ton | | | |
| Average net selling price per net ton of flat-rolled steel | $ | 1,006 | | | $ | 1,021 | |
| Revenues Attributable to International Customers | | | |
| Revenues to customers outside the United States (In Millions) | $ | 125.5 | | | $ | 196.4 | |
| Revenues to customers outside the United States as a percent of total Steel and Manufacturing revenues | 9.9 | % | | 9.0 | % |
1 We had negative Adjusted EBITDA for the three and nine months ended September 30, 2019, of $2.1 million and $4.0 million, respectively, for costs incurred at our HBI production plant.
The following table presents the percentage of revenues to each of our Steel and Manufacturing markets:
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| Market | | September 30, 2020 | | September 30, 2020 |
| Automotive | | 73 | % | | 64 | % |
| Infrastructure and Manufacturing | | 16 | % | | 20 | % |
| Distributors and Converters | | 11 | % | | 16 | % |
Operating Results
Adjusted EBITDA for the three months ended September 30, 2020 was positive as pent-up demand from the COVID-19 pandemic helped boost automotive production during the quarter. As a result, sales to the automotive market accounted for 73% of Revenues during the third quarter. Cost of goods sold for the three months ended September 30, 2020 was unfavorably impacted by temporary idle related costs of approximately $39 million, driven by the lingering effects of temporarily idled facilities in response to lower customer demand due to the COVID-19 pandemic.
Despite a positive third quarter, which showed significant signs of improvement, Adjusted EBITDA for the nine months ended September 30, 2020 was negative as the second quarter was impacted by decreased customer demand resulting from the COVID-19 pandemic. Cost of goods sold for the nine months ended September 30, 2020 was unfavorably impacted by idle related costs of approximately $149 million, driven by the temporary idling of facilities in response to lower customer demand due to the COVID-19 pandemic. Additionally, Cost of goods sold as a percentage of Revenues was unfavorably impacted by product sales mix primarily due to the COVID-19 pandemic, which resulted in lower sales volumes to our automotive customers in the second quarter during the height of the COVID-19 stay-at-home orders and shutdowns.
Production
During the third quarter, certain of our facilities, which were previously temporarily idled in response to the COVID-19 pandemic, including Dearborn Works, Mansfield Works, all Precision Partners stamping facilities and approximately 65% of AK Tube production, were all restarted and resumed production. Dearborn Works hot strip mill, anneal and temper operations and AK Coal remain permanently idled as part of the permanent cost reduction efforts.
Mining and Pelletizing
The following is a summary of Mining and Pelletizing segment results for the three months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (In Millions) | | | | | | | | |
| | Three Months Ended
September 30, | | | | | | | | |
| | 2020 | | 2019 | | Change | | Percent change | | |
Volumes - In Thousands of Long Tons1,2 | | | | | | | | | | |
| Sales tons | | 4,907 | | | 5,750 | | | (843) | | | (14.7) | % | | |
| Production tons | | 4,560 | | | 5,159 | | | (599) | | | (11.6) | % | | |
Operating Results - In Millions2 | | | | | | | | | | |
| Revenues | | $ | 520.3 | | | $ | 590.6 | | | $ | (70.3) | | | (11.9) | % | | |
| Cost of goods sold | | $ | (393.3) | | | $ | (424.8) | | | $ | 31.5 | | | (7.4) | % | | |
| Adjusted EBITDA | | $ | 145.3 | | | $ | 182.7 | | | $ | (37.4) | | | (20.5) | % | | |
1 Includes Cliffs' 23% share of the Hibbing mine production.
2 Includes intercompany sales to our Steel and Manufacturing segment of 1,204 thousand long tons and 346 thousand long tons for the three months ended September 30, 2020 and 2019, respectively.
The following table presents certain operating results on a per ton basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | | | | | |
| Per Ton Information | | 2020 | | 2019 | | Change | | Percent change |
Realized product revenue rate1 | | $ | 98.06 | | | $ | 95.65 | | | $ | 2.41 | | | 2.5 | % |
| | | | | | | | |
Cash cost of goods sold rate1,2 | | $ | 68.25 | | | $ | 63.20 | | | $ | 5.05 | | | 8.0 | % |
| Depreciation, depletion & amortization | | 3.93 | | | 3.62 | | | 0.31 | | | 8.6 | % |
| Total cost of goods sold | | $ | 72.18 | | | $ | 66.82 | | | $ | 5.36 | | | 8.0 | % |
1 Excludes revenues and expenses related to freight, which are offsetting.
2 Cash cost of goods sold rate is a non-GAAP financial measure. Refer to "–Non-GAAP Reconciliation" for a reconciliation of this non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP.
Adjusted EBITDA decreased by $37.4 million during the three months ended September 30, 2020, compared to the prior-year period, primarily due to the decrease in revenues of $70.3 million, offset partially by the decrease in cost of goods sold of $31.5 million, as discussed below.
Revenues decreased by $68.7 million during the three months ended September 30, 2020, compared to the prior-year period, excluding a decrease in domestic freight of $1.6 million, driven by:
•Lower sales volume of 0.8 million long tons, primarily due to reduced demand as certain customer blast furnaces remained idled in response to the COVID-19 pandemic, which resulted in decreased revenue of $80 million.
•This decrease was offset partially by an increase in the average year-to-date realized product revenue rate of $2.41 per long ton, or 2.5%, during the three months ended September 30, 2020, compared to the prior-year period, which resulted in an increase of $11 million, predominantly due to:
◦An increase in the Platts 62% Price, which positively affected the realized revenue rate by $31 million, or $6 per long ton; and
◦Lower index freight rates, a component in most of our contract pricing formulas, which positively affected the realized revenue rate by $24 million, or $5 per long ton.
◦These increases were offset partially by lower Atlantic Basin Pellet Premiums, which negatively affected the realized revenue rate by $45 million, or $9 per long ton.
Cost of goods sold decreased $29.9 million during the three months ended September 30, 2020, excluding the domestic freight decrease of $1.6 million, compared to the same period in 2019. This is predominantly due to a decrease in sales volume, as discussed above, of 0.8 million long tons, which resulted in decreased costs of $55 million period-over-period. This was offset partially by idle costs of $14 million as a result of the temporary idling of operations in response to reduced customer demand driven by the COVID-19 pandemic, that were incurred during the three months ended September 30, 2020.
Production
Production for the three months ended September 30, 2020, decreased 11.6% compared to the same period in 2019, predominantly due to the temporary idling of the Northshore and Hibbing mines in response to the COVID-19 pandemic and resulting decreased customer demand. Both the Northshore and Hibbing mine operations were restarted during the third quarter.
Mining and Pelletizing
The following is a summary of Mining and Pelletizing segment results for the nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (In Millions) | | | | | | | | |
| | Nine Months Ended
September 30, | | | | | | | | |
| | 2020 | | 2019 | | Change | | Percent change | | |
Volumes - In Thousands of Long Tons1,2 | | | | | | | | | | |
| Sales tons | | 11,800 | | 13,527 | | (1,727) | | | (12.8) | % | | |
| Production tons | | 11,430 | | 14,737 | | (3,307) | | | (22.4) | % | | |
Operating Results - In Millions2 | | | | | | | | | | |
Revenues3 | | $ | 1,238.7 | | | $ | 1,494.8 | | | $ | (256.1) | | | (17.1) | % | | |
| Cost of goods sold | | $ | (987.8) | | | $ | (1,033.5) | | | $ | 45.7 | | | (4.4) | % | | |
| Adjusted EBITDA | | $ | 309.5 | | | $ | 510.7 | | | $ | (201.2) | | | (39.4) | % | | |
1 Includes Cliffs' 23% share of the Hibbing mine production.
2 Includes intercompany sales to our Steel and Manufacturing segment of 3,028 thousand long tons and 384 thousand long tons for the nine months ended September 30, 2020 and 2019, respectively.
3 Includes Realization of deferred revenue of $34.6 million for the nine months ended September 30, 2020.
The following table presents certain operating results on a per ton basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | | | | | |
| Per Ton Information | | 2020 | | 2019 | | Change | | Percent change |
Realized product revenue rate1,3 | | $ | 96.98 | | | $ | 103.26 | | | $ | (6.28) | | | (6.1) | % |
| | | | | | | | |
Cash cost of goods sold rate1,2 | | $ | 70.87 | | | $ | 64.80 | | | $ | 6.07 | | | 9.4 | % |
| Depreciation, depletion & amortization | | 4.85 | | | 4.35 | | | 0.50 | | | 11.5 | % |
| Total cost of goods sold | | $ | 75.72 | | | $ | 69.15 | | | $ | 6.57 | | | 9.5 | % |
1 Excludes revenues and expenses related to freight, which are offsetting.
2 Cash cost of goods sold rate is a non-GAAP financial measure. Refer to "–Non-GAAP Reconciliation" for a reconciliation of this non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP.
3 Includes Realization of deferred revenue of $34.6 million for the nine months ended September 30, 2020.
Adjusted EBITDA decreased by $201.2 million during the nine months ended September 30, 2020, compared to the prior-year period, primarily due to the decrease in revenues of $256.1 million, offset partially by the decrease in cost of goods sold of $45.7 million, as discussed below.
Revenues decreased by $252.3 million during the nine months ended September 30, 2020, compared to the prior-year period, excluding a decrease in domestic freight of $3.8 million, driven by:
•Lower sales volume of 1.7 million long tons, primarily due to reduced demand as customers idled their blast furnaces in response to the COVID-19 pandemic, which resulted in decreased revenue of $177 million; and
•A decrease in the average year-to-date realized product revenue rate of $6.28 per long ton, or 6.1%, during the nine months ended September 30, 2020, compared to the prior-year period, which resulted in a decrease of $76 million, predominantly due to:
◦Lower Atlantic Basin Pellet Premiums, which negatively affected the realized revenue rate by $11 per long ton, or $131 million; and
◦A decrease in the hot-rolled coil steel price, which negatively affected the realized revenue rate by $5 per long ton, or $59 million.
◦These decreases were offset partially by:
▪The Realization of deferred revenue of $35 million, or $3 per long ton, as a result of the termination of the AK Steel iron ore pellet sales agreement;
▪An increase in the Platts 62% Price, which positively affected the realized revenue rate by $31 million, or $3 per long ton; and
▪Lower index freight rates, a component in most of our contract pricing formulas, which positively affected the realized revenue rate by $25 million, or $2 per long ton.
Cost of goods sold decreased $41.9 million during the nine months ended September 30, 2020, excluding the domestic freight decrease of $3.8 million, compared to the same period in 2019. This is predominantly due to a decrease in sales volume, as discussed above, of 1.7 million long tons, which resulted in decreased costs of $118 million period-over-period. This was offset partially by idle costs of $63 million as a result of the temporary idling of operations in response to reduced customer demand driven by the COVID-19 pandemic, that were incurred during the nine months ended September 30, 2020.
Production
Production for the nine months ended September 30, 2020, decreased 22.4% compared to the same period in 2019, predominantly due to the temporary idling of the Tilden, Northshore and Hibbing mines in response to the COVID-19 pandemic and resulting decrease in customer demand.
Liquidity, Cash Flows and Capital Resources
Our primary sources of liquidity are Cash and cash equivalents and cash generated from our operations, availability under the ABL Facility and other financing activities. Our capital allocation decision-making process is focused on preserving healthy liquidity levels while maintaining the strength of our balance sheet and creating financial flexibility to manage through the inherent cyclical demand for our products and volatility in commodity prices. We are focused on maximizing the cash generation of our operations, reducing debt, and aligning capital investments with our strategic priorities and the requirements of our business plan, including regulatory and permission-to-operate related projects.
SinceFollowing the onset of the COVID-19 pandemic in the United States,U.S. in 2020, our primary focus has been on maintainingwas to maintain adequate levels of liquidity to manage through a potentially prolonged economic downturn. In alignment with this,Now that business conditions have improved and we expect to generate healthy free cash flow during remaining nine months of 2021, we believe we will have made several operational adjustments, including facility closures, idles, and extended maintenance outages. Along with the cost savings achieved through these operational adjustments, we have reduced planned capital expenditures for the year, reduced overhead costs and suspendedability to lower our quarterly dividend payment. Additionally, on April 17, 2020 and April 24, 2020, we issued $400.0 million aggregate principal amount and an additional $555.2 million aggregate principal amount, respectively, of 9.875% 2025 Senior Secured Notes to further bolster our liquidity position and reduce debt.long-term debt balance. We also issued an additional $120.0look at the composition of our debt, as we are interested in both extending our maturity profile and increasing our ratio of unsecured debt to secured debt. These actions will better prepare us to navigate more easily through potentially volatile industry conditions in the future. In furtherance of these goals, we consummated certain financing transactions in February 2021.
On February 11, 2021, we sold 20 million common shares at a price per share of $16.12. We used the net proceeds from the offering, plus cash on hand, to redeem $322 million aggregate principal amount of 6.75% 2026our outstanding 9.875% 2025 Senior Secured Notes on June 19, 2020, the net proceeds of which we intendNotes. Prior to use to finance construction of our HBI production plant. Pending such use, the net proceeds were used to temporarily reduce the outstanding borrowings under our ABL Facility.
On February 17, 2021, we issued $500 million aggregate principal amount of 4.625% 2029 Senior Notes and $500 million aggregate principal amount of 4.875% 2031 Senior Notes in an offering that was exempt from the registration requirements of the Securities Act. We believe these measures will allowused the net proceeds from the notes offerings to redeem all of the outstanding 4.875% 2024 Senior Secured Notes and 6.375% 2025 Senior Notes issued by Cleveland-Cliffs Inc. and all of the outstanding 7.625% 2021 AK Senior Notes, 7.50% 2023 AK Senior Notes and 6.375% 2025 AK Senior Notes issued by AK Steel Corporation (n/k/a Cleveland-Cliffs Steel Corporation), and pay fees and expenses in connection with such redemptions, and reduce borrowings under our ABL Facility.
The application of the net proceeds to us from the February 2021 financing transactions shifted our debt horizon by providing a four-year window in which none of our long-term senior notes are due clearing the way for us to remain comfortable with our liquidity levels for an extended market downturn related to the COVID-19 pandemic.fully focus on operational integration.
Based on our outlook for the next 12 months, which is subject to continued changing demand from customers and volatility in iron ore and domestic steel prices, we expect to have ample liquidity through cash generated from operations and availability under our ABL Facility sufficient to meet the needs of our operations and service our debt obligations, as well as provide the $505 million of cash required to be paid pursuant to the terms of the Transaction Agreement.obligations.
The following discussion summarizes the significant items impacting our cash flows during the ninethree months ended September 30,March 31, 2021 and 2020 and 2019 as well as expected impacts to our future cash flows over the next 12 months. Refer to the Statements of Unaudited Condensed Consolidated Cash Flows for additional information. Unless otherwise noted, the following discussion refers to our continuing operations on a stand-alone basis without giving effect to the Transaction.
Operating Activities
Net cash used by operating activities was $53.2$379 million and $164 million for the ninethree months ended September 30,March 31, 2021 and 2020, compared to net cash provided by operating activities of $388.1 million for the comparable period in 2019.respectively. The increase in cash used by operating activities during the first ninethree months of 2020,2021, compared to 2019,2020, was driven by the increasing receivables due primarily to rising prices, unwind of the slowing economy in connection with the COVID-19 pandemic resulting in reduced customer demandArcelorMittal USA factoring agreement and the need2020 pension contributions that were deferred under the CARES Act to temporarily idle many of our operations, which had an adverse effect on our operating results.January 2021.
Our U.S. cashCash and cash equivalents balance at September 30, 2020March 31, 2021 was $36.6$91 million, or 66%86% of our consolidated total cashCash and cash equivalents balance, excluding cash related to our consolidated VIE of $55.6$4 million. Additionally, we had a cash balance at September 30, 2020 of $4.4 million classified as part of Other current assets in the Statements of Unaudited Condensed Consolidated Financial Position related to discontinued operations.
Investing Activities
Net cash used by investing activities was $1,240.2$135 million and $449.5$1,007 million for the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, respectively. During the first nine months of 2020, we had net cash outflows of $869.3 million for the acquisition of AK Steel, net of cash acquired. This includes $590.0 million to pay off AK Steel Corporation's former revolving credit facility and $323.6 million to purchase outstanding 7.50% 2023 AK Senior Notes. Additionally, weWe had capital expenditures, including capitalized interest, of $378.9$136 million and $460.7$138 million for the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, respectively.
During the nine months ended September 30, 2020, we We had cash outflows, including deposits and capitalized interest, of approximately $270 million for the development of the HBI production plant. This compares to net cash outflows, including depositsToledo direct reduction plant of $28 million and capitalized interest, during$112 million for the first ninethree months of 2019 of approximately $370 million on development of the HBI production plantended March 31, 2021 and approximately $40 million on the upgrades at Northshore.2020, respectively. Additionally, we spent approximately $110$108 million and $50$26 million on sustaining capital expenditures during the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, respectively. Sustaining capital spend includes infrastructure, mobile equipment, fixed equipment, product quality, environment, health and safety.
During the first three months of 2020, we had net cash outflows of $869 million for the acquisition of AK Steel, net of cash acquired, which included $590 million used to repay the COVID-19 pandemic, we temporarily limited our cashformer AK Steel Corporation revolving credit facility and $324 million used for capital expenditures to critical sustaining capital, but have now resumed growth capital spending, including the restart of Toledo HBI production plant construction in June 2020. The HBI production plant is expected to be completed and begin production in the fourth quarter of 2020. purchase outstanding 7.50% 2023 AK Senior Notes.
We anticipate total cash used for capital expenditures during the next 12 months to be approximately $440 million, including capitalized interest.between $650 and $700 million.
Financing Activities
Net cash provided by financing activities was $994.2$512 million and $1,005 million for the ninethree months ended September 30,March 31, 2021 and 2020, compared to net cash used byrespectively. Cash inflows from financing activities of $366.9 million for the comparable periodthree months ended March 31, 2021, included the issuance of $500 million aggregate principal amount of 4.625% 2029 Senior Notes, issuance of $500 million aggregate principal amount of 4.875% 2031 Senior Notes, issuance of 20 million common shares for net proceeds of $322 million and net borrowings of $148 million under credit facilities. We used the net proceeds from the issuance of the 20 million common shares, and cash on hand, to repurchase $322 million in 2019. Cashaggregate principal amount of 9.875% 2025 Senior Secured Notes. We used the net proceeds from the issuances of the 4.625% 2029 Senior Notes and 4.875% 2031 Senior Notes to redeem all of the outstanding 4.875% 2024 Senior Secured Notes and 6.375% 2025 Senior Notes issued by Cleveland-Cliffs Inc. and all of the outstanding 7.625% 2021 AK Senior Notes, 7.50% 2023 AK Senior Notes and 6.375% 2025 AK Senior Notes issued by AK Steel Corporation (n/k/a Cleveland-Cliffs Steel Corporation), and pay fees and expenses in connection with such redemptions, and reduce borrowings under our ABL Facility.
Net cash provided by financing activities for the ninethree months ended September 30,March 31, 2020, primarily related to the issuancesissuance of $845.0$725 million aggregate principal amount of 6.75% 2026 Senior Secured Notes $955.2 million aggregate principal amount of 9.875% 2025 Senior Secured Notes and borrowings of $800.0$800 million under the ABL Facility. The net proceeds from the initial issuance of $725.0 million aggregate principal amount of the 6.75% 2026 Senior Secured Notes, along with cash on hand, were used to purchase $372.7$373 million aggregate principal amount of 7.625% 2021 AK Senior Notes and $367.2$367 million aggregate principal amount of 7.50% 2023 AK Senior Notes and to pay for the $44.4$44 million of debt issuance costs in the first quarter of 2020. The net proceeds from the additional issuance of $555.2 million aggregate principal amount of the 9.875% 2025 Senior Secured Notes were used to repurchase $736.4 million aggregate principal amount of our outstanding senior notes. Additionally, during the nine months ended September 30, 2020, we repaid $400.0 million under the ABL Facility.costs.
Net cash used by financing activities during the first nine months of 2019 primarily related to the repurchase of 24.4 million common shares for $252.9 million in the aggregate under the $300.0 million share repurchase program. Additionally, we issued $750.0 million aggregate principal amount of 5.875% 2027 Senior Notes, which provided net proceeds of approximately $714 million. The net proceeds from the notes offering, along with cash on hand, were used to redeem in full all of our then-outstanding 4.875% 2021 Senior Notes and to purchase $600.0 million aggregate principal amount of our outstanding 5.75% 2025 Senior Notes pursuant to a tender offer. In total, during the first nine months of 2019, we purchased $724.0 million aggregate principal amount of senior notes for $729.3 million in cash. During the first nine months of 2019, we also made a cash payment of $44.2 million for the final annual installment related to the distribution of Empire partnership equity.
Additional uses of cash from financing activities during the first nine months of 2020 and 2019, included payments of cash dividends on our common shares of $40.8 million and $45.1 million, respectively.
We have temporarily suspended future dividend distributions as a result of the COVID-19 pandemic in order to preserve cash during this time of economic uncertainty. We anticipate future uses of cash and cash provided by financing activities during the next 12 months to include opportunistic debt transactions as part of our liability management strategy, such as the transactions that occurred during the first nine months of 2020, in addition to, providing supplemental financing to meet cash requirements for business improvement opportunities.
Capital Resources
The following represents a summary of key liquidity measures:
| | | | | |
| (In Millions) |
| September 30,March 31,
20202021 |
| Cash and cash equivalents | $ | 56.0 | |
Cash and cash equivalents from discontinued operations, included within Other current assets
| 4.4110 | |
Less: Cash and cash equivalents from variable interest entitiesVIE's | (0.4)(4) | |
| Total cash and cash equivalents | $ | 60.0106 | |
| |
Available borrowing base on ABL Facility1 | $ | 1,715.23,500 | |
| Borrowings | (400.0)(1,630) | |
| Letter of credit obligations | (192.2)(272) | |
| Borrowing capacity available | $ | 1,123.01,598 | |
| |
1 As of March 31, 2021, the ABL Facility had a maximum borrowing base of $3.5 billion. The available borrowing base is determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment. |
| |
| |
1 As of September 30, 2020, the ABL Facility had a maximum borrowing base of $2.0 billion. The available borrowing base is determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment.
Our primary sources of funding are cash on hand,and cash equivalents, which totaled $60.0$106 million as of September 30, 2020,March 31, 2021, cash generated by our business, availability under the ABL Facility and other financing activities. The combination of cash and availability under the ABL Facility gives us $1,183.0 million$1.7 billion in liquidity entering the fourthsecond quarter of 2020,2021, which is expected to be adequate to fund operations, letter of credit obligations, sustaining and expansion capital expenditures and other cash commitments for at least the next 12 months. In connection with the announced Transaction with ArcelorMittal USA, we have received commitments to increase our existing ABL Facility. Upon completion of the Transaction, ArcelorMittal USA inventories and accounts receivable are expected to further increase the Company’s proforma combined borrowing base, enhancing availability and overall liquidity.
As of September 30, 2020,March 31, 2021, we were in compliance with the ABL Facility liquidity requirements and, therefore, the springing financial covenant requiring a minimum fixed charge coverage ratio of 1.0 to 1.0 was not applicable.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain arrangements that are not reflected on our Statements of Unaudited Condensed Consolidated Financial Position. These arrangements include minimum "take or pay" purchase commitments, such as minimum electric power demand charges, minimum coal, diesel and natural gas purchase commitments, and minimum railroad transportation commitments. We also havecommitments and minimum port facility usage commitments, and financial instruments with off-balance sheet risk, such as bank letters of credit and bank guarantees.
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") have fully and unconditionally, and jointly and severally, guaranteed the obligations under (a) the 5.75% 2025 Senior Notes, the 6.375% 2025 Senior Notes, the 5.875% 2027 Senior Notes, and the 7.00% 2027 Senior Notes, the 4.625% 2029 Senior Notes and the 4.875% 2031 Senior Notes issued by Cleveland-Cliffs Inc. on a senior unsecured basis and (b) the 4.875% 2024 Senior Secured Notes, the 6.75% 2026 Senior Secured Notes and the 9.875% 2025 Senior Secured Notes on a senior secured basis. See NOTE 78 - DEBT AND CREDIT FACILITIES for further information.
The following presents the summarized financial information on a combined basis for Cleveland-Cliffs Inc. (parent company and issuer of the guaranteed obligations) and the Guarantor subsidiaries, collectively referred to as the obligated group. Transactions between the obligated group have been eliminated. Information for the non-Guarantor subsidiaries was excluded from the combined summarized financial information of the obligated group.
Each Guarantor subsidiary is consolidated by Cleveland-Cliffs Inc. as of September 30, 2020.March 31, 2021. Refer to Exhibit 22.122, incorporated herein by reference, for the detailed list of entities included within the obligated group as of September 30, 2020 and DecemberMarch 31, 2019.2021. The guarantee of a Guarantor subsidiary with respect to Cliffs' 5.75% 2025 Senior Notes, 6.375% 2025 Senior Notes, 5.875% 2027 Senior Notes, 7.00% 2027 Senior Notes, 4.875% 2024 Senior Secured Notes,the 6.75% 2026 Senior Secured Notes, andthe 5.875% 2027 Senior Notes, the 7.00% 2027 Senior Notes, the 9.875% 2025 Senior Secured 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:
(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; provided that (i) such sale, exchange, transfer or disposition is made in compliance with the applicable Indenture, including the covenants regarding consolidation, merger and sale of assets and, as applicable, dispositions of assets that constitute notes collateral, and (ii) all the obligations of such Guarantor subsidiary under all debt of the Company or its subsidiaries terminate upon consummation of such transaction;
(b) designation of any Guarantor subsidiary as an “excluded subsidiary” (as defined in the Indentures); or
(c) defeasance or satisfaction and discharge of the Indentures.
Each entity in the summarized combined financial information follows the same accounting policies as described in the consolidated financial statements. 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; 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.
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) | | | (In Millions) |
| | September 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| Current assets | Current assets | $ | 2,434.3 | | | $ | 891.0 | | Current assets | $ | 5,491 | | | $ | 4,903 | |
| Non-current assets | Non-current assets | 5,015.8 | | | 2,381.8 | | Non-current assets | 10,160 | | | 10,535 | |
| Current liabilities | Current liabilities | (834.5) | | | (392.9) | | Current liabilities | (2,810) | | | (2,767) | |
| Non-current liabilities | Non-current liabilities | (6,099.9) | | | (2,791.7) | | Non-current liabilities | (10,508) | | | (10,563) | |
|
The following table is summarized combined financial information from the Statements of Unaudited Condensed Consolidated Operations of the obligated group:
| | | | | |
| (In Millions) |
| NineThree Months Ended |
| September 30, 2020March 31, 2021 |
Revenues1 | $ | 2,996.73,979 | |
| Cost of goods sold | (3,039.1)(3,724) | |
LossIncome from continuing operations | (184.9)32 | |
Net lossincome | (183.6)33 | |
Net lossincome attributable to Cliffs shareholders | (183.6)34 | |
1 Includes Realization of deferred revenue of $34.6 million for the nine months ended September 30, 2020.
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, the obligated group had the following balances with non-Guarantor subsidiaries and other related parties:
| | | (In Millions) | | | (In Millions) |
| | September 30, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| Balances with non-Guarantor subsidiaries: | Balances with non-Guarantor subsidiaries: | | | | Balances with non-Guarantor subsidiaries: | | | |
| Accounts receivable, net | Accounts receivable, net | $ | 18.0 | | | $ | — | | Accounts receivable, net | $ | 29 | | | $ | 69 | |
| Accounts payable | Accounts payable | (48.0) | | | — | | Accounts payable | (25) | | | (17) | |
| | Balances with other related parties: | Balances with other related parties: | | Balances with other related parties: | |
| Accounts receivable, net | Accounts receivable, net | $ | 91.6 | | | $ | 31.1 | | Accounts receivable, net | $ | 30 | | | $ | 2 | |
| Other current assets | 58.5 | | | 44.5 | | |
| | Accounts payable | Accounts payable | (1.2) | | | — | | Accounts payable | (9) | | | (6) | |
| Other current liabilities | (1.7) | | | (2.0) | | |
|
Additionally, for the ninethree months ended September 30, 2020,March 31, 2021, the obligated group had Revenues of $587.5$77 million and Cost of goods sold of $456.9$59 million, in each case with other related parties.
Market Risks
We are subject to a variety of risks, including those caused by changes in commodity prices and interest rates. We have established policies and procedures to manage such risks; however, certain risks are beyond our control.
Pricing Risks
Commodity Price RiskIn the ordinary course of business, we are exposed to market risk and price fluctuations related to the sale of our products, which are impacted primarily by market prices for HRC, and the purchase of energy and raw materials used in our operations, which are impacted by market prices for electricity, natural gas, ferrous and stainless steel scrap, chrome, coal, coke, nickel and zinc. Our strategy to address market risk has generally been to obtain competitive prices for our products and services and allow operating results to reflect market price movements dictated by supply and demand; however, we make forward physical purchases and enter into hedge contracts to manage exposure to price risk related to the purchases of certain raw materials and energy used in the production process.
Our financial results can vary for our operations as a result of fluctuations in market prices. We attempt to mitigate commodity price riskthese risks by aligning fixed and variable components in our customer pricing contracts, supplier purchasing agreements and derivative financial instruments.
Some customer contracts have fixed-pricing terms, which increase our exposure to fluctuations in raw material and energy costs. To reduce our exposure, we enter into annual, fixed-price agreements for certain raw materials. Some of our existing multi-year raw material supply agreements have required minimum purchase quantities. Under adverse economic conditions, those minimums may exceed our needs. Absent exceptions for force majeure and other circumstances affecting the legal enforceability of the agreements, these minimum purchase requirements may compel us to purchase quantities of raw materials that could significantly exceed our anticipated needs or pay damages to the supplier for shortfalls. In these circumstances, we would attempt to negotiate agreements for new purchase quantities. There is a risk, however, that we would not be successful in reducing purchase quantities, either through negotiation or litigation. If that occurred, we would likely be required to purchase more of a particular raw material in a particular year than we need, negatively affecting our results of operations and cash flows.
Certain of our customer contracts include variable-pricing mechanisms that adjust selling prices in response to changes in the costs of certain raw materials and energy, while other of our customer contracts exclude such mechanisms. We may enter multi-year purchase agreements for certain raw materials with similar variable-price mechanisms, allowing us to achieve natural hedges between the customer pricing contracts and supplier purchasingpurchase agreements. Therefore, in some cases, price fluctuations for energy (particularly natural gas and electricity), raw materials (such as scrap, chrome, zinc and nickel) or other commodities may be, in part, passed on to customers rather than absorbed solely by us. There is a risk, however, that the variable-price mechanisms in the sales contracts may not necessarily change in tandem with the variable-price mechanisms in our purchase agreements, negatively affecting our results of operations and cash flows.
Our strategy to address volatile natural gas rates, diesel rates and electricity rates includes improving efficiency in energy usage, identifying alternative providers and utilizing the lowest cost alternative fuels. If we are unable to align fixed and variable components between customer pricing contracts and supplier purchasingpurchase agreements, we use cash-settled commodity price swaps and options 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 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 impact of a 10% and 25% change in market price from the September 30, 2020March 31, 2021 estimated price on our derivative instruments, thereby impacting our pre-tax income by the same amount.
| | | | | | | | | | | | | | |
| | (In Millions) | | |
| | Positive or Negative Effect on
Pre-tax Income | | |
| Commodity Derivative | | 10% Increase or Decrease | | 25% Increase or Decrease |
| Natural gas | | $ | 8.2 | | | $ | 20.5 | |
| Electricity | | 2.3 | | | 5.8 | |
| Zinc | | 1.1 | | | 2.6 | |
| Other | | 0.9 | | | 1.9 | |
Additionally, our iron ore pellet revenue is impacted by pricing of iron ore, hot-rolled coil steel and iron ore pellet premiums. World market prices for these commodities have fluctuated historically and are affected by numerous factors beyond our control.The world market price that is most commonly utilized in our iron ore sales contracts is the Platts 62% Price, which can fluctuate widely due to numerous factors, such as global economic growth or contraction, change in demand for steel or changes in availability of supply.
Customer Supply Agreement
A supply agreement with one Mining and Pelletizing customer provides for supplemental revenue or refunds based on the hot-rolled coil steel price at the time the iron ore product is consumed in the customer’s blast furnaces. At September 30, 2020, we had derivative assets of $34.5 million, representing the fair value of the pricing factors, based upon the amount of unconsumed long tons and an estimated average hot-rolled coil steel price for the period in which the iron ore is expected to be consumed in the customer's blast furnaces, subject to final pricing at a future date. We estimate that a $75 positive or negative change in the hot-rolled coil steel price realized from the September 30, 2020 estimates would cause the fair value of the derivative instrument to increase or decrease by approximately $22 million, respectively, thereby impacting our consolidated revenues by the same amount. We have not entered into any hedging programs to mitigate the risk of adverse price fluctuations.
Refer to NOTE 12 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
Provisional Pricing Arrangements
Certain of our customer supply agreements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate based on market inputs at a specified point in time in the future, per the terms of the supply agreements. At September 30, 2020, we had derivative assets of $26.9 million and derivative liabilities of $0.3 million, reflected as part of our revenue, representing the fair value of the provisional price calculations. We estimate that a positive or negative $10 change in fourth quarter pricing from management's estimate of the Platts 62% Price would cause the fair value of the net derivative instrument position for provisional pricing arrangements to increase or decrease by approximately $11 million, respectively. Additionally, we | | | | | | | | | | | | | | |
| | (In Millions) |
| | Positive or Negative Effect on
Pre-tax Income |
| Commodity Derivative | | 10% Increase or Decrease | | 25% Increase or Decrease |
| Natural gas | | $ | 22 | | | $ | 54 | |
| Electricity | | 1 | | | 3 | |
| Zinc | | 1 | | | 1 | |
estimate that a positive or negative $10 change in fourth quarter pricing from management's estimate of the Atlantic Basin Pellet Premium would cause the fair value of the net derivative instrument position for provisional pricing arrangements to increase or decrease by approximately $8 million, respectively. We have not entered into any hedging programs to mitigate the risk of adverse price fluctuations.
Foreign Currency Exchange Rate Risk
Exchange rate fluctuations affect a portion of Precision Partner's operating costs, reported within the Steel and Manufacturing segment, that are denominated in Canadian dollars, and we use forward currency contracts to reduce our exposure to certain of these currency price fluctuations. At September 30, 2020, we had outstanding option and forward currency contracts with a total contract value of $29.3 million for the purchase of Canadian dollars. Based on the contracts outstanding at September 30, 2020, a 10% change in the U.S. dollar-to-Canadian dollar exchange rate would result in a pre-tax impact of $1.5 million on the fair value of these contracts, which would offset the effect of a change in the exchange rate on the underlying operating costs. Refer to NOTE 12 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
Valuation of Goodwill and Other Long-Lived Assets
We assign goodwill arising from acquired companies to the reporting units that are expected to benefit from the synergies of the acquisition. Goodwill is tested on a qualitative basis for impairment at the reporting unit level on an annual basis (October 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of a reporting unit. As necessary, should our qualitative test indicate impairment,that it is more likely than not that the fair value of a reporting unit is less than its carry amount, we perform a quantitative test to determine the amount of impairment, if any, to the carrying value of the reporting unit and its associated goodwill.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and if a quantitative assessment is deemed necessary in determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow methodology, which considers forecasted cash flows discounted at an estimated weighted average cost of capital. Assessing the recoverability of our goodwill requires significant assumptions regarding the estimated future cash flows and other factors to determine the fair value of a reporting unit, including, among other things, estimates related to forecasts of future revenues, expected Adjusted EBITDA, expected capital expenditures and working capital requirements, which are based upon our long-range plan estimates. The assumptions used to calculate the fair value of a reporting unit may change from year to year based on operating results, market conditions and other factors. Changes in these assumptions could materially affect the determination of fair value for each reporting unit.
Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that would indicate that the carrying value of the assets may not be recoverable. Such indicators may include: a significant decline in expected future cash flows; a sustained, significant decline in market pricing; a significant adverse change in legal or environmental factors or in the business climate; changes in estimates of our recoverable reserves; and unanticipated competition. Any adverse change in these factors could have a significant impact on the recoverability of our long-lived assets and could have a material impact on our consolidated statements of operations and statement of financial position.
A comparison of each asset group's carrying value to the estimated undiscounted net future cash flows expected to result from the use of the assets, including cost of disposition, is used to determine if an asset is recoverable. Projected future cash flows reflect management's best estimate of economic and market conditions over the projected period, including growth rates in revenues and costs, and estimates of future expected changes in operating margins and capital expenditures. If the carrying value of the asset group is higher than its undiscounted net future cash flows, the asset group is measured at fair value and the difference is recorded as a reduction to the long-lived assets. We estimate fair value using a market approach, an income approach or a cost approach. WhileFor the three months ended March 31, 2021, we concluded that an event triggering the need for an impairment assessment did not occur during the nine months ended September 30, 2020, a prolonged COVID-19 pandemic could impact the results of operations due to changes to assumptions that would indicate that the carrying value of our asset groups may not be recoverable.occur.
Interest Rate Risk
Interest payable on our senior notes is at fixed rates. 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. Additionally, we have outstanding IRBs with fixed and variable rates. As of September 30, 2020,March 31, 2021, we had $400.0$1,630 million outstanding under the ABL Facility. An increase in prevailing interest rates would increase interest expense and interest paid for any outstanding borrowings from the ABL Facility. For example, a 100 basis point change to interest rates under the ABL Facility at the current borrowing level would result in a change of $4.1$17 million to interest expense on an annual basis.
Supply Concentration Risks
Many of our operations and mines rely on one source each of electric power and natural gas. A significant interruption or change in service or rates from our energy suppliers could materially impact our production costs, margins and profitability.
Forward-Looking Statements
This report contains statements that constitute "forward-looking statements" within the meaning of the federal securities laws. As a general matter, forward-looking statements relate to anticipated trends and expectations rather than historical matters. Forward-looking statements are subject to uncertainties and factors relating to our operations and business environment that are difficult to predict and may be beyond our control. Such uncertainties and factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements. These statements speak only as of the date of this report, and we undertake no ongoing obligation, other than that imposed by law, to update these statements. Uncertainties and risk factors that could affect our future performance and cause results to differ from the forward-looking statements in this report include, but are not limited to:
•disruptions to our operations relating to the COVID-19 pandemic, including the heightened risk that a significant portion of our workforce or on-site contractors may suffer illness or otherwise be unable to perform their ordinary work functions;
•continued volatility of steel and iron ore market prices, which directly and indirectly impact the prices of the products that we sell to our customers;
•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 a trend toward light weighting that could result in lower steel volumes being consumed;
•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 the COVID-19 pandemic;
•severe financial hardship, bankruptcy, temporary or permanent shutdowns or operational challenges, due to the ongoing COVID-19 pandemic or otherwise, of one or more of our major customers, including customers in the automotive market, key suppliers or contractors, which, among other adverse effects, could 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;
•uncertainty and weaknesses in global economic conditions, including downward pressure on prices caused by the COVID-19 pandemic, oversupply of imported products, reduced market demand and risks related to U.S. government actions with respect to Section 232, the USMCA and/or other trade agreements, tariffs, treaties or policies;policies, as well as the uncertainty of obtaining and maintaining effective antidumping and countervailing duty orders to counteract the harmful effects of unfairly traded imports;
•uncertainties associatedimpacts of existing and increasing governmental regulation, including climate change and other environmental regulation that may be proposed under the Biden Administration, and related costs and liabilities, including failure to receive or maintain required operating and environmental permits, approvals, modifications or other authorizations of, or from, any governmental or regulatory authority and costs related to implementing improvements to ensure compliance with the highly competitive and highly cyclical steel industry and reliance on the demand for steel from the automotive industry;regulatory changes, including potential financial assurance requirements;
•continued volatility of steel and iron ore prices and other trends, which may impact the price-adjustment calculations under certain of our sales contracts;
•our ability to cost-effectively achieve planned production rates or levels, including at our HBI production plant currently under construction;
•our ability to successfully identify and consummate any strategic investments or development projects, including our HBI production plant;
•the impact of our steelmaking customers reducing their steel production duepotential impacts to the COVID-19 pandemic,environment or increased market share of steel produced using methods other than those used byexposure to hazardous substances resulting from our customers, or increased market share of lighter-weight steel alternatives, including aluminum;operations;
•our ability to maintain adequate liquidity, our level of indebtedness and the availability of capital could limit cash flow availablenecessary to fund working capital, planned capital expenditures, acquisitions, and other general corporate purposes or ongoing needs of our business;
•adverse changes in credit ratings, interest rates, foreign currency rates and tax laws;
•limitations on our actual economic iron ore reservesability to realize some or reductions in current mineral estimates,all of our deferred tax assets, including whether any mineralized material qualifies as a reserve;our NOLs;
•our ability to realize the anticipated synergies and benefits of the Acquisitions and to successfully diversifyintegrate the businesses of AK Steel and ArcelorMittal USA into our product mixexisting businesses, including uncertainties associated with maintaining relationships with customers, vendors and add new customers;employees;
•additional debt we assumed, incurred or issued in connection with the Acquisitions, as well as additional debt we incurred in connection with enhancing our liquidity during the COVID-19 pandemic, may negatively impact our credit profile and limit our financial flexibility;
•known and unknown liabilities we assumed in connection with the Acquisitions, including significant environmental, pension and OPEB obligations;
•the outcome of any contractual disputes with our customers, joint venture partners or significant energy, material or service providers or any other litigation or arbitration;
•problems or uncertainties with sales volume or mix, productivity, transportation, environmental liabilities, employee-benefit costs and other risks of the steel and mining industries;
•impacts of existing and increasing governmental regulation and related costs and liabilities, including failure to receive or maintain required operating and environmental permits, approvals, modifications or other authorization of, or from, any governmental or regulatory entity and costs related to implementing improvements to ensure compliance with regulatory changes;
•our ability to maintain appropriate relations with unions and employees;
•the ability of our customers, joint venture partners and third-party service providers to meet their obligations to us on a timely basis or at all;
•eventssupply chain disruptions or circumstances thatchanges in the cost or quality of energy sources or critical raw materials and supplies, including iron ore, industrial gases, graphite electrodes, scrap, chrome, zinc, coke and coal;
•liabilities and costs arising in connection with any business decisions to temporarily idle or permanently close a mine or production facility, which could impair or adversely impact the viability of a production plant or mine and the carrying value of associated assets and give rise to impairment charges or closure and reclamation obligations, as well as uncertainties associated with restarting any resulting impairment charges;previously idled mine or production facility;
•problems or disruptions associated with transporting products to our customers, moving products internally among our facilities or suppliers transporting raw materials to us;
•uncertainties associated with natural or human-caused disasters, adverse weather conditions, unanticipated geological conditions, supply or price of energy,critical equipment failures, infectious disease outbreaks, tailings dam failures and other unexpected events;
•adverse changes in interest rates, foreign currency ratesour level of self-insurance and tax laws;
•the potential existence of significant deficiencies or material weakness in our internal control over financial reporting;
•our ability to realize the anticipated benefits of the Mergerobtain sufficient third-party insurance to adequately cover potential adverse events and to successfully integrate the businesses of AK Steel into our existing businesses, including uncertainties associated with maintaining relationships with customers, vendors and employees, as well as realizing additional future synergies;
•additional debt we assumed or issued in connection with the Merger, as well as additional debt we incurred in connection with enhancing our liquidity during the COVID-19 pandemic, may negatively impact our credit profile and limit our financial flexibility;
•changes in the cost of raw materials and supplies;
•supply chain disruptions or poor quality of raw materials or supplies, including scrap, coal, coke and alloys;business risks;
•disruptions in, or failures of, our information technology systems, including those related to cybersecurity;
•unanticipated costs associatedour ability to successfully identify and consummate any strategic investments or development projects, cost-effectively achieve planned production rates or levels, and diversify our product mix and add new customers;
•our actual economic iron ore and coal reserves or reductions in current mineral estimates, including whether we are able to replace depleted reserves with healthcare, pension and OPEB obligations;additional mineral bodies to support the long-term viability of our operations;
•the completionoutcome of the Transaction on the anticipated terms and timingany contractual disputes with our customers, joint venture partners, lessors, or at all, including the receipt of regulatory approvals and anticipated tax treatment;significant energy, raw material or service providers, or any other litigation or arbitration;
•our ability to integrate ArcelorMittal USA's businessesmaintain our social license to operate with our stakeholders, including by fostering a strong reputation and our existing businesses successfullyconsistent operational and to achieve anticipated synergies from the Transaction;
•business and management strategies for the maintenance, expansion and growth of the combined company's operations following the consummation of the Transaction;
•potential litigation relating to the Transaction that could be instituted against us or our officers and directors;
•disruptions from the proposed Transaction that have the potential to harm our or ArcelorMittal USA's businesses, including current plans and operations;safety track record;
•our ability to retainmaintain satisfactory labor relations with unions and employees;
•availability of workers to fill critical operational positions and potential labor shortages caused by the COVID-19 pandemic, as well as our ability to attract, hire, develop and retain key personnel, including within the acquired AK Steel and ArcelorMittal USA businesses followingbusinesses;
•unanticipated or higher costs associated with pension and OPEB obligations resulting from changes in the completionvalue of the Transaction;plan assets or contribution increases required for unfunded obligations; and
•potential adverse reactionssignificant deficiencies or changes to business relationships resulting from the announcement or completion of the Transaction; and
•additional debt we incur, or other proposed financing transactions we may enter into,material weaknesses in connection with the Transaction may negatively impact our credit profile and limit ourinternal control over financial flexibility.reporting.
For additional factors affecting our business, refer to Part II – Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. You are urged to carefully consider these risk factors.
Non-GAAP Reconciliations
We present cash cost of goods sold rate per long ton, which is a non-GAAP financial measure that management uses in evaluating operating performance. We believe our presentation of non-GAAP cash cost of goods sold is useful to investors because it excludes depreciation, depletion and amortization, which are non-cash, and freight, which has no impact on sales margin, thus providing a more accurate view of the cash outflows related to the sale of iron ore. The presentation of this measure is not intended to be considered in isolation from, as a substitute for, or as superior to, the financial information prepared and presented in accordance with GAAP. The presentation of this measure may be different from non-GAAP financial measures used by other companies. Below is a reconciliation in dollars of this non-GAAP financial measure to our Mining and Pelletizing segment cost of goods sold.
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | | | | | |
| Three Months Ended
September 30, | | | | Nine Months Ended
September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Cost of goods sold | $ | 393.3 | | | $ | 424.8 | | | $ | 987.8 | | | $ | 1,033.5 | |
| Less: | | | | | | | |
| Freight | 39.1 | | | 40.6 | | | 94.3 | | | 98.0 | |
| Depreciation, depletion & amortization | 19.3 | | | 20.8 | | | 57.2 | | | 58.9 | |
| Cash cost of goods sold | $ | 334.9 | | | $ | 363.4 | | | $ | 836.3 | | | $ | 876.6 | |
Refer to "–Results of Operations – Segment Information" above for a reconciliation of the non–GAAP measure, Adjusted EBITDA.
| | | | | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Information regarding our market risk is presented under the caption "Market Risks," which is included in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, and Part I – Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q.
| | | | | |
| Item 4. | Controls and Procedures |
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including theour President and Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based solely on the definition of “disclosure controls and procedures” in Rule 13a-15(e) promulgated under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including theour President and Chief Executive Officer and theour Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, theour President and Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.
The Company acquired AK Steel during March 2020. We are currently integrating the processes and internal controls of AK Steel. Except for the AK Steel acquisition, there was no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2020 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal control over financial reporting due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.
PART II - OTHER INFORMATION
SEC regulations require us to disclose certain information about administrative or judicial proceedings involving the environment and to which a governmental authority is a party if we reasonably believe that such proceedings may result in monetary sanctions above a stated threshold. Pursuant to SEC regulations, we use a threshold of $1 million for purposes of determining whether disclosure of any such proceedings is required. We believe that this threshold is reasonably designed to result in disclosure of any such proceedings that are material to our business or financial condition.
We have described the material pending legal proceedings, including administrative or judicial proceedings involving the environment, to which we are a party in our Annual Report on Form 10-K for the year ended December 31, 2019, and in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2020, and June 30, 2020. Additional information for this item relating to certain environmental and other contingencies may be found in NOTE 18 - COMMITMENTS AND CONTINGENCIES to the consolidated financial statements in Part I – Item 1. Financial Statements of this Quarterly Report on Form 10-Q, andwhich is incorporated herein by reference.
We caution readers that our business activities involve risks and uncertainties that could cause actual results to differ materially from those currently expected by management. We described the most significant risks that could impact our results in Part II, Item 1A, "Risk Factors" in our QuarterlyOur Annual Report on Form 10-Q10-K for the quarterly periodyear ended MarchDecember 31, 2020, and the additional risk factors presented below update and supplement that disclosure.
RISKS RELATED TO THE PROPOSED TRANSACTION
The Transaction Agreement may be terminated in accordance with its terms and the Transaction may not be completed.
The Transaction Agreement containsincludes a number of conditions that must be satisfied or waived in order to complete the Transaction. Those conditions include, among others:
•the receipt of required regulatory approvals in the United States, Germany and Austria;
•the absence of any governmental order or law prohibiting the consummation of the Transaction;
•the accuracydetailed discussion of our and ArcelorMittal S.A.’s respective representations and warranties under the Transaction Agreement (subject to the materiality standards set forth in the Transaction Agreement);
•the performance by us and ArcelorMittal S.A. of our respective obligations under the Transaction Agreement in all material respects;
•the receipt of consents and/or waivers under certain joint venture agreements to which ArcelorMittal USA is a party; and
•the absence of a material adverse effect (as described in the Transaction Agreement) on us or ArcelorMittal S.A.
These conditions to the closing of the Transaction may not be fulfilled in a timely manner or at all, and, accordingly, the Transaction may be delayed or may not be completed.
In addition, if the Transaction is not completed by June 28, 2021 (subject to either party being entitled to extend the date by three months (or such other period as the parties may agree in writing) if required antitrust approvals have not yet been obtained or there is an impediment under any antitrust law), either party may choose not to proceed with the Transaction. The parties can mutually decide to terminate the Transaction Agreement at any time.
Failure to complete the Transaction could negatively impact the price of our common shares as well as our future business and financial results.
If the Transaction is not completed for any reason, our business and financial results may be adversely affected, including as follows:
•we may experience negative reactions from the financial markets, including negative impacts on the market price of our common shares;
•the manner in which customers, vendors, business partners and other third parties perceive us may be negatively impacted, which in turn could affect our ability to compete for new business or obtain renewals in the marketplace more broadly;
•we may experience negative reactions from employees, which may adversely affect, among other things, productivity and occupational safety; and
•we will have expended significant time and resources that could otherwise have been spent on our existing businesses and the pursuit of other opportunities that could have been beneficial to us, and our ongoing business and financial results may be adversely affected.
We are subject to business uncertainties while the Transaction is pending, which could adversely affect our business.
Uncertainty about the effect of the Transaction on employees, suppliers and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Transaction is completed and for a period of time thereafter, and could cause our suppliers, customers and others that deal with us to seek to change their existing business relationships with us.
The Transaction may be less accretive than expected, or may be dilutive, to our earnings per share, which may negatively affect the market price of our common shares.
The Transaction may be less accretive than expected, or may be dilutive, to our earnings per share. Estimates of our earnings per share in the future are based on preliminary estimates that may materially change. In addition, future events and conditions could decrease or delay any accretion, result in dilution or cause greater dilution than is currently expected, including:
•adverse changes in market conditions;
•commodity prices for iron ore and steel;
•production levels;
•operating results;
•competitive conditions;
•laws and regulations affecting the iron ore and steel businesses;
•capital expenditure obligations;
•higher than expected integration costs;
•lower than expected synergies;
•adverse changes to the value or timing of liabilities we would assume in connection with the Transaction; and
•general economic conditions.
Any dilution of, or decrease or delay of any accretion to, our earnings per share could cause the price of our common shares to decline.
Following completion of the proposed Transaction, our debt may limit our financial flexibility.
As of September 30, 2020, we had $4.5 billion of outstanding indebtedness, including amounts drawn under our ABL Facility. In connection with entering into the Transaction Agreement, we have obtained commitments to increase our ABL Facility. Although the receipt of such financing is not a condition to the closing of the Transaction, the unavailability of such financing could adversely impact the financial condition and liquidity of the combined company.
Any increase in our indebtedness, including any issuance of long-term debt or any additional amounts drawn under our ABL Facility, could have adverse effects on our financial condition and results of operations, including:
•increasing our vulnerability to changing economic, regulatory and industry conditions;
•limiting our ability to compete and our flexibility in planning for, or reacting to, changes in our business and industry;
•limiting our ability to borrow additional funds; and
•requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for working capital, capital expenditures, acquisitions, share repurchases, dividends and other purposes.
In addition, in connection with executing our business strategies following the Transaction, we expect to continue to evaluate the possibility of acquiring additional assets and making further strategic investments, and we may elect to finance these endeavors by incurring additional indebtedness. Our ability to arrange any additional financing for the purposes described above or otherwise will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. We cannot assure you that we will be able to obtain such financing on acceptable terms or at all.
We will assume substantial pension and OPEB liabilities associated with ArcelorMittal USA following the completion of the Transaction, and future funding obligations related to these liabilities could restrict cash available for our operations, capital expenditures or other business purposes, or require us to borrow additional funds.
Following the completion of the proposed Transaction, we will assume substantial funded and unfunded pension and OPEB liabilities related to the employees of ArcelorMittal USA who become employees of the Company as well as certain former employees and/or retirees of ArcelorMittal USA and its predecessor companies. Funding obligations with respect to pension and OPEB plans are affected directly by the value of plan assets, the projected and actual rate of return on plan assets, and the actuarial assumptions used to measure such pension and OPEB plan obligations, including the rate at which future obligations are discounted. Continued volatility in the capital markets may have a further negative impact on the funded status of certain pension and OPEB liabilities associated with ArcelorMittal USA that we will assume following the completion of the proposed Transaction, which may in turn increase attendant funding obligations. Further, changing market or economic conditions, regulatory changes or other factors may require us to make substantial cash contributions to such pension and OPEB plans in the future, preventing the use of cash for other purposes and adversely affecting our liquidity. In the event we are unable to fund these pension and OPEB obligations through cash from operations, we may be required to seek funding from other sources, including through additional borrowings, which could materially increase our outstanding debt or debt service requirements.
We will incur significant transaction costs and other integration-related costs in connection with the Transaction, which may be in excess of those anticipated by us.
We expect to continue to incur a number of non-recurring costs associated with completing the Transaction, transitioning the operations of ArcelorMittal USA from ArcelorMittal S.A. to Cliffs, and achieving anticipated synergies. These fees and costs have been, and will continue to be, substantial. We anticipate that the substantial majority of non-recurring expenses will consist of costs relating to completing the Transaction and include, among others, fees paid to financial, legal and accounting advisors, employee retention costs, severance, change of control and benefit costs, and filing fees.
We also anticipate incurring transaction fees and costs related to formulating and implementing integration plans, including facilities and systems consolidation costs and employment-related costs, as well as reimbursing ArcelorMittal S.A. for certain costs incurred for a period of time after the completion of the Transaction for transition services provided to us with respect to the acquired business. We will continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred in the Transaction and the integration of the two companies’ businesses. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow us to offset integration-related costs over time, this net benefit may not be achieved in the near term or at all. In addition, many of these costs will be borne by us even if the Transaction is not completed.
The Company, ArcelorMittal S.A. or their respective directors and officers may be targets of securities class action and derivative lawsuits that could result in substantial costs and may delay completion of the Transaction.
Securities class action lawsuits and derivative lawsuits are often brought against public companies and their directors and officers when companies enter into agreements for transactions similar to those contemplated by the Transaction Agreement, and such lawsuits may be brought against us, ArcelorMittal S.A. or our respective directors and officers in connection with the Transaction Agreement. Even if the lawsuits are without merit, these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on our liquidity and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction, then that injunction may delay completion of the Transaction, which may
adversely affect our business, financial position and results of operations. Currently, we are not aware of any securities class action lawsuits or derivative lawsuits having been filed in connection with the Transaction.
Even if we complete the proposed Transaction, we may fail to realize all of the anticipated benefits of the Transaction, and our integration of ArcelorMittal USA may not be as successful as anticipated.
The success of the Transaction will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining our businesses with ArcelorMittal USA’s businesses. The anticipated benefits and cost savings of the Transaction may not be realized fully or at all, may take longer to realize than expected, may require more non-recurring costs and expenditures to realize than expected or could have other adverse effects that we do not currently foresee. Some of the assumptions that we have made, such as with respect to anticipated operating synergies or the costs associated with realizing such synergies, and significant long-term cash flow generation, may not be realized. In addition, there could be potential unknown liabilities and unforeseen expenses associated with the Transaction and/or ArcelorMittal USA’s businesses that were not discovered in the course of performing due diligence.
The Transaction involves numerous operational, strategic, financial, accounting, legal, tax and other functions, systems and management controls that must be integrated. We expect to enter into an intellectual property license agreement, steel supply agreement and transition services agreement with ArcelorMittal S.A. to facilitate our operation of ArcelorMittal USA following the closing of the Transaction. If ArcelorMittal S.A. were unable or unwilling to perform its obligations under these agreements in a timely and efficient manner, or if these agreements were to terminate unexpectedly and we are not able to enter into replacement arrangements on acceptable terms or at all, then our integration of ArcelorMittal USA may take longer and be more costly than anticipated.
In addition, we are still in the process of integrating AK Steel’s businesses with our historical businesses, and if the Transaction is completed as planned, we will begin the process of integrating ArcelorMittal USA’s businesses, as well. The process of concurrently integrating both AK Steel’s and ArcelorMittal USA’s businesses with our historical businesses may present additional challenges. Difficulties in integrating the companies may result in the combined company performing differently than expected, in operational challenges or in the failure to realize anticipated expense-related efficiencies. Following completion of the Transaction, we may also experience challenges associated with managing the larger, more complex, integrated businesses. The integration process may result in the loss of key employees, the disruption of ongoing businesses, or inconsistencies in standards, controls, procedures and policies.
Following completion of the proposed Transaction, ArcelorMittal S.A. will be a significant shareholder of the Company, which may limit the ability of other shareholders to influence corporate decisions.
Under the Transaction Agreement, we will issue approximately 78 million of our common shares to ArcelorMittal S.A. in connection with the closing of the Transaction. As a result, following completion of the Transaction, ArcelorMittal S.A. will beneficially own approximately 16.4% of our outstanding common shares (based on the number of our outstanding common shares as of October 22, 2020). Although ArcelorMittal S.A. will be subject to certain restrictions and requirements under an Investor Rights Agreement with respect to its ownership and voting of our common shares following the closing of the Transaction, at such a level of beneficial ownership, ArcelorMittal S.A. may be able to exert significant influence over us and actions requiring the approval of our common shareholders.
Following completion of the proposed Transaction, the market price of our common shares may decline in the future as a result of the sale of our common shares held by ArcelorMittal S.A. or our current shareholders.
We will enter into an Investor Rights Agreement with ArcelorMittal S.A. in connection with the closing of the Transaction, which will initially limit ArcelorMittal S.A. and its affiliates' ability to sell our common shares held by them. Specifically, the Investor Rights Agreement will provide that, without our written consent, ArcelorMittal S.A. will not, and will cause its affiliates not to, directly or indirectly, in one or more transactions, sell, assign or otherwise encumber, whether pursuant to a loan, pledge or otherwise, through swap or hedging transactions or otherwise (each, a “Transfer”), (i) any of our common shares for a period ending on the six-month anniversary of the effective date of the Investor Rights Agreement and (ii) 50% or more, in the aggregate, of the number of our common shares held by ArcelorMittal S.A. and its affiliates during the period commencing on the six-month anniversary of the effective date of the Investor Rights Agreement and ending on the first anniversary of the effective date of the Investor Rights Agreement. On and following the one-year anniversary of the effective date of the Investor Rights Agreement, ArcelorMittal S.A. and its affiliates will be permitted to Transfer 100% of our common shares held by them, subject to certain restrictions on Transfers to persons whose beneficial ownership of our common shares following any such Transfer would exceed 5% or 10% of the then-outstanding common shares.
Other shareholders may also seek to sell our common shares held by them following, or in anticipation of, completion of the Transaction. These sales (or the perception that these sales may occur), coupled with the increase in the outstanding number of our common shares, may affect the market for, and the market price of, our common shares in an adverse manner.
The ability to use our pre-Transaction net operating loss (“NOL”) carryforwards and certain other tax attributes to offset future taxable income may be subject to certain limitations.
If a corporation undergoes an “ownership change” within the meaning of Section 382 of the IRC, the corporation’s NOL carryforwards and certain other tax attributes arising before the “ownership change” are subject to limitations after the “ownership change.” An “ownership change” under Section 382 of the IRC generally occurs if one or more shareholders or groups of shareholders who own at least 5% of the corporation’s equity increase their ownership in the aggregate by more than 50 percentage points over their lowest ownership percentage within a rolling period that begins on the later of three years prior to the testing date and the date of the last “ownership change.” If an “ownership change” were to occur, Section 382 of the IRC would impose an annual limit on the amount of pre-ownership change NOL carryforwards and other tax attributes the corporation could use to reduce its taxable income, potentially increasing and accelerating the corporation’s liability for income taxes, and also potentially causing tax attributes to expire unused. The amount of the annual limitation is determined based on a corporation’s value immediately prior to the ownership change.
The Transaction as currently structured is not expected to result in us succeeding to any material amount of ArcelorMittal USA NOLs for U.S. federal and state tax purposes.
As of December 31, 2019, we had U.S. federal NOL carryforwards of approximately $2.0 billion and state NOL carryforwards of approximately $1.5 billion. Our ability to utilize the $2.0 billion U.S. federal NOL carryforwards may be limited if we experience an “ownership change” under Section 382 of the IRC. Similar rules with respect to the $1.5 billion state NOL carryforwards may apply under state tax laws. The rules for determining whether we will experience an “ownership change” as a result of the Transaction requires a complex analysis that must take into account, among other facts, certain sales of our common shares over which we may have no control. Based on such rules, and certain facts that may require certain assumptions, we do not expect to experience an "ownership change" solely as a result of the Transaction. However, the issuance of our common shares to ArcelorMittal S.A. in the Transaction, in conjunction with other issuances or sales of our common shares (including certain transactions involving our common shares that are outside of our control), could cause us to experience an “ownership change.” Subsequent “ownership changes” may further affect the limitation in future years, and similar rules may also apply under state and foreign tax laws.
Consequently, we may not be able to utilize a material portion of our NOL carryforwards and other tax attributes, which, in addition to increasing our U.S. federal income tax liability, could adversely affect our share price, financial condition, results of operations and cash flows.
Following completion of the proposed Transaction, we may record tangible and intangible assets, including goodwill, that could become impaired and result in material non-cash charges to our results of operations in the future.
The Transaction will be accounted for as an acquisition by us in accordance with GAAP. Under the acquisition method of accounting, the assets of ArcelorMittal USA will be recorded, as of completion of the Transaction, at their respective fair values and added to our assets. Our reported financial condition and results of operations for periods after completion of the Transaction will reflect ArcelorMittal USA balances and results after completion of the Transaction but will not be restated retroactively to reflect the historical financial position or results of operations of ArcelorMittal USA for periods prior to the Transaction.
Under the acquisition method of accounting, the total purchase price will be allocated to ArcelorMittal USA’s tangible assets and identifiable intangible assets based on their fair values as of the date of completion of the Transaction. The excess, if any, of the purchase price over those fair values will be recorded as goodwill. To the extent the value of tangible or intangible assets, including goodwill, becomes impaired, we may be required to incur material non-cash charges relating to such impairment. Our operating results may be significantly impacted from both the impairment and the underlying trends in the business that triggered the impairment.
Completion of the proposed Transaction may trigger change in control or other provisions in certain agreements to which ArcelorMittal USA is a party, including those governing its joint ventures.
The completion of the Transaction may trigger change in control or other provisions in certain agreements to which ArcelorMittal USA is a party and to which the combined company will be subject following the Transaction. These include agreements governing ArcelorMittal USA’s joint ventures. If we are unable to obtain consents to the Transaction from the counterparties or negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements, which may include terminating the agreements, seeking monetary damages, or buying or selling joint venture ownership interests. Even if we are able to obtain consents or negotiate waivers, the counterparties may require consideration for granting such consents or waivers or seek to renegotiate the agreements on terms less favorable to us.risk factors.
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| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table presents information with respect to repurchases by the Company of our common shares during the periods indicated:
ISSUER PURCHASES OF EQUITY SECURITIES
| | Period | Period | | Total Number of Shares (or Units) Purchased1 | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | Period | | Total Number of Shares (or Units) Purchased1 | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
| July 1 - 31, 2020 | | 14,148 | | | $ | 5.76 | | | — | | | $ | — | | |
| August 1 - 31, 2020 | | 22,201 | | | $ | 6.76 | | | — | | | $ | — | | |
| September 1 - 30, 2020 | | 758 | | | $ | 5.18 | | | — | | | $ | — | | |
| January 1 - 31, 2021 | | January 1 - 31, 2021 | | 731,095 | | | $ | 18.51 | | | — | | | $ | — | |
| February 1 - 28, 2021 | | February 1 - 28, 2021 | | 5,521 | | | 16.83 | | | — | | | — | |
| March 1 - 31, 2021 | | March 1 - 31, 2021 | | 1,891 | | | 8.68 | | | — | | | — | |
| Total | Total | | 37,107 | | | $ | 6.34 | | | — | | | — | | Total | | 738,507 | | | $ | 18.47 | | | — | | | $ | — | |
| 1 All shares were delivered to us to satisfy tax withholding obligations due upon the vesting or payment of stock awards. | 1 All shares were delivered to us to satisfy tax withholding obligations due upon the vesting or payment of stock awards. | | 1 All shares were delivered to us to satisfy tax withholding obligations due upon the vesting or payment of stock awards. |
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| Item 4. | Mine Safety Disclosures |
We are committed to protecting the occupational health and well-being of each of our employees. Safety is one of our core values and we strive to ensure that safe production is the first priority for all employees. Our internal objective is to achieve zero injuries and incidents across the Company by focusing on proactively identifying needed prevention activities, establishing standards and evaluating performance to mitigate any potential loss to people, equipment, production and the environment. We have implemented intensive employee training that is geared toward maintaining a high level of awareness and knowledge of safety and health issues in the work environment through the development and coordination of requisite information, skills and attitudes. We believe that through these policies, we have developed an effective safety management system.
Under the Dodd-Frank Act, each operator of a coal or other mine is required to include certain mine safety results within its periodic reports filed with the SEC. As required by the reporting requirements included in §1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K, the required mine safety results regarding certain mining safety and health matters for each of our mine locations that are covered under the scope of the Dodd-Frank Act are included in Exhibit 95 of Part II – Item 6. Exhibits of this Quarterly Report on Form 10-Q.
None.
All documents referenced below have been filed pursuant to the Securities Exchange Act of 1934 by Cleveland-Cliffs Inc., file number 1-09844, unless otherwise indicated.
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Exhibit Number | | Exhibit |
| | *Transaction Agreement by and between Cleveland-Cliffs Inc. and ArcelorMittal S.A.,Indenture, dated as of September 28, 2020February 17, 2021, by and among Cleveland-Cliffs Inc., the Guarantors party thereto and U.S. Bank National Association, as trustee, including Forms of 4.625% Senior Guaranteed Notes due 2029 and 4.875% Senior Guaranteed Notes due 2031 (filed herewith). |
| | Fourth Amended Articles of Incorporation of Cleveland-Cliffs Inc., as filed with the Secretary of State for the State of Ohio on September 25, 2020 (filed as Exhibit 3.2 to Cliffs’ Form 8-K on September 28, 2020 and incorporated herein by reference). |
| | Schedule of the obligated group, including the parent and issuer and the subsidiary guarantors that have guaranteed the obligations under the 4.875% 2024 Senior Secured Notes, the 5.75% 2025 Senior Notes, the 6.375% 2025 Senior Notes, the 6.75% 2026 Senior Secured Notes, the 5.875% 2027 Senior Notes, the 7.00% 2027 Senior Notes, and the 9.875% 2025 Senior Secured Notes, the 4.625% 2029 Senior Notes and the 4.875% 2031 Senior Notes issued by Cleveland-Cliffs Inc. (filed as Exhibit 22.1 to Cliffs’ Form 10-Q for quarterly period ended June 30, 2020 and incorporated herein by reference). |
| | Certification Pursuant to 15 U.S.C. Section 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed and dated by Lourenco Goncalves as of October 23, 2020April 28, 2021 (filed herewith). |
| | Certification Pursuant to 15 U.S.C. Section 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed and dated by Keith A. Koci as of October 23, 2020April 28, 2021 (filed herewith). |
| | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed and dated by Lourenco Goncalves, Chairman, President and Chief Executive Officer of Cleveland-Cliffs Inc., as of October 23, 2020April 28, 2021 (filed herewith). |
| | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed and dated by Keith A. Koci, Executive Vice President, Chief Financial Officer of Cleveland-Cliffs Inc., as of October 23, 2020April 28, 2021 (filed herewith). |
| | Mine Safety Disclosures (filed herewith). |
| 101 | | The following financial information from Cleveland-Cliffs Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020March 31, 2021 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Statements of Unaudited Condensed Consolidated Financial Position, (ii) the Statements of Unaudited Condensed Consolidated Operations, (iii) the Statements of Unaudited Condensed Consolidated Comprehensive Income (Loss), (iv) the Statements of Unaudited Condensed Consolidated Cash Flows, (v) the Statements of Unaudited Condensed Consolidated Changes in Equity, and (vi) Notes to the Unaudited Condensed Consolidated Financial Statements. |
| 104 | | The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL and contained in Exhibit 101. |
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* | | Certain immaterial schedules and exhibits to this exhibit have been omitted pursuant to the provisions of Regulation S-K, Item 601(a)(5). A copy of any of the omitted schedules and exhibits will be furnished to the Securities and Exchange Commission upon request. |
SIGNATURES
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.
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| | | CLEVELAND-CLIFFS INC. | | | | |
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| | | By: | | /s/ Kimberly A. Floriani | | |
| | | | | Name: | | Kimberly A. Floriani |
| | | | | Title: | | Vice President, Corporate Controller & Chief Accounting Officer |
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| Date: | October 23, 2020April 28, 2021 | | | | | | |
