Document
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Table of Contents


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 June 30, 2019
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
clf-logoa01a01a11.jpg
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: (216694-5700
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 270,048,477 as of July 17, 2019.



Table of Contents


TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
Page Number
 
 
 
 
 
 
DEFINITIONS
 
 
 
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Statements of Unaudited Condensed Consolidated Financial Position as of June 30, 2019 and December 31, 2018
 
 
 
 
Statements of Unaudited Condensed Consolidated Operations for the Three and Six Months Ended June 30, 2019 and 2018
 
 
 
 
Statements of Unaudited Condensed Consolidated Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018
 
 
 
 
Statements of Unaudited Condensed Consolidated Cash Flows for the Six Months Ended June 30, 2019 and 2018
 
 
 
 
Statements of Unaudited Condensed Consolidated Changes in Equity for the Three and Six Months Ended June 30, 2019 and 2018
 
 
 
 
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
 
 
 
 
 
 
 
 
Signatures
 
 
 
 
 
 


Table of Contents


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.
Abbreviation or acronym
 
Term
A&R 2015 Equity Plan
 
Cliffs Natural Resources Inc. Amended and Restated 2015 Equity and Incentive Compensation Plan
ABL Facility
 
Amended and Restated Syndicated Facility Agreement by and among Bank of America, N.A., as Administrative Agent and Australian Security Trustee, the Lenders that are parties hereto, as the Lenders, Cleveland-Cliffs Inc., as Parent and a Borrower, and the Subsidiaries of Parent party hereto, as Borrowers dated as of March 30, 2015, and Amended and Restated as of February 28, 2018
Adjusted EBITDA
 
EBITDA excluding certain items such as extinguishment/restructuring of debt, impacts of discontinued operations, foreign currency exchange remeasurement, impairment of other long-lived assets, severance and intersegment corporate allocations of SG&A costs
ArcelorMittal
 
ArcelorMittal (as the parent company of ArcelorMittal Mines Canada, ArcelorMittal USA and ArcelorMittal Dofasco, as well as many other subsidiaries)
AMT
 
Alternative Minimum Tax
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Update
CECL
 
Current Expected Credit Losses model
Compensation Committee
 
Compensation and Organization Committee of the Board of Directors
Dodd-Frank Act
 
Dodd-Frank Wall Street Reform and Consumer Protection Act
DR-grade
 
Direct Reduction-grade
EBITDA
 
Earnings before interest, taxes, depreciation and amortization
Empire
 
Empire Iron Mining Partnership
Exchange Act
 
Securities Exchange Act of 1934, as amended
FASB
 
Financial Accounting Standards Board
Fe
 
Iron
FMSH Act
 
U.S. Federal Mine Safety and Health Act 1977, as amended
GAAP
 
Accounting principles generally accepted in the United States
HBI
 
Hot briquetted iron
Hibbing
 
Hibbing Taconite Company, an unincorporated joint venture
Hot-rolled coil steel price
 
Estimated average annual daily market price for hot-rolled coil steel
Long ton
 
2,240 pounds
Metric ton
 
2,205 pounds
MMBtu
 
Million British Thermal Units
MSHA
 
U.S. Mine Safety and Health Administration
Net ton
 
2,000 pounds
Northshore
 
Northshore Mining Company
OPEB
 
Other postretirement employment benefits
Platts 62% Price
 
Platts IODEX 62% Fe Fines CFR North China
PPI
 
Producer Price Indices
SEC
 
U.S. Securities and Exchange Commission
SG&A
 
Selling, general and administrative
Tilden
 
Tilden Mining Company L.C.
Topic 606
 
ASC Topic 606, Revenue from Contracts with Customers
Topic 815
 
ASC Topic 815, Derivatives and Hedging
TSR
 
Total shareholder return
United Taconite
 
United Taconite LLC
U.S.
 
United States of America
U.S. Steel
 
U.S Steel Corporation and all subsidiaries

1

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PART I
Item 1.
Financial Statements
Statements of Unaudited Condensed Consolidated Financial Position
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions)
 
June 30,
2019
 
December 31,
2018
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
377.2

 
$
823.2

Accounts receivable, net
193.1

 
226.7

Inventories
219.0

 
87.9

Supplies and other inventories
110.8

 
93.2

Derivative assets
118.3

 
91.5

Income tax receivable, current
58.7

 
117.3

Other current assets
42.3

 
39.8

TOTAL CURRENT ASSETS
1,119.4

 
1,479.6

PROPERTY, PLANT AND EQUIPMENT, NET
1,597.3

 
1,286.0

OTHER ASSETS
 
 
 
Deposits for property, plant and equipment
52.2

 
83.0

Income tax receivable, non-current
62.7

 
121.3

Deferred income taxes
443.3

 
464.8

Other non-current assets
118.3

 
94.9

TOTAL OTHER ASSETS
676.5

 
764.0

TOTAL ASSETS
$
3,393.2

 
$
3,529.6

(continued)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2

Table of Contents


Statements of Unaudited Condensed Consolidated Financial Position
Cleveland-Cliffs Inc. and Subsidiaries - (Continued)
 
(In Millions)
 
June 30,
2019
 
December 31,
2018
LIABILITIES
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
188.1

 
$
186.8

Accrued employment costs
58.4

 
74.0

Accrued interest
31.3

 
38.4

Partnership distribution payable
44.1

 
43.5

Other current liabilities
115.5

 
125.5

TOTAL CURRENT LIABILITIES
437.4

 
468.2

PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES
239.3

 
248.7

ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
176.7

 
172.0

LONG-TERM DEBT
2,104.5

 
2,092.9

OTHER LIABILITIES
149.7

 
123.6

TOTAL LIABILITIES
3,107.6

 
3,105.4

COMMITMENTS AND CONTINGENCIES (REFER TO NOTE 20)

 

EQUITY
 
 
 
SHAREHOLDERS' EQUITY
 
 
 
Preferred Stock - no par value
 
 
 
Class A - 3,000,000 shares authorized
 
 
 
Class B - 4,000,000 shares authorized
 
 
 
Common Shares - par value $0.125 per share
 
 
 
Authorized - 600,000,000 shares (2018 - 600,000,000 shares);
 
 
 
Issued - 301,886,794 shares (2018 - 301,886,794 shares);
 
 
 
Outstanding - 270,042,018 shares (2018 - 292,611,569 shares)
37.7

 
37.7

Capital in excess of par value of shares
3,863.6

 
3,916.7

Retained deficit
(2,952.6
)
 
(3,060.2
)
Cost of 31,844,776 common shares in treasury (2018 - 9,275,225 shares)
(391.3
)
 
(186.1
)
Accumulated other comprehensive loss
(271.8
)
 
(283.9
)
TOTAL EQUITY
285.6

 
424.2

TOTAL LIABILITIES AND EQUITY
$
3,393.2

 
$
3,529.6

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

Table of Contents


Statements of Unaudited Condensed Consolidated Operations
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions, Except Per Share Amounts)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
 
 
 
 
Product
$
697.4

 
$
672.0

 
$
842.8

 
$
841.2

Freight
45.8

 
42.3

 
57.4

 
53.1


743.2

 
714.3

 
900.2

 
894.3

COST OF GOODS SOLD
(480.2
)
 
(429.8
)
 
(606.3
)
 
(548.3
)
SALES MARGIN
263.0

 
284.5

 
293.9

 
346.0

OTHER OPERATING EXPENSE
 
 
 
 
 
 
 
Selling, general and administrative expenses
(30.6
)
 
(26.2
)
 
(58.7
)
 
(51.3
)
Miscellaneous – net
(5.6
)
 
(4.1
)
 
(9.2
)
 
(10.2
)
 
(36.2
)
 
(30.3
)
 
(67.9
)
 
(61.5
)
OPERATING INCOME
226.8

 
254.2

 
226.0

 
284.5

OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest expense, net
(26.1
)
 
(31.2
)
 
(51.2
)
 
(63.6
)
Gain (loss) on extinguishment of debt
(17.9
)
 
0.2

 
(18.2
)
 
0.2

Other non-operating income
0.6

 
4.4

 
1.0

 
8.8

 
(43.4
)
 
(26.6
)
 
(68.4
)
 
(54.6
)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
183.4

 
227.6

 
157.6

 
229.9

INCOME TAX BENEFIT (EXPENSE)
(22.0
)
 
1.8

 
(18.3
)
 
(13.9
)
INCOME FROM CONTINUING OPERATIONS
161.4

 
229.4

 
139.3

 
216.0

LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX
(0.6
)
 
(64.3
)
 
(0.6
)
 
(135.2
)
NET INCOME
$
160.8

 
$
165.1

 
$
138.7

 
$
80.8

 
 
 
 
 
 
 
 
EARNINGS (LOSS) PER COMMON SHARE – BASIC
 
 
 
 
 
 
 
Continuing operations
$
0.59

 
$
0.77

 
$
0.49

 
$
0.73

Discontinued operations

 
(0.22
)
 

 
(0.46
)
 
$
0.59

 
$
0.55

 
$
0.49

 
$
0.27

EARNINGS (LOSS) PER COMMON SHARE – DILUTED
 
 
 
 
 
 
 
Continuing operations
$
0.57

 
$
0.76

 
$
0.47

 
$
0.72

Discontinued operations

 
(0.21
)
 

 
(0.45
)
 
$
0.57

 
$
0.55

 
$
0.47

 
$
0.27

AVERAGE NUMBER OF SHARES (IN THOUSANDS)
 
 
 
 
 
 
 
Basic
275,769

 
297,618

 
282,647

 
297,442

Diluted
285,479

 
301,275

 
293,580

 
301,143

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

Table of Contents


Statements of Unaudited Condensed Consolidated Comprehensive Income
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
NET INCOME
$
160.8

 
$
165.1

 
$
138.7

 
$
80.8

OTHER COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Changes in pension and other post-retirement benefits, net of tax
5.8

 
6.7

 
11.5

 
13.4

Changes in foreign currency translation

 
2.2

 

 
2.9

Changes in derivative financial instruments, net of tax
(2.1
)
 
0.2

 
0.6

 
0.5

OTHER COMPREHENSIVE INCOME
3.7

 
9.1

 
12.1

 
16.8

TOTAL COMPREHENSIVE INCOME
$
164.5

 
$
174.2

 
$
150.8

 
$
97.6

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

Table of Contents


Statements of Unaudited Condensed Consolidated Cash Flows
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions)
 
Six Months Ended
June 30,
 
2019
 
2018
OPERATING ACTIVITIES
 
 
 
Net income
$
138.7

 
$
80.8

Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 
 
Depreciation, depletion and amortization
40.9

 
49.4

Loss (gain) on extinguishment of debt
18.2

 
(0.2
)
Gain on derivatives
(27.2
)
 
(123.5
)
Other
46.6

 
12.6

Changes in operating assets and liabilities:
 
 
 
Receivables and other assets
127.8

 
61.8

Inventories
(131.1
)
 
(125.6
)
Payables, accrued expenses and other liabilities
(62.8
)
 
(4.6
)
Net cash provided (used) by operating activities
151.1

 
(49.3
)
INVESTING ACTIVITIES
 
 
 
Purchase of property, plant and equipment
(294.4
)
 
(42.1
)
Deposits for property, plant and equipment
(6.5
)
 
(72.3
)
Proceeds on sales of assets

 
14.6

Other investing activities
8.5

 

Net cash used by investing activities
(292.4
)
 
(99.8
)
FINANCING ACTIVITIES
 
 
 
Repurchase of common shares
(252.9
)
 

Dividends paid
(28.9
)
 

Proceeds from issuance of debt
720.9

 

Debt issuance costs
(6.8
)
 
(1.5
)
Repurchase of debt
(729.3
)
 
(15.3
)
Other financing activities
(10.9
)
 
(8.9
)
Net cash used by financing activities
(307.9
)
 
(25.7
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH

 
(1.0
)
DECREASE IN CASH AND CASH EQUIVALENTS, INCLUDING CASH CLASSIFIED WITHIN OTHER CURRENT ASSETS RELATED TO DISCONTINUED OPERATIONS
(449.2
)
 
(175.8
)
LESS: DECREASE IN CASH AND CASH EQUIVALENTS FROM DISCONTINUED OPERATIONS, CLASSIFIED WITHIN OTHER CURRENT ASSETS
(3.2
)
 

NET DECREASE IN CASH AND CASH EQUIVALENTS
(446.0
)
 
(175.8
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
823.2

 
978.3

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
377.2

 
$
802.5

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

Table of Contents


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
 
Accumulated
Other
Comprehensive
Loss
 
Total
December 31, 2018
292.6

 
$
37.7

 
$
3,916.7

 
$
(3,060.2
)
 
$
(186.1
)
 
$
(283.9
)
 
$
424.2

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(22.1
)
 

 

 
(22.1
)
Other comprehensive income

 

 

 

 

 
8.4

 
8.4

Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(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
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
160.8

 

 

 
160.8

Other comprehensive income

 

 

 

 

 
3.7

 
3.7

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
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


7

Table of Contents


 
(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
 
Accumulated
Other
Comprehensive
Loss
 
Non-Controlling Interest
 
Total
December 31, 2017
297.4

 
$
37.7

 
$
3,933.9

 
$
(4,207.3
)
 
$
(169.6
)
 
$
(39.0
)
 
$
0.2

 
$
(444.1
)
Adoption of accounting standard

 

 

 
34.0

 

 

 

 
34.0

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(84.3
)
 

 

 

 
(84.3
)
Other comprehensive income

 

 

 

 

 
7.7

 

 
7.7

Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(76.6
)
Stock and other incentive plans
0.3

 

 
(15.8
)
 

 
17.7

 

 

 
1.9

March 31, 2018
297.7

 
$
37.7

 
$
3,918.1

 
$
(4,257.6
)
 
$
(151.9
)
 
$
(31.3
)
 
$
0.2

 
$
(484.8
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
165.1

 

 

 

 
165.1

Other comprehensive income

 

 

 

 

 
9.1

 

 
9.1

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
174.2

Distributions to noncontrolling interest

 

 

 
 
 

 

 
(0.2
)
 
(0.2
)
Stock and other incentive plans
0.1

 

 
0.2

 

 
4.3

 

 

 
4.5

June 30, 2018
297.8

 
$
37.7

 
$
3,918.3

 
$
(4,092.5
)
 
$
(147.6
)
 
$
(22.2
)
 
$

 
$
(306.3
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8

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Cleveland-Cliffs Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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, 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 six months ended June 30, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019 or any other future period. 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, 2018.
We have two reportable segments - the Mining and Pelletizing segment and the Metallics segment. Unless otherwise noted, discussion of our business and results of operations in this Quarterly Report on Form 10-Q refers to our continuing operations.
As more fully described in the Form 10-K for the year ended December 31, 2018, in 2018 we committed to a course of action leading to the permanent closure of the Asia Pacific Iron Ore mining operations and, as planned, completed our final shipment in June 2018. Factors considered in this decision included increasingly discounted prices for lower-iron-content ore and the quality of the remaining iron ore reserves. During 2018, we sold all of the assets of our Asia Pacific Iron Ore business through a series of sales to third parties. As a result of our planned exit, management determined that our Asia Pacific Iron Ore operating segment met the criteria to be classified as held for sale and a discontinued operation under ASC Topic 205, Presentation of Financial Statements. As such, all Asia Pacific Iron Ore operating segment results are classified within discontinued operations. Refer to NOTE 14 - DISCONTINUED OPERATIONS for further information.
Basis of Consolidation
The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, including the following operations as of June 30, 2019:
Name
 
Location
 
Business Segment
 
Status of Operations
Northshore
 
Minnesota
 
Mining and Pelletizing
 
Active
United Taconite
 
Minnesota
 
Mining and Pelletizing
 
Active
Tilden
 
Michigan
 
Mining and Pelletizing
 
Active
Empire
 
Michigan
 
Mining and Pelletizing
 
Indefinitely Idled
Toledo HBI
 
Ohio
 
Metallics
 
Construction Stage

Intercompany transactions and balances are eliminated upon consolidation.
Equity Method Investments
Our 23% ownership interest in Hibbing is recorded as an equity method investment. As of June 30, 2019 and December 31, 2018, our investment in Hibbing was $12.9 million and $15.4 million, respectively, classified as Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position.
Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the audited financial statements for the fiscal year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the SEC. There have been no material changes in our significant accounting policies and estimates from those disclosed therein.

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NOTE 2 - NEW ACCOUNTING STANDARDS
Issued and Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases except for short-term leases. For lessees, leases are classified as either operating or finance leases. We adopted this standard on its effective date of January 1, 2019 using the optional alternative approach, which requires application of the new guidance at the beginning of the standard's effective date. Adoption of the updated standard did not have a material effect on our consolidated financial statements.
Issued and Not Effective
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326), which introduces a new accounting model, CECL. CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. CECL utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. We plan to adopt this standard on its effective date of January 1, 2020, and do not expect the standard to have a material effect on our consolidated financial statements.
NOTE 3 - SEGMENT REPORTING
In alignment with our strategic goals, our Company’s continuing operations are organized and managed in two operating segments according to our differentiated products. 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. In our Metallics segment, we are currently constructing an HBI production plant in Toledo, Ohio. We expect to complete construction and begin production in 2020. In the second quarter of 2019, Northshore mine began supplying DR-grade pellets to our Metallics segment, which will be used as feedstock for the HBI production plant.
We evaluate performance based on sales margin, defined as revenues less cost of goods sold identifiable to each segment. Additionally, we evaluate performance on a segment basis, as well as a consolidated basis, based on EBITDA and Adjusted EBITDA. These measures are 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 iron ore industry. In addition, management believes EBITDA and Adjusted EBITDA are useful measures 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 tables present a summary of our reportable segments including a reconciliation of segment revenues to total revenues, segment sales margin to total sales margin and a reconciliation of Net income to EBITDA and Adjusted EBITDA:    
 
(In Millions)
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
 
Mining and Pelletizing
 
Metallics
 
Total
 
Mining and Pelletizing
 
Metallics
 
Total
Operating segment revenues from product sales and services
$
747.2

 
$

 
$
747.2

 
$
904.2

 
$

 
$
904.2

Elimination of intersegment revenues
(4.0
)
 

 
(4.0
)
 
(4.0
)
 

 
(4.0
)
Total revenue
$
743.2

 
$

 
$
743.2

 
$
900.2

 
$

 
$
900.2

 
 
 
 
 
 
 
 
 
 
 
 
Operating segment sales margin
$
264.6

 
$

 
$
264.6

 
$
295.5

 
$

 
$
295.5

Elimination of intersegment sales margin
(1.6
)
 

 
(1.6
)
 
(1.6
)
 

 
(1.6
)
Total sales margin
$
263.0

 
$

 
$
263.0

 
$
293.9

 
$

 
$
293.9

Revenues from product sales and services of $714.3 million and $894.3 million, respectively, and sales margin of $284.5 million and $346.0 million, respectively, related to our Mining and Pelletizing segment accounted for all of our consolidated revenues and sales margin for the three and six months ended June 30, 2018.

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(In Millions)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
160.8

 
$
165.1

 
$
138.7

 
$
80.8

Less:
 
 
 
 
 
 
 
Interest expense, net
(26.3
)
 
(32.3
)
 
(51.4
)
 
(65.8
)
Income tax benefit (expense)
(22.0
)
 
1.8

 
(18.3
)
 
(13.9
)
Depreciation, depletion and amortization
(21.0
)
 
(25.5
)
 
(40.9
)
 
(49.4
)
EBITDA
$
230.1

 
$
221.1

 
$
249.3

 
$
209.9

Less:
 
 
 
 
 
 
 
Foreign exchange remeasurement
$
(0.1
)
 
$
(0.1
)
 
$

 
$
(0.5
)
Impact of discontinued operations
(0.4
)
 
(54.7
)
 
(0.4
)
 
(117.8
)
Gain (loss) on extinguishment of debt
(17.9
)
 
0.2

 
(18.2
)
 
0.2

Severance costs

 

 
(1.7
)
 

Adjusted EBITDA
$
248.5

 
$
275.7

 
$
269.6

 
$
328.0

 
 
 
 
 
 
 
 
EBITDA:
 
 
 
 
 
 
 
Mining and Pelletizing
$
274.6

 
$
296.0

 
$
317.4

 
$
368.5

Metallics
(1.1
)
 
(1.2
)
 
(1.9
)
 
(1.5
)
Corporate and Other (including discontinued operations)
(43.4
)
 
(73.7
)
 
(66.2
)
 
(157.1
)
Total EBITDA
$
230.1

 
$
221.1

 
$
249.3

 
$
209.9

 
 
 
 
 
 
 
 
Adjusted EBITDA:
 
 
 
 
 
 
 
Mining and Pelletizing
$
280.5

 
$
301.3

 
$
328.0

 
$
378.4

Metallics
(1.1
)
 
(1.2
)
 
(1.9
)
 
(1.5
)
Corporate
(30.9
)
 
(24.4
)
 
(56.5
)
 
(48.9
)
Total Adjusted EBITDA
$
248.5

 
$
275.7

 
$
269.6

 
$
328.0

The following table summarizes our depreciation, depletion and amortization expense and capital additions:
 
(In Millions)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Depreciation, depletion and amortization:
 
 
 
 
 
 
 
Mining and Pelletizing
$
19.6

 
$
15.6

 
$
38.1

 
$
31.4

Corporate
1.4

 
1.4

 
2.8

 
2.8

Total depreciation, depletion and amortization
$
21.0

 
$
17.0

 
$
40.9

 
$
34.2

 
 
 
 
 
 
 
 
Capital additions1:
 
 
 
 
 
 
 
Mining and Pelletizing
$
35.6

 
$
26.7

 
$
82.4

 
$
45.4

Metallics
155.1

 
43.0

 
237.5

 
103.0

Corporate
0.9

 
0.7

 
1.0

 
0.9

Total capital additions
$
191.6

 
$
70.4

 
$
320.9

 
$
149.3

 
 
 
 
 
 
 
 
1 Refer to NOTE 17 - CASH FLOW INFORMATION for additional information.


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A summary of assets by segment is as follows:
 
(In Millions)
 
June 30,
2019
 
December 31,
2018
Assets:
 
 
 
Mining and Pelletizing
$
1,893.9

 
$
1,694.1

Metallics
514.7

 
265.9

Total segment assets
2,408.6

 
1,960.0

Corporate and Other (including discontinued operations)
984.6

 
1,569.6

Total assets
$
3,393.2

 
$
3,529.6


NOTE 4 - REVENUE
We sell primarily a single product, iron ore pellets, in the North American market. Revenue is recognized generally when iron ore is delivered 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. We offer standard payment terms to our customers, generally requiring settlement within 30 days.
We enter into supply contracts of varying lengths to provide customers iron ore pellets to use in their blast furnaces. Blast furnaces run continuously with a constant feed of iron ore and, once shut down, cannot easily be restarted. As a result, we ship iron ore in large quantities for storage and use by customers at a later date. Customers do not simultaneously receive and consume the iron ore. Based on our assessment of the factors that indicate the pattern of satisfaction, we transfer control of the iron ore at a point in time upon shipment or delivery of the product. The customer is able to direct the use of, and obtain substantially all of the benefits from, the product at the time the product is delivered.
Most of our customer supply agreements specify a provisional price, which is used for initial billing and cash collection. Revenue recorded in accordance with Topic 606 is calculated using the expected revenue rate at the point when control transfers. The final settlement includes market inputs for a specified period of time, which may vary by customer, but typically include one or more of the following published rates: Platts 62% Price, Atlantic Basin pellet premiums, Platts international indexed freight rates and changes in specified PPI, including industrial commodities, fuel and steel. Changes in the expected revenue rate from the date control transfers through final settlement of contract terms is recorded in accordance with Topic 815. Refer to NOTE 13 - DERIVATIVE INSTRUMENTS for further information on how our estimated and final revenue rates are determined.
A supply agreement with one customer provides for supplemental revenue or refunds based on the average annual daily market price for hot-rolled coil steel in the year the iron ore is consumed in the customer’s blast furnaces. As control transfers prior to consumption, the supplemental revenue is recorded in accordance with ASC Topic 815. Refer to NOTE 13 - DERIVATIVE INSTRUMENTS for further information on supplemental revenue or refunds.
Included within Revenues from product sales and services is derivative revenue related to Topic 815 of $74.8 million and $80.3 million for the three and six months ended June 30, 2019, respectively, and $154.7 million and $198.5 million for the three and six months ended June 30, 2018, respectively.
Deferred Revenue
The table below summarizes our deferred revenue balances:
 
(In Millions)
 
Deferred Revenue (Current)
 
Deferred Revenue (Long-Term)
 
2019
 
2018
 
2019
 
2018
Opening balance as of January 1
$
21.0

 
$
23.8

 
$
38.5

 
$
51.4

Closing balance as of June 30
15.5

 
20.0

 
34.3

 
47.1

Decrease
$
(5.5
)
 
$
(3.8
)
 
$
(4.2
)
 
$
(4.3
)


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The terms of one of our pellet supply agreements required supplemental payments to be paid by the customer during the period 2009 through 2012. Installment amounts received under this arrangement in excess of sales were classified as Other current liabilities and Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position upon receipt of payment. Revenue is recognized over the life of the supply agreement, which extends until 2022, in equal annual installments. As of June 30, 2019 and December 31, 2018, installment amounts received in excess of sales totaled $47.1 million and $51.3 million, respectively, related to this agreement. As of June 30, 2019 and December 31, 2018, deferred revenue of $12.8 million was recorded in Other current liabilities and $34.3 million and $38.5 million, respectively, was recorded as long-term in Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position, related to this agreement.
Due to the payment terms and the timing of cash receipts near a period end, cash receipts can exceed shipments for certain customers. Revenue recognized on these transactions totaling $2.7 million and $8.2 million was deferred and included in Other current liabilities in the Statements of Unaudited Condensed Consolidated Financial Position as of June 30, 2019 and December 31, 2018, respectively.
NOTE 5 - INVENTORIES
The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position:
 
 
(In Millions)
 
 
June 30, 2019
 
December 31, 2018
Segment
 
Finished Goods
 
Work-in-Process
 
Total Inventory
 
Finished Goods
 
Work-in-Process
 
Total Inventory
Mining and Pelletizing
 
$
186.2

 
$
30.4

 
$
216.6

 
$
77.8

 
$
10.1

 
$
87.9

Metallics
 

 
4.0

 
4.0

 

 

 

Intersegment elimination
 

 
(1.6
)
 
(1.6
)
 

 

 

Total
 
$
186.2

 
$
32.8

 
$
219.0

 
$
77.8

 
$
10.1

 
$
87.9


NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the carrying value of each of the major classes of our depreciable assets:
 
(In Millions)
 
June 30,
2019
 
December 31,
2018
Land rights and mineral rights
$
549.6

 
$
549.6

Office and information technology
70.6

 
70.0

Buildings
95.4

 
87.2

Mining equipment
575.8

 
548.5

Processing equipment
740.3

 
645.8

Electric power facilities
58.7

 
58.7

Land improvements
23.8

 
23.8

Asset retirement obligation
14.9

 
14.8

Other
27.6

 
25.2

Construction-in-progress
501.3

 
284.8

 
2,658.0

 
2,308.4

Allowance for depreciation and depletion
(1,060.7
)
 
(1,022.4
)
 
$
1,597.3

 
$
1,286.0


We recorded capitalized interest into property, plant and equipment of $5.9 million and $9.9 million for the three and six months ended June 30, 2019, respectively, and $1.1 million and $2.1 million during the three and six months ended June 30, 2018, respectively.

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NOTE 7 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt:
(In Millions)
June 30, 2019
Debt Instrument
 
Annual Effective
Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Unamortized Discounts
 
Total Debt
Secured Notes:
 
 
 
 
 
 
 
 
 
 
$400 Million 4.875% 2024 Senior Notes
 
5.00%
 
$
400.0

 
$
(5.2
)
 
$
(2.0
)
 
$
392.8

Unsecured Notes:
 
 
 
 
 
 
 
 
 
 
$316.25 Million 1.50% 2025 Convertible Senior Notes
 
6.26%
 
316.3

 
(5.1
)
 
(70.3
)
 
240.9

$1.075 Billion 5.75% 2025 Senior Notes
 
6.01%
 
473.3

 
(4.0
)
 
(6.0
)
 
463.3

$750 Million 5.875% 2027 Senior Notes
 
6.49%
 
750.0

 
(6.7
)
 
(28.7
)
 
714.6

$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
298.4

 
(2.2
)
 
(3.3
)
 
292.9

ABL Facility
 
N/A
 
450.0

 
N/A

 
N/A

 

Long-term debt
 
 
 
 
 
 
 
 
 
$
2,104.5

(In Millions)
December 31, 2018
Debt Instrument
 
Annual Effective
Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Unamortized Discounts
 
Total Debt
Secured Notes:
 
 
 
 
 
 
 
 
 
 
$400 Million 4.875% 2024 Senior Notes
 
5.00%
 
$
400.0

 
$
(5.7
)
 
$
(2.2
)
 
$
392.1

Unsecured Notes:
 
 
 
 
 
 
 
 
 
 
$700 Million 4.875% 2021 Senior Notes
 
4.89%
 
124.0

 
(0.2
)
 

 
123.8

$316.25 Million 1.50% 2025 Convertible Senior Notes
 
6.26%
 
316.3

 
(5.5
)
 
(75.6
)
 
235.2

$1.075 Billion 5.75% 2025 Senior Notes
 
6.01%
 
1,073.3

 
(9.9
)
 
(14.6
)
 
1,048.8

$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
298.4

 
(2.3
)
 
(3.3
)
 
292.8