CLEVELAND-CLIFFS INC., 10-K filed on 2/8/2019
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2018
Feb. 05, 2019
Jun. 30, 2018
Document and Entity Information [Abstract]      
Entity Registrant Name CLEVELAND-CLIFFS INC.    
Entity Central Index Key 0000764065    
Current Fiscal Year End Date --12-31    
Entity Filer Category Large Accelerated Filer    
Document Type 10-K    
Document Period End Date Dec. 31, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Amendment Flag false    
Entity Common Stock, Shares Outstanding   292,607,474  
Trading Symbol clf    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Emerging Growth Company false    
Entity Small Business false    
Entity Shell Company false    
Entity Public Float     $ 2,487,099,883
v3.10.0.1
Statements Of Condensed Consolidated Financial Position - USD ($)
$ in Millions
Dec. 31, 2018
Dec. 31, 2017
CURRENT ASSETS    
Cash and cash equivalents $ 823.2 $ 978.3
Accounts receivable, net 226.7 106.7
Inventories 87.9 138.4
Supplies and other inventories 93.2 88.8
Derivative assets 91.5 37.9
Income tax receivable, current 117.3 13.3
Loans to and accounts receivables from the Canadian Entities 0.0 51.6
Current assets of discontinued operations 12.4 118.5
Other current assets 27.4 11.1
TOTAL CURRENT ASSETS 1,479.6 1,544.6
PROPERTY, PLANT AND EQUIPMENT, NET 1,286.0 1,033.8
OTHER ASSETS    
Deposits for property, plant and equipment 83.0 17.8
Income tax receivable, non-current 121.3 235.3
Deferred income taxes 464.8 0.0
Non-current assets of discontinued operations 0.0 20.3
Other non-current assets 94.9 101.6
TOTAL ASSETS 3,529.6 2,953.4
CURRENT LIABILITIES    
Accounts payable 186.8 99.5
Accrued employment costs 74.0 52.7
State and local taxes payable 35.5 30.2
Accrued interest 38.4 31.4
Contingent claims 0.0 55.6
Partnership distribution payable 43.5 44.2
Current liabilities of discontinued operations 6.7 75.0
Other current liabilities 83.3 63.6
TOTAL CURRENT LIABILITIES 468.2 452.2
POSTEMPLOYMENT BENEFIT LIABILITIES    
Pensions 218.4 222.8
Other postretirement benefits 30.3 34.9
TOTAL POSTEMPLOYMENT BENEFIT LIABILITIES 248.7 257.7
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS 172.0 167.7
LONG-TERM DEBT 2,092.9 2,304.2
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS 8.3 52.2
OTHER LIABILITIES 115.3 163.5
TOTAL LIABILITIES 3,105.4 3,397.5
COMMITMENTS AND CONTINGENCIES (SEE NOTE 19)
CLIFFS SHAREHOLDERS' EQUITY (DEFICIT)    
Common Shares - par value $0.125 per share, Authorized - 600,000,000 shares (2017 - 600,000,000 shares); Issued - 301,886,794 shares (2017 - 301,886,794) shares); Outstanding - 292,611,569 shares (2017 - 297,400,968) shares) 37.7 37.7
Capital in excess of par value of shares 3,916.7 3,933.9
Retained deficit (3,060.2) (4,207.3)
Cost of 9,275,225 common shares in treasury (2017 - 4,485,826 shares) (186.1) (169.6)
Accumulated other comprehensive loss (283.9) (39.0)
TOTAL CLIFFS SHAREHOLDERS' EQUITY (DEFICIT) 424.2 (444.3)
NONCONTROLLING INTEREST 0.0 0.2
TOTAL EQUITY (DEFICIT) 424.2 (444.1)
TOTAL LIABILITIES AND EQUITY (DEFICIT) $ 3,529.6 $ 2,953.4
v3.10.0.1
Statements Of Condensed Consolidated Financial Position (Parenthetical) - $ / shares
Dec. 31, 2018
Dec. 31, 2017
Class of Stock [Line Items]    
Preferred stock, par value $ 0 $ 0
Common shares, par value $ 0.125 $ 0.125
Common shares, authorized (in shares) 600,000,000 600,000,000
Common shares, issued (in shares) 301,886,794 301,886,794
Common shares, outstanding (in shares) 292,611,569 297,400,968
Common shares in treasury 9,275,225 4,485,826
Preferred Class A [Member]    
Class of Stock [Line Items]    
Preferred stock, shares authorized (in shares) 3,000,000 3,000,000
Preferred stock, issued and outstanding (in shares) 0 0
Preferred Class B [Member]    
Class of Stock [Line Items]    
Preferred stock, shares authorized (in shares) 4,000,000 4,000,000
v3.10.0.1
Statements Of Condensed Consolidated Operations - USD ($)
shares in Millions, $ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
REVENUES FROM PRODUCT SALES AND SERVICES      
Product revenues $ 2,172.3 $ 1,644.6 $ 1,379.7
Freight and Reimbursement Revenue 160.1 221.4 174.8
TOTAL REVENUES FROM PRODUCT SALES AND SERVICES 2,332.4 1,866.0 1,554.5
COST OF GOODS SOLD AND OPERATING EXPENSES (1,522.8) (1,398.4) (1,274.4)
SALES MARGIN 809.6 467.6 280.1
OTHER OPERATING INCOME (EXPENSE)      
Selling, general and administrative expenses (116.8) (102.9) (115.8)
Miscellaneous - net (19.6) 25.5 (33.6)
Other operating expense (136.4) (77.4) (149.4)
OPERATING INCOME 673.2 390.2 130.7
OTHER INCOME (EXPENSE)      
Interest expense, net (118.9) (126.8) (193.9)
Gain (loss) on extinguishment/restructuring of debt (6.8) (165.4) 166.3
Other non-operating income 17.2 10.2 7.3
TOTAL OTHER INCOME (EXPENSE) (108.5) (282.0) (20.3)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 564.7 108.2 110.4
INCOME TAX BENEFIT 475.2 252.4 12.2
INCOME FROM CONTINUING OPERATIONS 1,039.9 360.6 122.6
INCOME FROM DISCONTINUED OPERATIONS, net of tax 88.2 2.5 76.7
NET INCOME 1,128.1 363.1 199.3
LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST 0.0 3.9 (25.2)
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS $ 1,128.1 $ 367.0 $ 174.1
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC      
Continuing operations $ 3.50 $ 1.27 $ 0.49
Discontinued operations 0.30 0.01 0.39
Earnings (Loss) per Common Share Attributable to Cliffs Common Shareholders - Basic: 3.80 1.28 0.88
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED      
Continuing operations 3.42 1.25 0.49
Discontinued operations 0.29 0.01 0.38
Earnings (Loss) per Common Share Attributable to Cliffs Common Shareholders - Diluted: $ 3.71 $ 1.26 $ 0.87
AVERAGE NUMBER OF SHARES (IN THOUSANDS)      
Basic 297.2 288.4 197.7
Diluted 304.1 293.0 200.1
v3.10.0.1
Statements Of Condensed Consolidated Comprehensive Income - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement of Comprehensive Income [Abstract]      
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS $ 1,128.1 $ 367.0 $ 174.1
OTHER COMPREHENSIVE INCOME (LOSS)      
Changes in pension and other post-retirement benefits, net of tax (17.2) 11.5 (19.8)
Changes in foreign currency translation (225.4) (13.9) 18.6
Changes in derivative financial instruments, net of tax (2.3) (0.5) (2.6)
OTHER COMPREHENSIVE LOSS (244.9) (2.9) (3.8)
OTHER COMPREHENSIVE LOSS (INCOME) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST 0.0 (1.1) 0.5
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS $ 883.2 $ 363.0 $ 170.8
v3.10.0.1
Statements Of Condensed Consolidated Cash Flows - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
OPERATING ACTIVITIES      
Net income $ 1,128.1 $ 363.1 $ 199.3
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation, depletion and amortization 89.0 87.7 115.4
Deferred income taxes (460.5) 0.0 0.0
Loss (gain) on extinguishment of debt 6.8 165.4 (166.3)
Loss on deconsolidation 0.0 20.2 17.5
Gain on derivatives (110.2) (4.1) (30.1)
Gain on foreign currency translation (228.1) 0.0 0.0
Other 20.7 25.3 40.1
Changes in operating assets and liabilities:      
Receivables and other assets 52.3 (248.7) 43.2
Inventories 42.9 (1.8) 157.8
Payables, accrued expenses and other liabilities (62.5) (69.0) (73.9)
Net cash provided by operating activities 478.5 338.1 303.0
INVESTING ACTIVITIES      
Purchase of property, plant and equipment (208.6) (134.9) (61.7)
Deposits for property, plant and equipment (87.5) (16.8) (7.4)
Other investing activities 23.0 (4.3) 11.2
Net cash used by investing activities (273.1) (156.0) (57.9)
FINANCING ACTIVITIES      
Net proceeds from issuance of common shares 0.0 661.3 287.4
Repurchase of common shares (47.5) 0.0 0.0
Proceeds from issuance of debt 0.0 1,771.5 0.0
Debt issuance costs (1.5) (28.6) (5.2)
Borrowings under credit facilities 0.0 0.0 105.0
Repayment under credit facilities 0.0 0.0 (105.0)
Repayments on equipment loans 0.0 0.0 (95.6)
Repurchase of debt (234.5) (1,720.7) (305.4)
Acquisition of noncontrolling interest 0.0 (105.0) 0.0
Distributions of partnership equity (44.2) (52.9) (59.9)
Other financing activities (47.5) (26.7) (27.7)
Net cash provided (used) by financing activities (375.2) 498.9 (206.4)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2.3) 3.3 (0.5)
Increase (Decrease) in Cash and Cash Equivalents, Including Cash Classified Within Current Assets of Discontinued Operations (172.1) 684.3 38.2
LESS: INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CLASSIFIED WITHIN CURRENT ASSETS OF DISCONTINUED OPERATIONS (17.0) 18.8 (35.3)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (155.1) 665.5 73.5
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 978.3 312.8 239.3
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 823.2 $ 978.3 $ 312.8
v3.10.0.1
Statements of Consolidated Changes in Equity - USD ($)
$ in Millions
Total
Depositary Shares [Member]
Common Stock [Member]
Capital in Excess of Par Value of Shares [Member]
Retained Earnings [Member]
Common Shares in Treasury [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Noncontrolling Interest [Member]
Comprehensive Income (Loss), Net of Tax, Including Portion Attributable to Noncontrolling Interest [Abstract]                
Preferred Stock, Shares Outstanding   29,300,000            
Balance, beginning of period (in shares) at Dec. 31, 2015     153,500,000          
Balance, beginning of period at Dec. 31, 2015 $ (1,811.6) $ 731.3 $ 19.8 $ 2,298.9 $ (4,748.4) $ (265.0) $ (18.0) $ 169.8
Comprehensive Income (Loss), Net of Tax, Including Portion Attributable to Noncontrolling Interest [Abstract]                
NET INCOME 199.3       174.1     25.2
Other Comprehensive Loss (3.3)           (3.3)  
OTHER COMPREHENSIVE INCOME (3.8)              
Pension and OPEB liability, net of tax (19.8)             (0.5)
Total comprehensive income (loss) 195.5             24.7
Distributions to noncontrolling interest (3.2)             (3.2)
Distributions of partnership equity (57.5)             (57.5)
Stock and other incentive plans (in shares)     500,000          
Stock and other incentive plans 13.7     (5.8)   19.5    
Repurchase of common shares 0.0              
Shares issued for debt exchange     8,200,000          
Debt for equity exchange (value) 45.2   $ 1.0 44.2        
Stock Issued During Period, Value, Conversion of Convertible Securities   $ (731.3) $ 3.5 727.8        
Stock Issued During Period, Shares, Conversion of Units   (29,300,000) 26,500,000          
Common stock issuance (value) 287.4   $ 5.5 281.9        
Balance, end of period (in shares) at Dec. 31, 2016     233,100,000          
Balance, end of period at Dec. 31, 2016 (1,330.5) $ 0.0 $ 29.8 3,347.0 (4,574.3) (245.5) (21.3) 133.8
Comprehensive Income (Loss), Net of Tax, Including Portion Attributable to Noncontrolling Interest [Abstract]                
Preferred Stock, Shares Outstanding   0            
NET INCOME 363.1       367.0     (3.9)
Other Comprehensive Loss (4.0)           (4.0)  
OTHER COMPREHENSIVE INCOME (2.9)              
Pension and OPEB liability, net of tax 11.5             1.1
Total comprehensive income (loss) 360.2             (2.8)
Adjustments to Additional Paid in Capital, Convertible Debt with Conversion Feature 83.4     83.4        
Distributions of partnership equity (128.8)     (17.3)     5.2 (116.7)
Capital contributions by noncontrolling interest to subsidiary 1.8             1.8
Stock and other incentive plans (in shares)     1,000,000          
Stock and other incentive plans 13.5     (62.4)   75.9    
Repurchase of common shares 0.0              
Common stock issuance (value) 661.3   $ 7.9 653.4        
Acquisition of Noncontrolling Interest $ (105.0)     (70.2)     (18.9) (15.9)
Balance, end of period (in shares) at Dec. 31, 2017 297,400,968   297,400,000          
Balance, end of period at Dec. 31, 2017 $ (444.1) $ 0.0 $ 37.7 3,933.9 (4,207.3) (169.6) (39.0) 0.2
Comprehensive Income (Loss), Net of Tax, Including Portion Attributable to Noncontrolling Interest [Abstract]                
Preferred Stock, Shares Outstanding   0            
NET INCOME 1,128.1       1,128.1      
Other Comprehensive Loss (244.9)           (244.9)  
OTHER COMPREHENSIVE INCOME (244.9)              
Pension and OPEB liability, net of tax (17.2)              
Total comprehensive income (loss) 883.2              
New Accounting Pronouncement or Change in Accounting Principle, Effect of Adoption, Quantification 34.0       34.0      
Distributions to noncontrolling interest (0.2)             (0.2)
Stock and other incentive plans (in shares)     600,000          
Stock and other incentive plans $ 13.8     (17.2)   31.0    
Stock Repurchased During Period, Shares 5,400,000   (5,400,000)          
Repurchase of common shares $ (47.5)         (47.5)    
Common stock dividends ($0.05 per share) $ (15.0)       (15.0)      
Balance, end of period (in shares) at Dec. 31, 2018 292,611,569   292,600,000          
Balance, end of period at Dec. 31, 2018 $ 424.2 $ 0.0 $ 37.7 $ 3,916.7 $ (3,060.2) $ (186.1) $ (283.9) $ 0.0
Comprehensive Income (Loss), Net of Tax, Including Portion Attributable to Noncontrolling Interest [Abstract]                
Preferred Stock, Shares Outstanding   0            
v3.10.0.1
Statements of Consolidated Changes in Equity (Parenthetical) - $ / shares
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement of Stockholders' Equity [Abstract]      
Common Stock, Dividends, Per Share, Declared $ 0.05 $ 0 $ 0
v3.10.0.1
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
12 Months Ended
Dec. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
BUSINESS SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Founded in 1847, Cleveland-Cliffs Inc. is the largest and oldest independent iron ore mining company in the United States. We are a major supplier of iron ore pellets to the North American steel industry from our mines and pellet plants located in Michigan and Minnesota. We are currently constructing an HBI production plant in Toledo, Ohio. We expect to complete construction and begin production in 2020.
In January 2018, we announced that we would accelerate the time frame for the planned closure of our Asia Pacific Iron Ore mining operations in Australia. In April 2018, we committed to a course of action leading to the permanent closure of our 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 current and historical Asia Pacific Iron Ore operating segment results are classified within discontinued operations. Refer to NOTE 13 - DISCONTINUED OPERATIONS for further information.
In alignment with our strategic goals, we have become a North America-centric business and have updated the names of our operating segments. We are now organized according to our differentiated products. We have two reportable segments – the Mining and Pelletizing segment (formerly known as U.S. Iron Ore) and the Metallics segment. Unless otherwise noted, discussion of our business and results of operations in this Annual Report on Form 10-K refers to our continuing operations.
Significant Accounting Policies
We consider the following policies to be beneficial in understanding the judgments involved in the preparation of our consolidated financial statements and the uncertainties that could impact our financial condition, results of operations and cash flows.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to mineral reserves future realizable cash flow; environmental, reclamation and closure obligations; valuation of long-lived assets, inventory, tax assets and post-employment, post-retirement and other employee benefit liabilities; reserves for contingencies and litigation; and the fair value of derivative instruments. Actual results could differ from estimates. Management reviews its estimates on an ongoing basis. Changes in facts and circumstances may alter such estimates and affect the results of operations and financial position in future periods.
Basis of Consolidation
The consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries, including the following iron ore operations at December 31, 2018:
Name
 
Location
 
Status of Operations
Northshore
 
Minnesota
 
Active
United Taconite
 
Minnesota
 
Active
Tilden
 
Michigan
 
Active
Empire
 
Michigan
 
Indefinitely Idled

Intercompany transactions and balances are eliminated upon consolidation.
Equity Method Investments
Investments in unconsolidated ventures that we have the ability to exercise significant influence over, but not control, are accounted for under the equity method.
Our 23% ownership interest in Hibbing is recorded as an equity method investment. As of December 31, 2018 and 2017, our investment in Hibbing was $15.4 million and $11.0 million, respectively, classified in Other liabilities in the Statements of Consolidated Financial Position.
Our share of equity income (loss) is eliminated against consolidated product inventory upon production, and against Cost of goods sold and operating expenses when sold. This effectively reduces our cost for our share of the mining ventures' production cost, reflecting the cost-based nature of our participation in unconsolidated ventures.
Noncontrolling Interests
During 2017, our ownership interest in Empire increased to 100% as we reached an agreement to distribute the noncontrolling interest net assets of $132.7 million to ArcelorMittal, in exchange for its interest in Empire. The parties agreed that the net assets were to be distributed in three installments of $44.2 million each, the first of which was paid upon the execution of the agreement, the second of which was paid in August 2018 and the final of which is due August 2019. Upon payment of the first installment, we assumed ArcelorMittal's 21% interest and reflected the ownership percentage change in our consolidated financial statements. During the year ended December 31, 2017, we accounted for the increase in ownership as an equity transaction, which resulted in a net $12.1 million decrease in equity attributable to Cliffs' shareholders and a $116.7 million decrease in Noncontrolling interest. The net loss and income attributable to the noncontrolling interest of the Empire mining venture was $3.9 million and $25.2 million for the years ended December 31, 2017 and 2016, respectively.
During 2017, we also acquired the remaining 15% equity interest in Tilden owned by U.S. Steel for $105.0 million. With the closing of this transaction, we now have 100% ownership of the mine. During the year ended December 31, 2017, we accounted for the increase in ownership as an equity transaction, which resulted in an $89.1 million decrease in equity attributable to Cliffs' shareholders and a $15.9 million decrease in Noncontrolling interest.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit as well as all short-term securities held for the primary purpose of general liquidity. We consider investments in highly liquid debt instruments with an original maturity of three months or less from the date of acquisition and longer maturities when funds can be withdrawn in three months or less without a significant penalty to be cash equivalents. We routinely monitor and evaluate counterparty credit risk related to the financial institutions in which our short-term investment securities are held.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the point control transfers and represents the amount of consideration we expect to receive in exchange for transferred goods and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We establish provisions for losses on accounts receivable when it is probable that all or part of the outstanding balance will not be collected. We regularly review our accounts receivable balances and establish or adjust the allowance as necessary using the specific identification method. There was no allowance for doubtful accounts at December 31, 2018 and 2017 and no bad debt expense for the years ended December 31, 2018, 2017 and 2016.
Inventories
The Mining and Pelletizing segment product inventories are stated at the lower of cost or market. Cost of iron ore inventories is determined using the LIFO method.
Supplies and Other Inventories
Supply inventories include replacement parts, fuel, chemicals and other general supplies, which are expected to be used or consumed in normal operations. Supply inventories also include critical spares. Critical spares are replacement parts for equipment that is critical for the continued operation of the mine or processing facilities.
Supply inventories are stated at the lower of cost or net realizable value using average cost, less an allowance for obsolete and surplus items. The allowance for obsolete and surplus items was $12.6 million at December 31, 2018 and 2017.
Derivative Financial Instruments and Hedging Activities
We are exposed to certain risks related to the ongoing operations of our business, including those caused by changes in commodity prices and energy rates. We have established policies and procedures, including the use of certain derivative instruments, to manage such risks, if deemed necessary.
Derivative financial instruments are recognized as either assets or liabilities in the Statements of Consolidated Financial Position and measured at fair value. On the date a qualifying hedging instrument is executed, we designate the hedging instrument as a hedge of the variability of cash flows to be received or paid related to a forecasted transaction (cash flow hedge). We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to specific firm commitments or forecasted transactions. We also formally assess, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the related hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively and record all future changes in fair value in the period of the instrument's earnings or losses.
For derivative instruments that have been designated as cash flow hedges, the changes in fair value are recorded in Accumulated other comprehensive loss. Amounts recorded in Accumulated other comprehensive loss are reclassified to earnings or losses in the period the underlying hedged transaction affects earnings or when the underlying hedged transaction is no longer reasonably possible of occurring.
For derivative instruments that have not been designated as cash flow hedges, such as provisional pricing arrangements and supplemental revenue or refunds contained within a customer supply agreement, changes in fair value are recorded in the period of the instrument's earnings or losses.
Refer to Revenue Recognition below for discussion of derivatives recorded as a result of pricing terms in our sales contracts. Additionally, refer to NOTE 12 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
Property, Plant and Equipment
Our properties are stated at the lower of cost less accumulated depreciation or fair value. Depreciation of plant and equipment is computed principally by the straight-line method based on estimated useful lives, not to exceed the mine lives. Depreciation continues to be recognized when operations are idled temporarily. We use the double-declining balance method of depreciation for certain mining equipment. Depreciation and depletion is provided over the following estimated useful lives:
Asset Class
 
Basis
 
Life
Office and information technology
 
Straight line
 
3 to 15 years
Buildings
 
Straight line
 
45 years
Mining equipment
 
Straight line/Double declining balance
 
3 to 20 years
Processing equipment
 
Straight line
 
10 to 45 years
Electric power facilities
 
Straight line
 
10 to 45 years
Land improvements
 
Straight line
 
20 to 45 years
Asset retirement obligation
 
Straight line
 
Life of mine
Mineral rights
 
Units of production
 
Life of mine

Refer to NOTE 5 - PROPERTY, PLANT AND EQUIPMENT for further information.
Capitalized Stripping Costs
During the development phase, stripping costs are capitalized as a part of the depreciable cost of building, developing and constructing a mine. These capitalized costs are amortized over the productive life of the mine using the units of production method. The production phase does not commence until the removal of more than a de minimis amount of saleable mineral material occurs in conjunction with the removal of overburden or waste material for purposes of obtaining access to an ore body. The stripping costs incurred in the production phase of a mine are variable production costs included in the costs of the inventory produced (extracted) during the period that the stripping costs are incurred.
Stripping costs related to expansion of a mining asset of proven and probable reserves are variable production costs that are included in the costs of the inventory produced during the period that the stripping costs are incurred.
Other Intangible Assets
Our mine permits are subject to periodic amortization on a straight line basis over their estimated useful life, which corresponds with the life of mine.
Asset Impairment
We monitor conditions that may affect the carrying value of our long-lived tangible and intangible assets when events and circumstances indicate that the carrying value of the asset groups may not be recoverable. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable, independent cash flows are available ("asset group"). An impairment loss exists when projected net undiscounted cash flows are less than the carrying value of the asset group. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the asset group. Fair value can be determined using a market approach, income approach or cost approach.
For the years ended December 31, 2018, 2017 and 2016, no impairment factors were present that would indicate the carrying value of any of our asset groups may not be recoverable; as a result, no impairment assessments were required.
Fair Value Measurements
ASC Topic 820, Fair Value Measurements and Disclosures, establishes a three-level valuation hierarchy for classification of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our own views about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three-tier hierarchy of inputs is summarized below:
Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 — Valuation is based upon other unobservable inputs that are significant to the fair value measurement.
The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety.
Refer to NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS and NOTE 8 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.
Pensions and Other Postretirement Benefits
We offer defined benefit pension plans, defined contribution pension plans and other postretirement benefit plans, primarily consisting of retiree healthcare benefits, to most employees in the United States as part of a total compensation and benefits program.
We recognize the funded or unfunded status of our postretirement benefit obligations on our December 31, 2018 and 2017 Statements of Consolidated Financial Position based on the difference between the market value of plan assets and the actuarial present value of our retirement obligations on that date, on a plan-by-plan basis. If the plan assets exceed the postretirement benefit obligations, the amount of the surplus is recorded as an asset; if the postretirement benefit obligations exceed the plan assets, the amount of the underfunded obligations is recorded as a liability. Year-end balance sheet adjustments to postretirement assets and obligations are recorded as Accumulated other comprehensive loss in the Statements of Consolidated Financial Position.
The actuarial estimates of the PBO and APBO incorporate various assumptions including the discount rates, the rates of increases in compensation, healthcare cost trend rates, mortality, retirement timing and employee turnover. The discount rate is determined based on the prevailing year-end rates for high-grade corporate bonds with a duration matching the expected cash flow timing of the benefit payments from the various plans. The remaining assumptions are based on our estimates of future events by incorporating historical trends and future expectations. The amount of net periodic cost that is recorded in the Statements of Consolidated Operations consists of several components including service cost, interest cost, expected return on plan assets, and amortization of previously unrecognized amounts. Service cost represents the value of the benefits earned in the current year by the participants. Interest cost represents the cost associated with the passage of time. Certain items, such as plan amendments, gains and/or losses resulting from differences between actual and assumed results for demographic and economic factors affecting the obligations and assets of the plans, and changes in other assumptions are subject to deferred recognition for income and expense purposes. The expected return on plan assets is determined utilizing the weighted average of expected returns for plan asset investments in various asset categories based on historical performance, adjusted for current trends. Service costs are classified within Cost of goods sold and operating expenses, Selling, general and administrative expenses and Miscellaneous - net while the interest cost, expected return on assets, amortization of prior service costs/credits, net actuarial gain/loss, and other costs are classified within Other non-operating income.
Refer to NOTE 2 - NEW ACCOUNTING STANDARDS and NOTE 8 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.
Asset Retirement Obligations
Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The fair value of the liability is determined as the discounted value of the expected future cash flows. The asset retirement obligation is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized and amortized over the life of the related asset. Reclamation costs are adjusted periodically to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. We review, on an annual basis, unless otherwise deemed necessary, the asset retirement obligation at each mine site in accordance with the provisions of ASC Topic 410, Asset Retirement and Environmental Obligations. We perform an in-depth evaluation of the liability every three years in addition to our routine annual assessments.
Future reclamation costs for inactive mines are accrued based on management’s best estimate at the end of each period of the costs expected to be incurred at a site. Such cost estimates include, where applicable, ongoing maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised. See NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.
Environmental Remediation Costs
We have a formal policy for environmental protection and restoration. Our mining and exploration activities are subject to various laws and regulations governing protection of the environment. We conduct our operations to protect the public health and environment and believe our operations are in compliance with applicable laws and regulations in all material respects. Our environmental liabilities, including obligations for known environmental remediation exposures at active and closed mining operations and other sites, have been recognized based on the estimated cost of investigation and remediation at each site. If the cost can only be estimated as a range of possible amounts with no point in the range being more likely, the minimum of the range is accrued. Future expenditures are not discounted unless the amount and timing of the cash disbursements reasonably can be estimated. It is possible that additional environmental obligations could be incurred, the extent of which cannot be assessed. Potential insurance recoveries have not been reflected in the determination of the liabilities. See NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.
Revenue Recognition - Pre-Adoption of Topic 606
Prior to the adoption of Topic 606, revenue was recognized from a sale when persuasive evidence of an arrangement existed, the price was fixed or determinable, the product was delivered in accordance with shipping terms, title and risk of loss were transferred to the customer in accordance with the specified provisions of each supply agreement and collection of the sales price reasonably was assured. Our supply agreements provide that title and risk of loss transfer to the customer either upon loading of the vessel, shipment or when payment is received. Under certain supply agreements, we ship the product to ports on the lower Great Lakes or to the customers’ facilities prior to the transfer of title. Our rationale for shipping iron ore products to certain customers and retaining title until payment is received for these products is to minimize credit risk exposure.
Sales were recorded at a sales price specified in the relevant supply agreements resulting in revenue and a receivable at the time of sale. The majority of our contracts have pricing mechanisms that require price estimation at the time of delivery with price finalization at a future period. Upon revenue recognition for provisionally priced sales, a derivative was created for the difference between the sales price used and expected future settlement price. The derivative was adjusted to fair value through Product revenues as a revenue adjustment each reporting period based upon current market data and forward-looking estimates determined by management until the final sales price was determined. The principal risks associated with recognition of sales on a provisional basis include Platts 62% Price, Atlantic Basin pellet premium and index freight fluctuations between the date initially recorded and the date of final settlement. For revenue recognition, we estimated the future settlement rate; however, if significant changes in inputs occurred between the provisional pricing date and the final settlement date, we were required to either return a portion of the sales proceeds received or bill for the additional sales proceeds due based on the provisional sales price.    
Revenue Recognition - Post-Adoption of Topic 606
We sell a single product, iron ore pellets, in the North American market. With the adoption of Topic 606 as of January 1, 2018, 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. Refer to NOTE 2 - NEW ACCOUNTING STANDARDS for further information.
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 benefits of 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: Platts 62% Price, Atlantic Basin pellet premiums, Platts international indexed freight rates and changes in specified Producer Price Indices, including industrial commodities, energy 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 12 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information on how our estimated and final revenue rates are determined.
A supply agreement with a 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 Topic 815. Refer to NOTE 12 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information on supplemental revenue or refunds.
Included within Revenues from product sales and services is derivative revenue related to Topic 815 of $422.6 million, $120.6 million and $55.9 million for the years ended December 31, 2018, 2017 and 2016, respectively.
As of December 31, 2018, under the new accounting standard, we had finished goods of 0.8 million long tons in transit or stored at the Port of Toledo to service customers, for which revenue had yet to be recognized. Under the previous accounting standard, we did not recognize revenue and related cost of goods sold until title transferred to the customer, usually when payment was received. As of December 31, 2017, under the previous accounting standard, we had finished goods of 1.5 million long tons stored at ports and customer facilities on the lower Great Lakes to service customers, for which revenue had yet to be recognized.
Practical expedients and exemptions
We have elected to treat all shipping and handling costs as fulfillment costs because a significant portion of these costs are incurred prior to control transfer.
We have various long-term sales contracts with minimum purchase and supply requirement provisions that extend beyond the current reporting period. The portion of our transaction price for these contracts that is allocated entirely to wholly unsatisfied performance obligations is based on market prices that have not yet been determined and therefore is variable in nature. As such, we have not disclosed the value of unsatisfied performance obligations pursuant to the practical expedient.
Deferred Revenue
The table below summarizes our deferred revenue balances:
 
(In Millions)
 
Deferred Revenue (Current)1
 
Deferred Revenue (Long-Term)
 
Year Ended
December 31,
 
Year Ended
December 31,
 
2018
 
2017
 
2018
 
2017
Opening balance as of January 1
$
23.8

 
$
16.2

 
$
51.4

 
$
64.3

Closing balance as of December 31
21.0

 
22.4

 
38.5

 
51.4

Increase (Decrease)
$
(2.8
)
 
$
6.2

 
$
(12.9
)
 
$
(12.9
)
 
 
 
 
 
 
 
 
1 The opening balance for the year ended December 31, 2018 includes a $1.4 million adjustment from the December 31, 2017 balance due to the adoption of Topic 606.

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 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 December 31, 2018 and December 31, 2017, installment amounts received in excess of sales totaled $51.3 million and $64.2 million, respectively, related to this agreement. As of December 31, 2018, and December 31, 2017, deferred revenue of $12.8 million was recorded in Other current liabilities and $38.5 million and $51.4 million, respectively, was recorded as long-term in Other liabilities in the Statements of 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 deliveries for certain customers. Revenue recognized on these transactions totaling $8.2 million and $9.6 million was deferred and included in Other current liabilities in the Statements of Consolidated Financial Position as of December 31, 2018 and December 31, 2017, respectively.
Cost of Goods Sold
Cost of goods sold and operating expenses represents all direct and indirect costs and expenses applicable to the sales from our mining operations.
In some circumstances, as requested by the customer, we will coordinate and ship our product via vessel directly to the port nearest to the customer's blast furnace. In this type of contract, the customer will pay one amount inclusive of both product and freight. We recognize revenue for both product revenue and the amount reimbursed for the vessel freight to the final port. We separate these revenue types in the Statements of Consolidated Operations. Accordingly, the revenue we record for freight is offset by an equal amount included in Cost of goods sold and operating expenses for costs we incur for that freight, resulting in no impact on sales margin.
Operating expenses represented the portion of the Tilden mining venture costs prior to our 100% ownership; that is, the costs attributable to the share of the mine’s production owned by the other joint venture partner in the Tilden mine until we acquired the remaining 15% noncontrolling interest during 2017. The mining venture functioned as a captive cost company, supplying product only to its owners effectively for the cost of production. Accordingly, the noncontrolling interests’ revenue amounts were stated at cost of production and were offset by an equal amount included in Cost of goods sold and operating expenses resulting in no sales margin reflected for the noncontrolling partner participant. As we were responsible for product fulfillment under the venture, we acted as a principal in the transaction and, accordingly, recorded revenue under these arrangements on a gross basis.
The following table is a summary of reimbursements in our operations:
 
 
(In Millions)
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
Reimbursements for:
 
 
 
 
 
 
Freight
 
$
160.1

 
$
166.7

 
$
106.8

Venture partners’ cost
 

 
54.7

 
68.0

Total reimbursements
 
$
160.1

 
$
221.4

 
$
174.8


Where we have joint ownership of a mine, such as Hibbing and up to the point at which we purchased the remaining interest in Tilden, our contracts entitle us to receive management fees or royalties, which we earn as the pellets are produced.
Repairs and Maintenance
Repairs, maintenance and replacement of components are expensed as incurred. The cost of major equipment overhauls is capitalized and depreciated over the estimated useful life, which is the period until the next scheduled overhaul, generally five years. All other planned and unplanned repairs and maintenance costs are expensed when incurred.
Share-Based Compensation
The fair value of each performance share grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. A correlation matrix of historic and projected stock prices was developed for both the Company and its predetermined peer group of mining and metals companies. The fair value assumes that objective will be achieved. The expected term of the grant represents the time from the grant date to the end of the service period. We estimate the volatility of our common shares and that of the peer group of mining and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds, with a term commensurate with the remaining performance period.
The fair value of the restricted stock units is determined based on the closing price of our common shares on the grant date.
Upon vesting of share-based compensation awards, we issue shares from treasury shares before issuing new shares. Forfeitures are recognized when they occur.
The fair value of stock options is estimated on the date of grant using a Black-Scholes model using the grant date price of our common shares and option exercise price, and assumptions regarding the option’s expected term, the volatility of our common shares, the risk-free interest rate, and the dividend yield over the option’s expected term.
Refer to NOTE 9 - STOCK COMPENSATION PLANS for additional information.
Income Taxes
Income taxes are based on income for financial reporting purposes, calculated using tax rates by jurisdiction, and reflect a current tax liability or asset for the estimated taxes payable or recoverable on the current year tax return and expected annual changes in deferred taxes. Any interest or penalties on income tax are recognized as a component of Income tax benefit.
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized within Net income in the period that includes the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial results of operations.
Accounting for uncertainty in income taxes recognized in the financial statements requires that a tax benefit from an uncertain tax position be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on technical merits.
See NOTE 10 - INCOME TAXES for further information.
Discontinued Operations
Asia Pacific Iron Ore Operations
In January 2018, we announced that we would accelerate the time frame for the planned closure of our Asia Pacific Iron Ore mining operations in Australia. In April 2018, we committed to a course of action leading to the permanent closure of our 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.
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 current and historical Asia Pacific Iron Ore operating segment results are classified within discontinued operations. Refer to NOTE 13 - DISCONTINUED OPERATIONS for further discussion of the Asia Pacific Iron Ore segment discontinued operations.
Canadian Operations
As more fully described in NOTE 13 - DISCONTINUED OPERATIONS, in January 2015, we announced that the Bloom Lake Group commenced restructuring proceedings in Montreal, Quebec under the CCAA. At that time, we had suspended Bloom Lake operations and for several months had been exploring options to sell certain of our Canadian assets, among other initiatives. Effective January 27, 2015, following the commencement of CCAA proceedings for the Bloom Lake Group, we deconsolidated the Bloom Lake Group and certain other wholly-owned subsidiaries comprising substantially all of our Canadian operations. Additionally, on May 20, 2015, the Wabush Group commenced restructuring proceedings in Montreal, Quebec under the CCAA which resulted in the deconsolidation of the remaining Wabush Group entities that were not previously deconsolidated. The Wabush Group was no longer generating revenues and was not able to meet its obligations as they came due. As a result of this action, the CCAA protection granted to the Bloom Lake Group was extended to include the Wabush Group to facilitate the reorganization of each of their businesses and operations. Our Canadian exit represented a strategic shift in our business. For this reason, all Eastern Canadian Iron Ore and Ferroalloys costs to exit are classified as discontinued operations.
Foreign Currency
Our financial statements are prepared with the U.S. dollar as the reporting currency. Historically, the functional currency of our Australian subsidiaries was the Australian dollar. Concurrent with the sale of assets to Mineral Resources Limited in August 2018, management determined that there were significant changes in economic factors related to our Australian subsidiaries. The change in economic factors was a result of the sale and conveyance of substantially all assets and liabilities of our Australian subsidiaries to third parties, representing a significant change in operations. As such, the functional currency for the Australian subsidiaries changed from the Australian dollar to the U.S. dollar and all remaining Australian denominated monetary balances will be remeasured prospectively through the Statements of Consolidated Operations.
In addition, as a result of the liquidation of substantially all of the Australian subsidiaries' assets, the historical impact of foreign currency translation recorded in Accumulated other comprehensive loss in the Statements of Consolidated Financial Position of $228.1 million was reclassified and recognized as a gain in Income from discontinued operations, net of tax in the Statements of Consolidated Operations. Refer to NOTE 13 - DISCONTINUED OPERATIONS for further information regarding our Australian subsidiaries.
The functional currency of all other subsidiaries is the U.S. dollar. To the extent that monetary assets and liabilities, including short-term intercompany loans, are recorded in a currency other than the functional currency, these amounts are remeasured each reporting period, with the resulting gain or loss being recorded in the Statements of Consolidated Operations. Transaction gains and losses resulting from remeasurement of intercompany loans are included in Miscellaneous - net in our Statements of Consolidated Operations.
The following represents the net gain (loss) related to impact of transaction gains and losses from continuing operations resulting from remeasurement:
 
 
(In Millions)
 
 
2018
 
2017
 
2016
Remeasurement of intercompany loans
 
$
(0.7
)
 
$
16.6

 
$
(16.6
)
Other remeasurement
 
(0.2
)
 
(2.7
)
 
(1.2
)
Total
 
$
(0.9
)
 
$
13.9

 
$
(17.8
)

Earnings Per Share
We present both basic and diluted earnings per share amounts for continuing operations and discontinued operations. Total basic earnings per share amounts are calculated by dividing Net income attributable to Cliffs shareholders by the weighted average number of common shares outstanding during the period presented. Total diluted earnings per share amounts are calculated by dividing Net income attributable to Cliffs shareholders by the weighted average number of common shares, common share equivalents under stock plans using the treasury-stock method and the calculated common share equivalents in excess of the conversion rate related to our 2025 Convertible Senior Notes using the treasury-stock method. Common share equivalents are excluded from EPS computations in the periods in which they have an anti-dilutive effect.
Holders of the 2025 Convertible Senior Notes may convert their notes during any quarter between April 1, 2018 and July 15, 2024 where our share price exceeds 130% of the conversion price for 20 trading days during a 30 trading day period. Holders of the 2025 Convertible Senior Notes may also convert their notes during any quarter between April 1, 2018 and July 15, 2024 during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common shares and the conversion price on each such trading day. If our common shares rise in value above the conversion price, diluted EPS will be calculated based on the treasury-stock method with the number of dilutive shares being calculated based on the difference in the average share price and the conversion price.
See NOTE 18 - EARNINGS PER SHARE for further information.
Nature of Business
Founded in 1847, Cleveland-Cliffs Inc. is the largest and oldest independent iron ore mining company in the United States. We are a major supplier of iron ore pellets to the North American steel industry from our mines and pellet plants located in Michigan and Minnesota. We are currently constructing an HBI production plant in Toledo, Ohio. We expect to complete construction and begin production in 2020.
In January 2018, we announced that we would accelerate the time frame for the planned closure of our Asia Pacific Iron Ore mining operations in Australia. In April 2018, we committed to a course of action leading to the permanent closure of our 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 current and historical Asia Pacific Iron Ore operating segment results are classified within discontinued operations. Refer to NOTE 13 - DISCONTINUED OPERATIONS for further information.
In alignment with our strategic goals, we have become a North America-centric business and have updated the names of our operating segments. We are now organized according to our differentiated products. We have two reportable segments – the Mining and Pelletizing segment (formerly known as U.S. Iron Ore) and the Metallics segment. Unless otherwise noted, discussion of our business and results of operations in this Annual Report on Form 10-K refers to our continuing operations.
Significant Accounting Policies
We consider the following policies to be beneficial in understanding the judgments involved in the preparation of our consolidated financial statements and the uncertainties that could impact our financial condition, results of operations and cash flows.
v3.10.0.1
NEW ACCOUNTING STANDARDS
12 Months Ended
Dec. 31, 2018
New Accounting Pronouncements and Changes in Accounting Principles [Abstract]  
NEW ACCOUNTING STANDARDS
NOTE 2 - NEW ACCOUNTING STANDARDS
Issued and Adopted
ASC Topic 606, Revenue from Contracts with Customers (Topic 606). On January 1, 2018, we adopted Topic 606 and applied it to all contracts that were not completed using the modified retrospective method. We recognized the cumulative effect of initially applying Topic 606 as an adjustment of $34.0 million to the opening balance of Retained deficit. The comparative period information has not been retrospectively revised and continues to be reported under the accounting standards in effect for those periods. On a prospective basis, we do not expect that the adoption of Topic 606 will have a material impact to our annual net income.
Under Topic 606, revenue is generally recognized upon delivery to our customers, which is earlier than under the previous guidance. As an example, for certain iron ore shipments where revenue was previously recognized upon title transfer when payment was received, we will now recognize revenue when control transfers, which is generally upon delivery. While we continue to retain title until we receive payment in many cases, we determined upon review of our customer contracts that the preponderance of control indicators pass to our customers' favor when we deliver our products; thus, we generally concluded that control transfers at that point. As a result of the adoption of Topic 606 and vessel deliveries not occurring during the winter months because of the closure of the Soo Locks and the Welland Canal, our revenues and net income will be relatively lower than historical levels during the first quarter of each year and relatively higher than historical levels during the remaining three quarters in 2018 and future years. However, the total amount of revenue recognized during the year should remain substantially the same as under previous accounting standards, assuming revenue rates and volumes are consistent between years.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of Topic 606 were as follows:
 
 
(In Millions)
 
 
Balance at December 31, 2017
 
Adjustments due to Topic 606
 
Balance at January 1, 2018
ASSETS
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
978.3

 
$

 
$
978.3

Accounts receivable, net
 
106.7

 
76.6

 
183.3

Inventories
 
138.4

 
(51.4
)
 
87.0

Supplies and other inventories
 
88.8

 

 
88.8

Derivative assets
 
37.9

 
11.6

 
49.5

Income tax receivable, current
 
13.3

 

 
13.3

Loans to and accounts receivables from the Canadian Entities
 
51.6

 

 
51.6

Current assets of discontinued operations
 
118.5

 

 
118.5

Other current assets
 
11.1

 

 
11.1

TOTAL CURRENT ASSETS
 
1,544.6

 
36.8

 
1,581.4

PROPERTY, PLANT AND EQUIPMENT, NET
 
1,033.8

 

 
1,033.8

OTHER ASSETS
 
 
 
 
 
 
Deposits for property, plant and equipment
 
17.8

 

 
17.8

Income tax receivable, non-current
 
235.3

 

 
235.3

Non-current assets of discontinued operations
 
20.3

 

 
20.3

Other non-current assets
 
101.6

 

 
101.6

TOTAL OTHER ASSETS
 
375.0

 

 
375.0

TOTAL ASSETS
 
$
2,953.4

 
$
36.8

 
$
2,990.2

 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
Accounts payable
 
$
99.5

 
$
1.4

 
$
100.9

Accrued employment costs
 
52.7

 

 
52.7

State and local taxes payable
 
30.2

 

 
30.2

Accrued interest
 
31.4

 

 
31.4

Contingent claims
 
55.6

 

 
55.6

Partnership distribution payable
 
44.2

 

 
44.2

Current liabilities of discontinued operations
 
75.0

 

 
75.0

Other current liabilities
 
63.6

 
1.4

 
65.0

TOTAL CURRENT LIABILITIES
 
452.2

 
2.8

 
455.0

PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES
 
257.7

 

 
257.7

ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
 
167.7

 

 
167.7

LONG-TERM DEBT
 
2,304.2

 

 
2,304.2

NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS
 
52.2

 

 
52.2

OTHER LIABILITIES
 
163.5

 

 
163.5

TOTAL LIABILITIES
 
3,397.5

 
2.8

 
3,400.3

EQUITY
 
 
 
 
 
 
CLIFFS SHAREHOLDERS' EQUITY (DEFICIT)
 
(444.3
)
 
34.0

 
(410.3
)
NONCONTROLLING INTEREST
 
0.2

 

 
0.2

TOTAL EQUITY (DEFICIT)
 
(444.1
)
 
34.0

 
(410.1
)
TOTAL LIABILITIES AND EQUITY (DEFICIT)
 
$
2,953.4

 
$
36.8

 
$
2,990.2

The impact of adoption on our Statements of Consolidated Operations and Statements of Consolidated Financial Position is as follows:
 
($ in Millions)
 
Year Ended
December 31, 2018
 
As Reported
 
Balances without Adoption of Topic 606
 
Effect of Change
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
 
 
Product
$
2,172.3

 
$
2,108.1

 
$
64.2

Freight and venture partners' cost reimbursements
160.1

 
156.2

 
3.9

 
2,332.4

 
2,264.3

 
68.1

COST OF GOODS SOLD AND OPERATING EXPENSES
(1,522.8
)
 
(1,513.2
)
 
(9.6
)
SALES MARGIN
809.6

 
751.1

 
58.5

OTHER OPERATING INCOME (EXPENSE)
 
 
 
 
 
Selling, general and administrative expenses
(116.8
)
 
(116.8
)
 

Miscellaneous - net
(19.6
)
 
(19.6
)
 

 
(136.4
)
 
(136.4
)
 

OPERATING INCOME
673.2

 
614.7

 
58.5

OTHER INCOME (EXPENSE)
 
 
 
 
 
Interest expense, net
(118.9
)
 
(118.9
)
 

Loss on extinguishment of debt
(6.8
)
 
(6.8
)
 

Other non-operating income
17.2

 
17.2

 

 
(108.5
)
 
(108.5
)
 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
564.7

 
506.2

 
58.5

INCOME TAX BENEFIT
475.2

 
487.5

 
(12.3
)
INCOME FROM CONTINUING OPERATIONS
1,039.9

 
993.7

 
46.2

INCOME FROM DISCONTINUED OPERATIONS, net of tax
88.2

 
88.2

 

NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$
1,128.1

 
$
1,081.9

 
$
46.2

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
 
 
 
 
 
Continuing operations
$
3.50

 
$
3.34

 
$
0.16

Discontinued operations
0.30

 
0.30

 

 
$
3.80

 
$
3.64

 
$
0.16

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
 
 
 
 
 
Continuing operations
$
3.42

 
$
3.27

 
$
0.15

Discontinued operations
0.29

 
0.29

 

 
$
3.71

 
$
3.56

 
$
0.15

AVERAGE NUMBER OF SHARES (IN THOUSANDS)
 
 
 
 
 
Basic
297,176

 
297,176

 
 
Diluted
304,141

 
304,141

 
 
The increased revenue recognized under Topic 606 is due to higher tons shipped and a higher realized revenue rate in December 2018 versus December 2017. Under the previous accounting standard, December 2017 shipments would have been recognized as 2018 sales due to the fact that title and risk of loss does not transfer until payment is received from our customers.
 
 
(In Millions)
 
 
December 31, 2018
 
 
As Reported
 
Balances without Adoption of Topic 606
 
Effect of Change
ASSETS
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
823.2

 
$
823.2

 
$

Accounts receivable, net
 
226.7

 
108.7

 
118.0

Inventories
 
87.9

 
141.3

 
(53.4
)
Supplies and other inventories
 
93.2

 
93.2

 

Derivative assets
 
91.5

 
60.7

 
30.8

Income tax receivable, current
 
117.3

 
117.3

 

Current assets of discontinued operations
 
12.4

 
12.4

 

Other current assets
 
27.4

 
27.4

 

TOTAL CURRENT ASSETS
 
1,479.6

 
1,384.2

 
95.4

PROPERTY, PLANT AND EQUIPMENT, NET
 
1,286.0

 
1,286.0

 

OTHER ASSETS
 
 
 
 
 
 
Deposits for property, plant and equipment
 
83.0

 
83.0

 

Income tax receivable, non-current
 
121.3

 
121.3

 

Deferred income taxes
 
464.8

 
477.1

 
(12.3
)
Other non-current assets
 
94.9

 
94.9

 

TOTAL OTHER ASSETS
 
764.0

 
776.3

 
(12.3
)
TOTAL ASSETS
 
$
3,529.6

 
$
3,446.5

 
$
83.1

 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
Accounts payable
 
$
186.8

 
$
184.9

 
$
1.9

Accrued employment costs
 
74.0

 
74.0

 

State and local taxes payable
 
35.5

 
35.5

 

Accrued interest
 
38.4

 
38.4

 

Partnership distribution payable
 
43.5

 
43.5

 

Current liabilities of discontinued operations
 
6.7

 
6.7

 

Other current liabilities
 
83.3

 
83.7

 
(0.4
)
TOTAL CURRENT LIABILITIES
 
468.2

 
466.7

 
1.5

PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES
 
248.7

 
248.7

 

ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
 
172.0

 
172.0

 

LONG-TERM DEBT
 
2,092.9

 
2,092.9

 

NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS
 
8.3

 
8.3

 

OTHER LIABILITIES
 
115.3

 
115.3

 

TOTAL LIABILITIES
 
3,105.4

 
3,103.9

 
1.5

EQUITY
 
 
 
 
 
 
CLIFFS SHAREHOLDERS' EQUITY
 
424.2

 
342.6

 
81.6

TOTAL LIABILITIES AND EQUITY
 
$
3,529.6

 
$
3,446.5

 
$
83.1


The adoption of Topic 606 did not have an impact on net cash flows in our Statements of Consolidated Cash Flows.
ASU 2017-07, Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. On January 1, 2018, we adopted the amendments to ASC Topic 715, Compensation - Retirement Benefits regarding the presentation of net periodic pension and postretirement benefit costs. We retrospectively adopted the presentation of service cost separate from the other components of net periodic costs. The interest cost, expected return on assets, amortization of prior service costs, net remeasurement, and other costs have been reclassified from Cost of goods sold and operating expenses, Selling, general and administrative expenses and Miscellaneous - net to Other non-operating income.  We elected to apply the practical expedient, which allows us to reclassify amounts disclosed previously in our pension and other postretirement benefits footnote as the basis for applying retrospective presentation for comparative periods. On a prospective basis, only service costs will be included in amounts capitalized in inventory or property, plant, and equipment.
The effect of the retrospective presentation change related to the net periodic cost of our defined benefit pension and other postretirement employee benefits plans on our Statements of Consolidated Operations was as follows:
 
(In Millions)
 
Year Ended December 31, 2017
 
Year Ended December 31, 2016
 
As Adjusted
 
Without Adoption of ASU 2017-07
 
Effect of Change
 
As Adjusted
 
Without Adoption of ASU 2017-07
 
Effect of Change
Cost of goods sold and operating expenses
$
(1,398.4
)
 
$
(1,400.7
)
 
$
2.3

 
$
(1,274.4
)
 
$
(1,278.7
)
 
$
4.3

Selling, general and administrative expenses
$
(102.9
)
 
$
(95.1
)
 
$
(7.8
)
 
$
(115.8
)
 
$
(106.3
)
 
$
(9.5
)
Miscellaneous - net
$
25.5

 
$
27.0

 
$
(1.5
)
 
$
(33.6
)
 
$
(32.0
)
 
$
(1.6
)
Operating income
$
390.2

 
$
397.2

 
$
(7.0
)
 
$
130.7

 
$
137.5

 
$
(6.8
)
Other non-operating income
$
10.2

 
$
3.2

 
$
7.0

 
$
7.3

 
$
0.5

 
$
6.8

Net income
$
363.1

 
$
363.1

 
$

 
$
199.3

 
$
199.3

 
$


In August 2018, the FASB issued ASU No. 2018-14, Defined Benefit Plans (Topic 715-20) - Changes to the Disclosure Requirements for Defined Benefit Plans. Certain of the existing required disclosures were modified for clarification or removed and additional disclosures were added. We elected to early adopt ASU No. 2018-14 for the year ended December 31, 2018. The effect of the adoption is an overall reduction in our annual disclosures related to defined benefit plans. The adoption of this standard required retrospective adoption, but did not impact prior-period financial results.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement. The new standard removes or modifies certain existing disclosure requirements and adds additional disclosure requirements related to fair value measurement. We elected to early adopt ASU No. 2018-13 for the year ended December 31, 2018. The affect of the adoption is an overall reduction in our quarterly and annual disclosures related to fair value measurement.
Issued and Not Effective
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 will be classified as either operating or finance leases in the Statements of Consolidated Operations. 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. We have compiled an inventory of our existing leases and have finalized our implementation plan. Based on our analysis, the updated standard will not have a material effect on our consolidated financial statements.
v3.10.0.1
SEGMENT REPORTING
12 Months Ended
Dec. 31, 2018
Segment Reporting [Abstract]  
SEGMENT REPORTING
NOTE 3 - SEGMENT REPORTING
In alignment with our strategic goals, our Company’s continuing operations are organized and managed in two business units according to our differentiated products. The former 'U.S. Iron Ore' segment is now 'Mining and Pelletizing.' 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 addition, the Toledo HBI business will be categorized under the segment 'Metallics.' 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.
We evaluate performance based on sales margin, defined as revenues less cost of goods sold and operating expenses 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 allow management and investors to focus on our ability to service our debt as well as illustrate how the business is performing.  Additionally, EBITDA and Adjusted EBITDA assist management and investors in their analysis and forecasting as these measures approximate the cash flows associated with operational earnings.
The following tables present a summary of our reportable segments, including a reconciliation of segment sales margin to Income from continuing operations before income taxes and a reconciliation of Net income to EBITDA and Adjusted EBITDA:
 
 
 
2018
 
2017
2016
Revenues from product sales and services:
 
 
 
 
 
Mining and Pelletizing
$
2,332.4

 
$
1,866.0

 
$
1,554.5

 
 
 
 
 
 
Sales margin:
 
 
 
 
 
Mining and Pelletizing
$
809.6

 
$
467.6

 
$
280.1

Other operating expense
(136.4
)
 
(77.4
)
 
(149.4
)
Other expense
(108.5
)
 
(282.0
)
 
(20.3
)
Income from continuing operations before income taxes
$
564.7

 
$
108.2

 
$
110.4

 
(In Millions)
 
2018
 
2017
 
2016
Net income
$
1,128.1

 
$
363.1

 
$
199.3

Less:
 
 
 
 
 
Interest expense, net
(121.3
)

(132.0
)

(200.5
)
Income tax benefit
460.3


252.4


12.2

Depreciation, depletion and amortization
(89.0
)

(87.7
)

(115.4
)
Total EBITDA
$
878.1

 
$
330.4

 
$
503.0

Less:
 
 
 
 
 
Gain (loss) on extinguishment/restructuring of debt
$
(6.8
)
 
$
(165.4
)
 
$
166.3

Impact of discontinued operations
120.6

 
22.0

 
108.4

Foreign exchange remeasurement
(0.9
)
 
13.9

 
(17.8
)
Impairment of long-lived assets
(1.1
)




Total Adjusted EBITDA
$
766.3

 
$
459.9

 
$
246.1

 
 
 
 
 
 
EBITDA:
 
 
 
 
 
Mining and Pelletizing
$
852.9


$
534.9


$
342.4

Metallics
(3.3