CLEVELAND-CLIFFS INC., 10-Q filed on 5/11/2020
Quarterly Report
v3.20.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2020
May 08, 2020
Cover [Abstract]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Mar. 31, 2020  
Document Transition Report false  
Entity File Number 1-8944  
Entity Registrant Name CLEVELAND-CLIFFS INC.  
Entity Incorporation, State or Country Code OH  
Entity Tax Identification Number 34-1464672  
Entity Address, Address Line One 200 Public Square,  
Entity Address, City or Town Cleveland,  
Entity Address, State or Province OH  
Entity Address, Postal Zip Code 44114-2315  
City Area Code 216  
Local Phone Number 694-5700  
Title of 12(b) Security Common shares, par value $0.125 per share  
Trading Symbol CLF  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   398,609,923
Entity Central Index Key 0000764065  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Amendment Flag false  
v3.20.1
Statements Of Unaudited Condensed Consolidated Financial Position - USD ($)
$ in Millions
Mar. 31, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 186.9 $ 352.6
Accounts receivable, net 560.8 94.0
Inventories 2,148.8 317.4
Income tax receivable, current 61.7 58.6
Other current assets 107.4 75.3
Total current assets 3,065.6 897.9
Non-current assets:    
Property, plant and equipment, net 4,549.8 1,929.0
Goodwill 143.3 2.1
Intangible assets, net 210.0 48.1
Income tax receivable, non-current 4.1 62.7
Deferred income taxes 486.4 459.5
Right-of-use asset, operating lease 238.0 11.7
Other non-current assets 215.1 92.8
TOTAL ASSETS 8,912.3 3,503.8
Current liabilities:    
Accounts payable 825.3 193.2
Accrued liabilities 299.8 126.3
Other current liabilities 245.7 89.9
TOTAL CURRENT LIABILITIES 1,370.8 409.4
Non-current liabilities:    
Long-term debt 4,357.1 2,113.8
Operating lease liability, non-current 201.2 10.5
Intangible liability, net 137.9 0.0
Pension and OPEB liabilities 1,171.6 311.5
Asset retirement obligations 179.2 163.2
Other non-current liabilities 263.5 137.5
TOTAL LIABILITIES 7,681.3 3,145.9
Commitments and contingencies (See Note 20)
SHAREHOLDERS' EQUITY    
Common Shares - par value $0.125 per share, Authorized - 600,000,000 shares (2019 - 600,000,000 shares); Issued - 428,645,866 shares (2019 - 301,886,794 shares); Outstanding - 398,587,083 shares (2019 - 270,084,005 shares) 53.6 37.7
Capital in excess of par value of shares 4,450.2 3,872.1
Retained deficit (2,918.5) (2,842.4)
Cost of 30,058,783 common shares in treasury (2019 - 31,802,789 shares) (365.0) (390.7)
Accumulated other comprehensive loss (317.1) (318.8)
Total Cliffs shareholders' equity 903.2 357.9
Noncontrolling interest 327.8 0.0
TOTAL EQUITY 1,231.0 357.9
TOTAL LIABILITIES AND EQUITY $ 8,912.3 $ 3,503.8
v3.20.1
Statements Of Condensed Consolidated Financial Position (Parenthetical) - $ / shares
Mar. 31, 2020
Dec. 31, 2019
Statement of Financial Position [Abstract]    
Common shares, par value $ 0.125 $ 0.125
Common shares, authorized (in shares) 600,000,000 600,000,000
Common shares, issued (in shares) 428,645,866 301,886,794
Common shares, outstanding (in shares) 398,587,083 270,084,005
Common shares in treasury (in shares) 30,058,783 31,802,789
v3.20.1
Statements Of Unaudited Condensed Consolidated Operations - USD ($)
shares in Thousands, $ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Income Statement [Abstract]    
Revenues $ 324.5 $ 157.0
Realization of deferred revenue 34.6 0.0
Operating costs:    
Cost of goods sold (356.0) (126.1)
Selling, general and administrative expenses (26.1) (27.3)
Acquisition-related costs (42.5) 0.0
Miscellaneous - net (13.3) (4.4)
Total operating costs (437.9) (157.8)
Operating loss (78.8) (0.8)
Other income (expense):    
Interest expense, net (31.0) (25.1)
Other non-operating income 9.2 0.1
Total other expense (21.8) (25.0)
Loss from continuing operations before income taxes (100.6) (25.8)
Income tax benefit 51.4 3.7
Loss from continuing operations (49.2) (22.1)
Income from discontinued operations, net of tax 0.6 0.0
Net loss (48.6) (22.1)
Income attributable to noncontrolling interest (3.5) 0.0
Net loss attributable to Cliffs shareholders $ (52.1) $ (22.1)
Loss per common share attributable to Cliffs shareholders - basic    
Continuing operations (in dollars per share) $ (0.18) $ (0.08)
Discontinued operations (in dollars per share) 0 0
Earnings (Loss) per Common Share - Basic (in dollars per share) (0.18) (0.08)
Loss per common share attributable to Cliffs shareholders - diluted    
Continuing operations (in dollars per share) (0.18) (0.08)
Discontinued operations (in dollars per share) 0 0
Earnings (Loss) per Common Share - Diluted (in dollars per share) $ (0.18) $ (0.08)
Average number of shares (in thousands)    
Basic 297,515 289,525
Diluted 297,515 289,525
v3.20.1
Statements Of Unaudited Condensed Consolidated Comprehensive Income - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Statement of Comprehensive Income [Abstract]    
Net loss $ (48.6) $ (22.1)
Other comprehensive income (loss):    
Changes in pension and OPEB, net of tax 5.6 5.7
Changes in foreign currency translation (0.9) 0.0
Changes in derivative financial instruments, net of tax (3.0) 2.7
Total other comprehensive income 1.7 8.4
Comprehensive loss (46.9) (13.7)
Comprehensive income attributable to noncontrolling interests (3.5) 0.0
Comprehensive loss attributable to Cliffs shareholders $ (50.4) $ (13.7)
v3.20.1
Statements Of Unaudited Condensed Consolidated Cash Flows - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
OPERATING ACTIVITIES    
Net loss $ (48.6) $ (22.1)
Adjustments to reconcile net loss to net cash used by operating activities:    
Depreciation, depletion and amortization 34.4 19.9
Deferred income taxes (47.5) (4.1)
Loss (gain) on derivatives 32.0 (5.7)
Other (31.6) 13.9
Changes in operating assets and liabilities, net of business combination:    
Receivables and other assets 254.1 204.0
Inventories (244.1) (228.9)
Payables, accrued expenses and other liabilities (109.2) (88.2)
Net cash used by operating activities (160.5) (111.2)
INVESTING ACTIVITIES    
Purchase of property, plant and equipment (138.1) (134.1)
Acquisition of AK Steel, net of cash acquired (869.3) 0.0
Other investing activities (0.1) 8.5
Net cash used by investing activities (1,007.5) (125.6)
FINANCING ACTIVITIES    
Repurchase of common shares 0.0 (124.3)
Dividends paid (16.9) (14.8)
Proceeds from issuance of debt 716.2 0.0
Debt issuance costs (44.4) 0.0
Repurchase of debt (429.9) (10.3)
Borrowings under credit facilities 800.0 0.0
Other financing activities (19.9) (8.4)
Net cash provided (used) by financing activities 1,005.1 (157.8)
Decrease in cash and cash equivalents, including cash classified within other current assets related to discontinued operations (162.9) (394.6)
Less: increase (decrease) in cash and cash equivalents from discontinued operations, classified within other current assets 2.8 (1.6)
Cash and Cash Equivalents, Period Increase (Decrease) (165.7) (393.0)
Cash and cash equivalents at beginning of period 352.6 823.2
Cash and cash equivalents at end of period $ 186.9 $ 430.2
v3.20.1
Statements of Unaudited Condensed Consolidated Changes in Equity Statement - USD ($)
$ in Millions
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Treasury Stock [Member]
AOCI Attributable to Parent [Member]
Noncontrolling Interest [Member]
Balance, beginning of period (in shares) at Dec. 31, 2018   292,600,000          
Balance, beginning of period at Dec. 31, 2018 $ 424.2 $ 37.7 $ 3,916.7 $ (3,060.2) $ (186.1) $ (283.9)  
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Comprehensive Income (Loss), Net of Tax, Attributable to Parent (13.7)     (22.1)   8.4  
Shares Issued, Shares, Share-based Payment Arrangement, after Forfeiture   1,700,000          
Shares Issued, Value, Share-based Payment Arrangement, after Forfeiture $ (10.0)   (56.5)   46.5    
Stock Repurchased During Period, Shares (11,500,000) (11,500,000)          
Common Share Repurchases, Value $ (124.3)       (124.3)    
Dividends, Common Stock (14.5)     (14.5)      
Balance, end of period (in shares) at Mar. 31, 2019   282,800,000          
Balance, end of period at Mar. 31, 2019 $ 261.7 $ 37.7 3,860.2 (3,096.8) (263.9) (275.5)  
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Common Stock, Dividends, Per Share, Declared $ 0.05            
Balance, beginning of period (in shares) at Dec. 31, 2019 270,084,005 270,100,000          
Balance, beginning of period at Dec. 31, 2019 $ 357.9 $ 37.7 3,872.1 (2,842.4) (390.7) (318.8) $ 0.0
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Comprehensive Income (Loss), Net of Tax, Attributable to Parent (46.9)     (52.1)   1.7 3.5
Shares Issued, Shares, Share-based Payment Arrangement, after Forfeiture   1,700,000          
Shares Issued, Value, Share-based Payment Arrangement, after Forfeiture 2.1   (23.6)   25.7    
Stock Issued During Period, Shares, Acquisitions   126,800,000          
Noncontrolling Interest, Increase from Business Combination             329.8
Stock Issued During Period, Value, Acquisitions 947.4 $ 15.9 601.7        
Noncontrolling Interest, Decrease from Distributions to Noncontrolling Interest Holders (5.5)           (5.5)
Dividends, Common Stock $ (24.0)     (24.0)      
Balance, end of period (in shares) at Mar. 31, 2020 398,587,083 398,600,000          
Balance, end of period at Mar. 31, 2020 $ 1,231.0 $ 53.6 $ 4,450.2 $ (2,918.5) $ (365.0) $ (317.1) $ 327.8
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Common Stock, Dividends, Per Share, Declared $ 0.06            
v3.20.1
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
3 Months Ended
Mar. 31, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation and Significant Accounting Policies [Text Block]
Business, Consolidation and Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations, comprehensive income (loss), cash flows and changes in equity for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020 or any other future period. Due to the acquisition of AK Steel, certain balances have become material and are no longer being condensed in our Statements of Unaudited Condensed Consolidated Financial Position, such as balances for Right-of-use asset, operating lease and Operating lease liability, non-current. As a result, certain prior period amounts have been reclassified to conform with the current year presentation. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Acquisition of AK Steel
On March 13, 2020, we consummated the Merger, pursuant to which, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub was merged with and into AK Steel, with AK Steel surviving the Merger as a wholly owned subsidiary of Cliffs. Refer to NOTE 3 - ACQUISITION OF AK STEEL for further information.
AK Steel is a leading North American producer of flat-rolled carbon, stainless and electrical steel products, primarily for the automotive, infrastructure and manufacturing markets. The acquisition of AK Steel has transformed us into a vertically integrated producer of value-added iron ore and steel products.
COVID-19
In response to the COVID-19 pandemic, we have made various operational changes to adjust to the demand for our products. Although steel and iron ore are considered “essential” by the states in which we operate, certain of our facilities, including Dearborn Works, all Precision Partners facilities and approximately 65% of AK Tube production, have been temporarily idled until market conditions improve. We have also temporarily shut down construction activities at the HBI production plant. On April 13, 2020, we announced the temporarily idling of two of our iron ore mining operations, Northshore in Minnesota and Tilden in Michigan, and we expect them to restart in July 2020 and August 2020, respectively. Mansfield Works is idled for an unknown, extended period of time, and AK Coal has been indefinitely idled and held for sale. We are also moving forward with the permanent idle of the Dearborn Works hot strip mill, anneal and temper operations. Finally, the Hibbing mine, of which we are a minority participant, has been idled by the joint venture.
Basis of Consolidation
The unaudited condensed consolidated financial statements consolidate our accounts and the accounts of our wholly owned subsidiaries, all subsidiaries in which we have a controlling interest and two variable interest entities for which we are the primary beneficiary. All intercompany transactions and balances are eliminated upon consolidation.
Reportable Segments
The acquisition of AK Steel has transformed us into a vertically integrated producer of value-added iron ore and steel products and we are organized according to our differentiated products in two reportable segments - the new Steel and Manufacturing segment and the Mining and Pelletizing segment. Our new Steel and Manufacturing segment includes the assets acquired through the acquisition of AK Steel and our previously reported Metallics segment, and our Mining and Pelletizing segment includes our three active operating mines and our indefinitely idled mine.
Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the audited financial statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K filed with the SEC. Due to the completion of our acquisition of AK Steel, there have been several changes in our significant accounting policies from those disclosed therein. The significant accounting policies requiring updates have been included within the disclosures below.
Revenue Recognition
Steel and Manufacturing
We generate our revenue through product sales, in which shipping terms generally indicate when we have fulfilled our performance obligations and transferred control of products to our customer. Our revenue transactions consist of a single performance obligation to transfer promised goods. We have contracts with a significant portion of our customers. These contracts usually define the mechanism for determining the sales price, which is normally fixed upon transfer of control, but the contracts do not impose a specific quantity on either party. Quantities to be delivered to the customer are determined at a point near the date of delivery through purchase orders or other written instructions we receive from the customer. Spot market sales are made through purchase orders or other written instructions. For sales with shipping terms that transfer control at the destination point, we consider our performance obligation is complete and recognize revenue when the customer receives the goods. For sales with shipping terms that transfer control at the shipping point with us bearing responsibility for freight costs to the destination, we determine that we fulfilled a single performance obligation and recognize revenue when we ship the goods.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring product. We reduce the amount of revenue recognized for estimated returns and other customer credits, such as discounts and volume rebates, based on the expected value to be realized. Payment terms are consistent with terms standard to the markets we serve. Sales taxes collected from customers are excluded from revenues.
Mining and Pelletizing
We sell 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 must run continuously with a constant feed of iron ore in order to be most efficient. 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 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 premium and Platts international indexed freight rates. 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 14 - 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 hot-rolled coil steel price 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 14 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information on supplemental revenue or refunds.
Included within Revenues related to Topic 815 is a derivative loss of $26.8 million and a derivative gain of $5.5 million for the three months ended March 31, 2020 and 2019, respectively.
Allowance for Doubtful Accounts
We establish provisions for expected lifetime losses on accounts receivable at the time a receivable is recorded based on historical experience, customer credit quality and forecasted economic conditions. We regularly review our accounts receivable balances and the allowance for credit loss and establish or adjust the allowance as necessary using
the specific identification method in accordance with CECL. We evaluate the aggregation and risk characteristics of receivable pools and develop loss rates that reflect historical collections, current forecasts of future economic conditions over the time horizon we are exposed to credit risk, and payment terms or conditions that may materially affect future forecasts. We expect credit losses associated with major auto companies to be lower than other customer pools.
Deferred Revenue
The table below summarizes our deferred revenue balances:
 
(In Millions)
 
Deferred Revenue (Current)
 
Deferred Revenue (Long-Term)
 
2020
 
2019
 
2020
 
2019
Opening balance as of January 1
$
22.1

 
$
21.0

 
$
25.7

 
$
38.5

Decrease
(21.8
)
 
(2.9
)
 
(25.7
)
 

Closing balance as of March 31
$
0.3

 
$
18.1

 
$

 
$
38.5


One of our iron ore pellet sales agreements required supplemental payments to be paid by a customer during the period from 2009 through 2013. Installment amounts received under this arrangement in excess of sales were classified as deferred revenue in the Statements of Consolidated Financial Position upon receipt of payment and the revenue was recognized over the life of the supply agreement, which had extended until 2022, in equal annual installments. As a result of the termination of the AK Steel iron ore pellet sales agreement, we realized $34.6 million of deferred revenue, which was recognized within Realization of deferred revenue in the Statements of Unaudited Condensed Consolidated Operations, during the three months ended March 31, 2020.
We have certain other sales agreements that require customers to pay in advance. Payments received on these agreements prior to revenue being recognized is recorded as deferred revenue in Other current liabilities.
Inventories
Steel and Manufacturing    
Inventories are stated at the lower of cost or net realizable value. The Steel and Manufacturing segment determines cost using average cost, excluding depreciation and amortization.
Mining and Pelletizing
Inventories are stated at the lower of cost or market. The Mining and Pelletizing segment determines cost using the LIFO method.
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. Depreciation continues to be recognized when operations are idled temporarily. Depreciation and depletion is recorded over the following estimated useful lives:
Asset Class
 
Basis
 
Life
Land, land improvements and mineral rights
 
 
 
 
Land and mineral rights
 
Units of production
 
Life of mine
Land improvements
 
Straight line
 
20 to 45 years
Buildings
 
Straight line
 
40 to 45 years
Mining and Pelletizing equipment
 
Straight line/Double declining balance
 
3 to 20 years
Steel and Manufacturing equipment
 
Straight line/Double declining balance
 
3 to 20 years

Refer to NOTE 5 - PROPERTY, PLANT AND EQUIPMENT for further information.
Goodwill
Goodwill represents the excess purchase price paid over the fair value of the net assets during an acquisition. Goodwill is not amortized but is assessed for impairment on an annual basis on October 1st (or more frequently if necessary).  
Other Intangible Assets and Liabilities
Intangible assets and liabilities are subject to periodic amortization on a straight-line basis over their estimated useful lives as follows:
Type
 
Basis
 
Useful Life
Intangible assets, net
 
 
 
 
Customer relationships
 
Straight line
 
18 years
Developed technology
 
Straight line
 
17 years
Trade names and trademarks
 
Straight line
 
10 years
Mining permits
 
Straight line
 
Life of mine
Intangible liability, net
 
 
 
 
Above-market supply contract
 
Straight line
 
13 years

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 the carrying value of the asset group is greater than its fair value. 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.
Refer to NOTE 6 - GOODWILL AND INTANGIBLE ASSETS AND LIABILITIES for further information.
Leases
We determine if an arrangement contains a lease at inception. We recognize right-of-use assets and lease liabilities associated with leases based on the present value of the future minimum lease payments over the lease term at the commencement date. Lease terms reflect options to extend or terminate the lease when it is reasonably certain that the option will be exercised. For short-term leases (leases with an initial lease term of 12 months or less), right-of-use assets and lease liabilities are not recognized in the consolidated balance sheet, and lease expense is recognized on a straight-line basis over the lease term. In addition, we have agreements with both lease and non-lease components for which we have elected the practical expedient, for each underlying class of asset, to not separate the components.
Refer to NOTE 8 - LEASES for further information.
Investments in Affiliates
We have investments in several businesses accounted for using the equity method of accounting. We review an investment for impairment when circumstances indicate that a loss in value below its carrying amount is other than temporary. Investees and equity ownership percentages are presented below:
Investee
 
Segment Reported Within
 
Equity Ownership Percentage
Combined Metals of Chicago, LLC
 
Steel and Manufacturing
 
40.0%
Hibbing Taconite Company
 
Mining and Pelletizing
 
23.0%
Spartan Steel Coating, LLC
 
Steel and Manufacturing
 
48.0%

Recent Accounting Pronouncements
Issued and Adopted
On March 2, 2020, the SEC issued a final rule that amended the disclosure requirements related to certain registered securities under SEC Regulation S-X, Rule 3-10, which required separate financial statements for subsidiary issuers and guarantors of registered debt securities unless certain exceptions are met. The final rule replaces the previous requirement under Rule 3-10 to provide condensed consolidating financial information in the registrant’s financial statements with a requirement to provide alternative financial disclosures (which include summarized financial information of the parent and any issuers and guarantors, as well as other qualitative disclosures) in either the registrant’s Management's Discussion and Analysis of Financial Condition and Results of Operations or its financial statements, in addition to other simplifications. The final rule is effective for filings on or after January 4, 2021, and early adoption is permitted. We have elected to early adopt this disclosure update for the period ended March 31, 2020. As a result, we have excluded the footnote disclosures required under the previous Rule 3-10, and applied the final rule by including the summarized financial information and qualitative disclosures in Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q and Exhibit 22.1, filed herewith.
v3.20.1
SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
3 Months Ended
Mar. 31, 2020
Disclosure Text Block [Abstract]  
Supplementary Financial Statement Information
Revenues
The following table represents our consolidated Revenues (excluding intercompany revenues) by market:
 
(In Millions)
 
Three Months Ended
March 31,
 
2020
 
2019
Steel and Manufacturing:
 
 
 
Automotive
$
120.2

 
$

Infrastructure and manufacturing
44.0

 

Distributors and converters
53.3

 

Total Steel and Manufacturing
217.5

 

Mining and Pelletizing:
 
 
 
Steel producers1
141.6

 
157.0

Total revenues
$
359.1

 
$
157.0

1 Includes Realization of deferred revenue of $34.6 million for the three months ended March 31, 2020.
The following table represents our consolidated Revenues (excluding intercompany revenues) by product line:
 
(In Millions)
 
Three Months Ended
March 31,
 
2020
 
2019
Steel and Manufacturing:
 
 
 
Carbon steel
$
138.6

 
$

Stainless and electrical steel
59.4

 

Tubular products, components and other
19.5

 

Total Steel and Manufacturing
217.5

 

Mining and Pelletizing:
 
 
 
Iron ore1
131.3

 
145.4

Freight
10.3

 
11.6

Total Mining and Pelletizing
141.6

 
157.0

Total revenues
$
359.1

 
$
157.0

1 Includes Realization of deferred revenue of $34.6 million for the three months ended March 31, 2020.

We sell domestically to customers located primarily in the Midwestern, Southern and Eastern United States and to foreign customers, primarily in Canada, Mexico and Western Europe. Net revenues to customers located outside the United States were $46.7 million and $43.0 million for the three months ended March 31, 2020 and 2019, respectively.
Allowance for Credit Losses
The following is a roll forward of our allowance for credit losses associated with Accounts receivable, net:
 
(In Millions)
 
March 31,
2020
 
March 31,
2019
Allowance for credit losses at beginning of period
$

 
$

Increase in allowance
1.2

 

Allowance for credit losses at end of period
$
1.2

 
$


Inventories
The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position:
 
(In Millions)
 
March 31,
2020
 
December 31,
2019
Product inventories
 
 
 
Finished and semi-finished goods
$
1,358.9

 
$
114.1

Work-in-process
88.0

 
68.7

Raw materials
343.0

 
9.4

Total product inventories
1,789.9

 
192.2

Manufacturing supplies and critical spares
358.9

 
125.2

Inventories
$
2,148.8

 
$
317.4


Accrued Liabilities
The following table presents the detail of our Accrued liabilities in the Statements of Unaudited Condensed Consolidated Financial Position:
 
(In Millions)
 
March 31,
2020
 
December 31, 2019
Accrued employment costs
$
158.3

 
$
61.7

Accrued interest
47.1

 
29.0

Accrued dividends
24.9

 
17.8

Other
69.5

 
17.8

Accrued liabilities
$
299.8

 
$
126.3


Cash Flow Information
A reconciliation of capital additions to cash paid for capital expenditures is as follows:
 
(In Millions)
 
Three Months Ended
March 31,
 
2020
 
2019
Capital additions
$
157.7

 
$
129.3

Less:
 
 
 
Non-cash accruals
(10.3
)
 
(11.5
)
Right-of-use assets - finance leases
29.9

 
15.1

Grants

 
(8.4
)
Cash paid for capital expenditures including deposits
$
138.1

 
$
134.1

Cash payments (receipts) for income taxes and interest are as follows:
 
(In Millions)
 
Three Months Ended
March 31,
 
2020
 
2019
Taxes paid on income
$
0.1

 
$
0.1

Income tax refunds
(60.4
)
 

Interest paid on debt obligations net of capitalized interest1
29.7

 
39.2

1 Capitalized interest was $9.7 million and $4.0 million for the three months ended March 31, 2020 and 2019, respectively.
Non-Cash Investing and Financing Activities
 
(In Millions)
 
Three Months Ended
March 31,
 
2020
 
2019
Fair value of common shares issued for consideration for business combination
$
617.6

 
$

Fair value of equity awards assumed from AK Steel acquisition
4.3

 

Dividends declared
24.0

 
14.5


On February 18, 2020, our Board declared a quarterly cash dividend on our common shares of $0.06 per share. The cash dividend of $23.9 million was paid on April 15, 2020 to shareholders of record as of the close of business on April 3, 2020.
v3.20.1
ACQUISITION OF AK STEEL
3 Months Ended
Mar. 31, 2020
Business Combinations [Abstract]  
Business Combination Disclosure [Text Block]
Transaction Overview
On March 13, 2020, pursuant to the Merger Agreement, we completed the acquisition of AK Steel, in which we were the acquirer. As a result of the Merger, each share of AK Steel common stock issued and outstanding immediately prior to the effective time of the Merger (other than excluded shares) was converted into the right to receive 0.400 Cliffs common shares and, if applicable, cash in lieu of any fractional Cliffs common shares.
The acquisition combined Cliffs, North America’s largest producer of iron ore pellets, with AK Steel, a leading producer of innovative flat-rolled carbon, stainless and electrical steel products, to create a vertically integrated producer of value-added iron ore and steel products. The combination is expected to create significant opportunities to generate additional value from market trends across the entire steel value chain and enable more consistent, predictable performance through normal market cycles. Together, Cliffs and AK Steel have a presence across the entire manufacturing process, from mining to pelletizing to the development and production of finished high value steel products, including
Next Generation Advanced High Strength Steels for automotive and other markets. The combination is expected to generate cost synergies, primarily from consolidating corporate functions, reducing duplicative overhead costs, and procurement and energy cost savings, as well as operational and supply chain efficiencies. The combined company is well positioned to provide high-value iron ore and steel solutions to customers primarily across North America.
Total net revenues for AK Steel for the most recent pre-acquisition year ended December 31, 2019 were $6,359.4 million. Following the acquisition, the operating results of AK Steel were included in our unaudited condensed consolidated financial statements and are reported as part of our Steel and Manufacturing segment. For the period subsequent to the acquisition (March 13, 2020 through March 31, 2020), AK Steel's Revenues were $217.5 million and Net loss attributable to Cliffs shareholders was $55.1 million, which includes $23.2 million and $17.6 million related to amortization of the fair value inventory step-up and severance costs, respectively.
Additionally, we incurred acquisition costs of $23.2 million for the three months ended March 31, 2020, which were recorded in Acquisition-related costs on the Statements of Unaudited Condensed Consolidated Operations.
Refer to NOTE 7 - DEBT AND CREDIT FACILITIES for information regarding debt transactions executed in connection with the Merger.
The Merger was accounted for under the acquisition method of accounting for business combinations. The acquisition date fair value of the consideration transferred totaled $1.5 billion. The following tables summarize the consideration paid for AK Steel and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
The fair value of the total purchase consideration was determined as follows:
 
(In Millions, Except Per Share Amounts)
Fair value of Cliffs common shares issued for AK Steel outstanding common stock
$
617.6

Fair value of replacement equity awards
4.3

Fair value of AK Steel debt
913.6

Total transaction consideration
$
1,535.5


The fair value of Cliffs common shares issued for outstanding shares of AK Steel common stock and with respect to Cliffs common shares underlying converted AK Steel equity awards that vested upon completion of the Merger is calculated as follows:
 
(In Millions, Except Per Share Amounts)
Number of shares of AK Steel common stock issued and outstanding
316.9

Exchange ratio
0.400

Shares of Cliffs common shares issued to AK Steel stockholders
126.8

Price per share of Cliffs common shares
$
4.87

Fair value of Cliffs common shares issued for AK Steel outstanding common stock
$
617.6


The fair value of AK Steel's debt included in the consideration is calculated as follows:
 
(In Millions)
Credit Facility
$
590.0

7.50% Senior Secured Notes due July 2023
323.6

Fair value of debt included in consideration
$
913.6


Valuation Assumption and Preliminary Purchase Price Allocation
We estimated fair values at March 13, 2020 for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed. During the measurement period, we will continue to obtain information to assist in finalizing the fair value of net assets acquired and liabilities assumed, which may differ materially from these preliminary estimates. If we determine any measurement period adjustments are material, we will apply those adjustments, including any related impacts to net income, in the reporting period in which the adjustments are determined. We are in the process of conducting a valuation of the assets acquired and liabilities assumed related to the acquisition, most notably, inventories, including manufacturing supplies and critical spares, personal and real property, leases, deferred taxes, investments, asset retirement obligations, OPEB liabilities and intangible assets/liabilities, and the final allocation will be made when completed, including the result of any identified goodwill. Accordingly, the provisional measurements noted below are preliminary and subject to modification in the future.
The preliminary purchase price allocation to assets acquired and liabilities assumed in the Merger was:
 
(In Millions)
Cash and cash equivalents
$
37.7

Accounts receivable
666.0

Inventories
1,562.8

Other current assets
67.5

Property, plant and equipment
2,184.4

Intangible assets
163.0

Right-of-use asset, operating lease
225.9

Other non-current assets
85.9

Accounts payable
(636.3
)
Accrued liabilities
(222.5
)
Other current liabilities
(181.8
)
Long-term debt
(1,179.4
)
Deferred income taxes
(19.7
)
Operating lease liability, non-current
(188.1
)
Intangible liability
(140.0
)
Pension and OPEB liabilities
(873.0
)
Asset retirement obligations
(13.9
)
Other non-current liabilities
(144.2
)
Net identifiable assets acquired
$
1,394.3

Goodwill
141.2

Total net assets acquired
$
1,535.5


The goodwill resulting from the acquisition of AK Steel was assigned to Precision Partners, our downstream tooling and stamping operations, and AK Tube, our tubing operations, that are reporting units included in the Steel and Manufacturing segment. Goodwill is calculated as the excess of the purchase price over the net identifiable assets recognized and primarily represents the growth opportunities in lightweighting solutions to automotive customers, as well as any synergistic benefits to be realized from the acquisition of AK Steel. None of the goodwill is expected be deductible for income tax purposes.
The preliminary purchase price allocated to identifiable intangible assets and liabilities acquired was:
 
(In Millions)
 
Weighted Average Life (In Years)
Intangible assets:
 
 
 
Customer relationships
$
91.0

 
18
Developed technology
61.0

 
17
Trade names and trademarks
11.0

 
10
Total identifiable intangible assets
$
163.0

 
17
Intangible liability:
 
 
 
Above-market supply contract
$
(140.0
)
 
13

The above-market supply contract relates to a long-term coke supply agreement with SunCoke Middletown, a consolidated variable interest entity. Refer to NOTE 18 - VARIABLE INTEREST ENTITIES for further information.
Pro Forma Results
The following table provides unaudited pro forma financial information, prepared in accordance with Topic 805, for the three months ended March 31, 2020 and 2019, as if AK Steel had been acquired as of January 1, 2019:
 
(In Millions)
 
Three Months Ended March 31,
 
2020
 
2019
Revenues
$
1,526.4

 
$
1,787.3

Net loss attributable to Cliffs shareholders
$
(17.4
)
 
$
(79.7
)

The unaudited pro forma financial information has been calculated after applying our accounting policies and adjusting the historical results with pro forma adjustments, net of tax, that assume the acquisition occurred on January 1, 2019. Significant pro forma adjustments include the following:
1.
The elimination of intercompany revenues between Cliffs and AK Steel of $67.8 million and $67.4 million for the three months ended March 31, 2020 and 2019, respectively.
2.
The 2020 pro forma net income was adjusted to exclude $23.2 million of non-recurring inventory acquisition accounting adjustments incurred during the three months ended March 31, 2020. The 2019 pro forma net income was adjusted to include $84.8 million of non-recurring inventory acquisition accounting adjustments.
3.
The elimination of nonrecurring transaction costs incurred by Cliffs and AK Steel in connection with the Merger of $26.6 million for the three months ended March 31, 2020.
4.
Total other pro forma adjustments included income of $13.1 million and $4.2 million, for the three months ended March 31, 2020 and 2019, respectively, primarily due to reduced interest and amortization expense, offset partially by additional depreciation expense.
5.
The income tax impact of pro forma transaction adjustments that affect Net loss attributable to Cliffs shareholders at a statutory rate of 24.3% resulted in an income tax expense of $11.6 million and an income tax benefit of $18.3 million, for the three months ended March 31, 2020 and 2019, respectively.
The unaudited pro forma financial information does not reflect the potential realization of revenue synergies or cost savings, nor does it reflect other costs relating to the integration of the two companies. This unaudited pro forma financial information should not be considered indicative of the results that would have actually occurred if the acquisition had been consummated on January 1, 2019, nor are they indicative of future results.
v3.20.1
SEGMENT REPORTING
3 Months Ended
Mar. 31, 2020
Segment Reporting [Abstract]  
Segment Reporting Disclosure
Our Company is a vertically integrated producer of value-added iron ore and steel products. Our operations are organized and managed in two operating segments according to our upstream and downstream operations. 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. Our Steel and Manufacturing segment is a leading producer of flat-rolled carbon, stainless and electrical steel products, primarily for the automotive, infrastructure and manufacturing, and distributors and converters markets. Our Steel and Manufacturing segment includes subsidiaries that provide customer solutions with carbon and stainless steel tubing products, advanced-engineered solutions, tool design and build, hot- and cold-stamped steel components, and complex assemblies. Although we planned for our HBI production plant in Toledo, Ohio, now included as part of our Steel and Manufacturing segment, to be ready for production before the end of the second quarter of 2020, construction is temporarily on hold due to the economic impact of the COVID-19 pandemic. All intersegment transactions were eliminated in consolidation.
We evaluate performance on a segment basis, as well as a consolidated basis, based on Adjusted EBITDA, which is a non-GAAP measure. This measure is used by management, investors, lenders and other external users of our financial statements to assess our operating performance and to compare operating performance to other companies in the steel and iron ore industries. In addition, management believes Adjusted EBITDA is a useful measure to assess the earnings power of the business without the impact of capital structure and can be used to assess our ability to service debt and fund future capital expenditures in the business.
Our results by segment are as follows:
 
(In Millions, Except Sales Tons)
 
Three Months Ended
March 31,
 
2020
 
2019
Sales volume (in thousands):
 
 
 
Steel and Manufacturing consolidated sales (net tons)
199

 

 
 
 
 
Mining and Pelletizing sales (long tons)
2,134

 
1,550

Less: Intercompany sales (long tons)
(783
)
 

Mining and Pelletizing consolidated sales (long tons)
1,351

 
1,550

 
 
 
 
Revenues:
 
 
 
Steel and Manufacturing consolidated revenues
$
217.5

 
$

 
 
 
 
Mining and Pelletizing1
229.4

 
157.0

Less: Intercompany revenues
(87.8
)
 

Mining and Pelletizing consolidated revenues
141.6

 
157.0

 
 
 
 
Revenues
$
359.1

 
$
157.0

 
 
 
 
Adjusted EBITDA:
 
 
 
Steel and Manufacturing
$
(11.1
)
 
$
(0.8
)
Mining and Pelletizing
81.8

 
47.5

Corporate and eliminations
(48.0
)
 
(25.5
)
Total Adjusted EBITDA
$
22.7

 
$
21.2

1 Includes Realization of deferred revenue of $34.6 million for the three months ended March 31, 2020.

The following table provides a reconciliation of our consolidated Net loss to Total Adjusted EBITDA:
 
(In Millions)
 
Three Months Ended
March 31,
 
2020
 
2019
Net loss
$
(48.6
)
 
$
(22.1
)
Less:
 
 
 
Interest expense, net
(31.1
)
 
(25.1
)
Income tax benefit
51.4

 
3.7

Depreciation, depletion and amortization
(34.4
)
 
(19.9
)
Total EBITDA
$
(34.5
)
 
$
19.2

Less:
 
 
 
EBITDA of noncontrolling interests1
$
4.6

 
$

Severance costs
(19.3
)
 
(1.7
)
Acquisition costs
(23.2
)
 

Amortization of inventory step-up
(23.2
)
 

Gain (loss) on extinguishment of debt
3.2

 
(0.3
)
Impact of discontinued operations
0.7

 

Total Adjusted EBITDA
$
22.7

 
$
21.2

1 Includes $3.5 million of income attributable to noncontrolling interests and $1.1 million of depreciation, depletion and amortization for the three months ended March 31, 2020.
The following summarizes our assets by segment:
 
(In Millions)
 
March 31,
2020
 
December 31,
2019
Assets:
 
 
 
Steel and Manufacturing
$
6,442.4

 
$
913.6

Mining and Pelletizing
1,752.4

 
1,643.1

Total segment assets
8,194.8

 
2,556.7

Corporate and Other (including discontinued operations)
717.5

 
947.1

Total assets
$
8,912.3

 
$
3,503.8


The following table summarizes our capital additions by segment:
 
(In Millions)
 
Three Months Ended
March 31,
 
2020
 
2019
Capital additions1:
 
 
 
Steel and Manufacturing
$
122.9

 
$
82.4

Mining and Pelletizing
34.2

 
46.8

Corporate and Other (including discontinued operations)
0.6

 
0.1

Total capital additions
$
157.7

 
$
129.3

1 Refer to NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION for additional information.
v3.20.1
PROPERTY, PLANT AND EQUIPMENT
3 Months Ended
Mar. 31, 2020
Property, Plant and Equipment [Abstract]  
PROPERTY, PLANT AND EQUIPMENT
The following table indicates the carrying value of each of the major classes of our depreciable assets:
 
(In Millions)
 
March 31,
2020
 
December 31,
2019
Land, land improvements and mineral rights
$
652.7

 
$
582.2

Buildings
452.5

 
157.8

Mining and Pelletizing equipment
1,431.8

 
1,413.6

Steel and Manufacturing equipment
2,140.9

 
42.0

Other
123.0

 
101.5

Construction-in-progress
1,011.3

 
730.3

Total property, plant and equipment1
5,812.2

 
3,027.4

Allowance for depreciation and depletion
(1,262.4
)
 
(1,098.4
)
Property, plant and equipment, net
$
4,549.8

 
$
1,929.0


1 Includes right-of-use assets related to finance leases of $84.2 million and $49.0 million as of March 31, 2020 and December 31, 2019, respectively.
We recorded capitalized interest into property, plant and equipment of $9.7 million and $4.0 million during the three months ended March 31, 2020 and March 31, 2019, respectively.
We recorded depreciation and depletion expense of $35.4 million and $19.6 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
v3.20.1
GOODWILL AND INTANGIBLE ASSETS AND LIABILITIES
3 Months Ended
Mar. 31, 2020
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Intangible Assets Disclosure [Text Block]
Goodwill
The increase in the balance of Goodwill as of March 31, 2020 is due to the preliminary assignment of $141.2 million to Goodwill in the first quarter of 2020 based on the preliminary purchase price allocation for the acquisition of AK Steel. The carrying amount of goodwill related to our Mining and Pelletizing segment was $2.1 million as of both March 31, 2020 and December 31, 2019.
Intangible Assets and Liabilities
The following is a summary of our intangible assets and liability:
 
 
 
(In Millions)
 
Classification
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
As of March 31, 2020
 
 
 
 
 
 
 
Intangible assets:
 
 
 
 
 
 
 
Customer relationships
Intangible assets, net
 
$
91.0

 
$
(0.5
)
 
$
90.5

Developed technology
Intangible assets, net
 
61.0

 
(0.3
)
 
60.7

Trade names and trademarks
Intangible assets, net
 
11.0

 
(0.1
)
 
10.9

Mining permits
Intangible assets, net
 
72.2

 
(24.3
)
 
47.9

Total intangible assets
 
 
$
235.2

 
$
(25.2
)
 
$
210.0

Intangible liability:
 
 
 
 
 
 
 
Above-market supply contract
Intangible liability, net
 
$
(140.0
)
 
$
2.1

 
$
(137.9
)
 
 
 
 
 
 
 
 
As of December 31, 2019
 
 
 
 
 
 
 
Intangible assets:
 
 
 
 
 
 
 
Mining permits
Intangible assets, net
 
$
72.2

 
$
(24.1
)
 
$
48.1


Amortization expense related to intangible assets was $1.1 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively, and is recognized in Selling, general and administrative expenses in the Statements of Unaudited Condensed Consolidated Operations.
Estimated future amortization expense related to intangible assets at March 31, 2020 is as follows:
 
 
(In Millions)
Years ending December 31,
 
 
2020 (remaining period of the year)
 
$
8.1

2021
 
10.8

2022
 
10.8

2023
 
10.8

2024
 
10.8

2025
 
10.8


Income from amortization of the intangible liability was $2.1 million for the three months ended March 31, 2020 and is recognized in Cost of goods sold in the Statements of Unaudited Condensed Consolidated Operations.
Estimated future amortization income related to the intangible liability at March 31, 2020 is as follows:
 
 
(In Millions)
Years ending December 31,
 
 
2020 (remaining period of the year)
 
$
7.0

2021
 
10.9

2022
 
10.9

2023
 
10.9

2024
 
10.9

2025
 
10.9


v3.20.1
DEBT AND CREDIT FACILITIES
3 Months Ended
Mar. 31, 2020
Debt Disclosure [Abstract]  
DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt:
(In Millions)
March 31, 2020
Debt Instrument
 
Issuer1
 
Annual Effective
Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Unamortized Premiums (Discounts)
 
Total Debt
Senior Secured Notes:
 
 
 
 
 
 
 
 
 
 
 
 
4.875% 2024 Senior Secured Notes
 
Cliffs
 
5.00%
 
$
400.0

 
$
(4.3
)
 
$
(1.7
)
 
$
394.0

6.75% 2026 Senior Secured Notes
 
Cliffs
 
7.00%
 
725.0

 
(20.3
)
 
(8.8
)
 
695.9

Senior Unsecured Notes:
 
 
 
 
 
 
 
 
 
 
 
 
7.625% 2021 AK Senior Notes
 
AK Steel
 
7.33%
 
33.5

 

 
0.1

 
33.6

7.50% 2023 AK Senior Notes
 
AK Steel
 
6.17%
 
12.8

 

 
0.5

 
13.3

6.375% 2025 Senior Notes
 
Cliffs
 
8.11%
 
231.8

 
(0.9
)
 
(17.9
)
 
213.0

6.375% 2025 AK Senior Notes
 
AK Steel
 
8.11%
 
38.4

 

 
(3.0
)
 
35.4

1.50% 2025 Convertible Senior Notes
 
Cliffs
 
6.26%
 
316.3

 
(4.4
)
 
(62.2
)
 
249.7

5.75% 2025 Senior Notes
 
Cliffs
 
6.01%
 
473.3

 
(3.5
)
 
(5.3
)
 
464.5

7.00% 2027 Senior Notes
 
Cliffs
 
9.24%
 
335.4

 
(1.3
)
 
(38.4
)
 
295.7

7.00% 2027 AK Senior Notes
 
AK Steel
 
9.24%
 
56.3

 

 
(6.4
)
 
49.9

5.875% 2027 Senior Notes
 
Cliffs
 
6.49%
 
750.0

 
(6.2
)
 
(26.6
)
 
717.2

6.25% 2040 Senior Notes
 
Cliffs
 
6.34%
 
298.4

 
(2.1
)
 
(3.2
)
 
293.1

IRBs due 2020 to 2028
 
AK Steel
 
Various
 
99.3

 

 
2.5

 
101.8

ABL Facility
 
Cliffs2
 
2.33%
 
2,000.0

 

 

 
800.0

Total long-term debt
 
 
 
 
 
 
 
 
 
 
 
$
4,357.1

 
 
 
 
 
 
 
 
 
 
 
 
 
1 Unless otherwise noted, references in this column to "Cliffs" are to Cleveland-Cliffs Inc., and references to "AK Steel" are to AK Steel Corporation.
2 Refers to Cleveland-Cliffs Inc. as borrower under our ABL Facility.
(In Millions)
December 31, 2019
Debt Instrument
 
Issuer1
 
Annual Effective
Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Unamortized Discounts
 
Total Debt
Senior Secured Notes:
 
 
 
 
 
 
 
 
 
 
 
 
4.875% 2024 Senior Notes
 
Cliffs
 
5.00%
 
$
400.0

 
$
(4.6
)
 
$
(1.8
)
 
$
393.6

Senior Unsecured Notes:
 
 
 
 
 
 
 
 
 
 
 
 
1.50% 2025 Convertible Senior Notes
 
Cliffs
 
6.26%
 
316.3

 
(4.6
)
 
(65.0
)
 
246.7

5.75% 2025 Senior Notes
 
Cliffs
 
6.01%
 
473.3

 
(3.6
)
 
(5.5
)
 
464.2

5.875% 2027 Senior Notes
 
Cliffs
 
6.49%
 
750.0

 
(6.3
)
 
(27.3
)
 
716.4

6.25% 2040 Senior Notes
 
Cliffs
 
6.34%
 
298.4

 
(2.2
)
 
(3.3
)
 
292.9

Former ABL Facility
 
Cliffs2
 
N/A
 
450.0

 
N/A

 
N/A

 

Total long-term debt
 
 
 
 
 
 
 
 
 
 
 
$
2,113.8

 
 
 
 
 
 
 
 
 
 
 
 
 
1 Unless otherwise noted, references in this column to "Cliffs" are to Cleveland-Cliffs Inc.
2 Refers to Cleveland-Cliffs Inc. and certain of its subsidiaries as borrowers under our Former ABL Facility.

$725 Million 6.75% 2026 Senior Secured Notes Offering
On March 13, 2020, we entered into an indenture among Cliffs, the guarantors party thereto and U.S. Bank National Association, as trustee and notes collateral agent, relating to the issuance of $725 million aggregate principal amount of 6.75% 2026 Senior Secured Notes. The 6.75% 2026 Senior Secured Notes were issued at 98.783% of face value. The 6.75% 2026 Senior Secured Notes were issued in a private placement transaction exempt from the registration requirements of the Securities Act.
The 6.75% 2026 Senior Secured Notes bear interest at a rate of 6.75% per annum, payable semi-annually in arrears on March 15 and September 15 of each year, commencing on September 15, 2020. The 6.75% 2026 Senior Secured Notes mature on March 15, 2026.
The 6.75% 2026 Senior Secured Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by substantially all of our material domestic subsidiaries and are secured (subject in each case to certain exceptions and permitted liens) by (i) a first-priority lien, on an equal ranking with the 4.875% 2024 Senior Secured Notes, on substantially all of our assets and the assets of the guarantors, and (ii) a second-priority lien on the ABL Collateral (as defined below), which is junior to a first-priority lien for the benefit of the lenders under our ABL Facility and pari passu with the 4.875% 2024 Senior Secured Notes.
The 6.75% 2026 Senior Secured Notes may be redeemed, in whole or in part, at any time at our option upon not less than 30, and not more than 60, days' prior notice sent to the holders of the 6.75% 2026 Senior Secured Notes. The following is a summary of redemption prices for our 6.75% 2026 Senior Secured Notes:
Redemption Period
 
Redemption Price1
 
Restricted Amount
Prior to March 15, 2022 - using proceeds of equity issuance
 
106.750
%
 
Up to 35% of original aggregate principal
Prior to March 15, 20222
 
100.000
 
 
 
Beginning on March 15, 2022
 
105.063
 
 
 
Beginning on March 15, 2023
 
103.375
 
 
 
Beginning on March 15, 2024
 
101.688
 
 
 
Beginning on March 15, 2025 and thereafter
 
100.000
 
 
 
 
 
 
 
 
 
1  Plus accrued and unpaid interest, if any, up to, but excluding, the redemption date.
2  Plus a "make-whole" premium.

In addition, if a change in control triggering event, as defined in the indenture, occurs with respect to the 6.75% 2026 Senior Secured Notes, we will be required to offer to purchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to, but not including, the date of purchase.
The terms of the 6.75% 2026 Senior Secured Notes contain certain customary covenants; however, there are no financial covenants.
Debt issuance costs of $20.5 million were incurred related to the offering of the 6.75% 2026 Senior Secured Notes and are included in Long-term debt in the Statements of Unaudited Condensed Consolidated Financial Position.
Cliffs Senior Notes exchanged for AK Steel Corporation Senior Notes
On March 16, 2020, we entered into indentures, in each case among Cliffs, the guarantors party thereto and U.S. Bank National Association, as trustee, relating to the issuance by Cliffs of $231.8 million aggregate principal amount of 6.375% 2025 Senior Notes and $335.4 million aggregate principal amount of 7.00% 2027 Senior Notes. The new notes were issued in exchange for equal aggregate principal amounts of 6.375% 2025 AK Senior Notes and 7.00% 2027 AK Senior Notes, respectively. The 6.375% 2025 Senior Notes and 7.00% 2027 Senior Notes were issued pursuant to exchange offers made by Cliffs in private placement transactions exempt from the registration requirements of the Securities Act. Pursuant to the registration rights agreements executed in connection with the issuance of the new notes, we agreed to file registration statements with the SEC with respect to registered offers to exchange the 6.375% 2025 Senior Notes and 7.00% 2027 Senior Notes for publicly registered notes within 365 days of the closing date, with all significant terms and conditions remaining the same.
The 6.375% 2025 Senior Notes and 7.00% 2027 Senior Notes are unsecured obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated indebtedness. The notes are guaranteed on a senior unsecured basis by our material direct and indirect wholly owned domestic subsidiaries and, therefore, are structurally senior to any of our existing and future indebtedness that is not guaranteed by such guarantors and are structurally subordinated to all existing and future indebtedness and other liabilities of our subsidiaries that do not guarantee the notes.
In addition, if a change in control triggering event, as defined in the indentures, occurs with respect to the 6.375% 2025 Senior Notes or 7.00% 2027 Senior Notes, we will be required to offer to purchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to, but not including, the date of purchase.
The terms of the 6.375% 2025 Senior Notes and 7.00% 2027 Senior Notes contain certain customary covenants; however, there are no financial covenants.
6.375% 2025 Senior Notes
The 6.375% 2025 Senior Notes bear interest at a rate of 6.375% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2020. The 6.375% 2025 Senior Notes mature on October 15, 2025.
The 6.375% 2025 Senior Notes may be redeemed, in whole or in part, at any time at our option upon not less than 30, and not more than 60, days' prior notice sent to the holders of the 6.375% 2025 Senior Notes. The following is a summary of redemption prices for our 6.375% 2025 Senior Notes:
Redemption Period
 
Redemption Price1
 
Restricted Amount
Prior to October 15, 2020 - using proceeds of equity issuance
 
106.375
%
 
Up to 35% of original aggregate principal
Prior to October 15, 20202
 
100.000
 
 
 
Beginning on October 15, 2020
 
103.188
 
 
 
Beginning on October 15, 2021
 
101.594
 
 
 
Beginning on October 15, 2022 and thereafter
 
100.000
 
 
 
 
 
 
 
 
 
1  Plus accrued and unpaid interest, if any, up to but excluding the redemption date.
2  Plus a "make-whole" premium.

Debt issuance costs of $0.9 million were incurred in connection with the issuance of the 6.375% 2025 Senior Notes and are included in Long-term debt in the Statements of Unaudited Condensed Consolidated Financial Position.
7.00% 2027 Senior Notes
The 7.00% 2027 Senior Notes bear interest at a rate of 7.00% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2020. The 7.00% 2027 Senior Notes mature on October 15, 2025.
The 7.00% 2027 Senior Notes may be redeemed, in whole or in part, at any time at our option upon not less than 30, and not more than 60, days' prior notice sent to the holders of the 7.00% 2027 Senior Notes. The following is a summary of redemption prices for our 7.00% 2027 Senior Notes:
Redemption Period
 
Redemption Price1
Prior to March 15, 20222
 
100.000
%
Beginning on March 15, 2022
 
103.500
 
Beginning on March 15, 2023
 
102.333
 
Beginning on March 15, 2024
 
101.167
 
Beginning on March 15, 2025 and thereafter
 
100.000
 
 
 
 
 
1  Plus accrued and unpaid interest, if any, up to but excluding the redemption date.
2  Plus a "make-whole" premium.

Debt issuance costs of $1.3 million were incurred in connection with the issuance of the 7.00% 2027 Senior Notes and are included in Long-term debt in the Statements of Unaudited Condensed Consolidated Financial Position.
AK Steel Corporation Senior Unsecured Notes
As of March 31, 2020, AK Steel Corporation had outstanding a total of $141.0 million aggregate principal amount of 7.625% 2021 AK Senior Notes, 7.50% 2023 AK Senior Notes, 6.375% 2025 AK Senior Notes and 7.00% 2027 AK Senior Notes. These senior notes are unsecured obligations and rank equally in right of payment with AK Steel Corporation's guarantees of Cliffs' unsecured and unsubordinated indebtedness. These notes contain certain customary covenants; however, there are no financial covenants.
We may redeem the 7.625% 2021 AK Senior Notes at 100.000% of their principal amount, together with all accrued and unpaid interest to the date of redemption.
The following is a summary of redemption prices for the 7.50% 2023 AK Senior Notes:
Redemption Period
 
Redemption Price1
Prior to July 15, 2020
 
103.750
%
Beginning on July 15, 2020
 
101.875
 
Beginning on July 15, 2021 and thereafter
 
100.000
 
 
 
 
 
1  Plus accrued and unpaid interest, if any, up to but excluding the redemption date.

The following is a summary of redemption prices for the 6.375% 2025 AK Senior Notes:
Redemption Period
 
Redemption Price1
Prior to October 15, 20202
 
100.000
%
Beginning on October 15, 2020
 
103.188
 
Beginning on October 15, 2021
 
101.594
 
Beginning on October 15, 2022 and thereafter
 
100.000
 
 
 
 
 
1  Plus accrued and unpaid interest, if any, up to but excluding the redemption date.
2  Plus a "make-whole" premium.

The following is a summary of redemption prices for the 7.00% 2027 AK Senior Notes:
Redemption Period
 
Redemption Price1
Prior to March 15, 20222
 
100.000
%
Beginning on March 15, 2022
 
103.500
 
Beginning on March 15, 2023
 
102.333
 
Beginning on March 15, 2024
 
101.167
 
Beginning on March 15, 2025 and thereafter
 
100.000
 
 
 
 
 
1  Plus accrued and unpaid interest, if any, up to but excluding the redemption date.
2  Plus a "make-whole" premium.

Industrial Revenue Bonds
AK Steel Corporation had an outstanding $73.3 million aggregate principal amount of fixed-rate, tax-exempt IRBs as of March 31, 2020. The weighted-average fixed rate of the unsecured IRBs is 6.80%. The IRBs are unsecured senior debt obligations that are equal in ranking with AK Steel Corporation's senior unsecured notes and AK Steel Corporation's guarantees of Cliffs' unsecured and unsubordinated indebtedness. In addition, AK Steel Corporation had outstanding $26.0 million aggregate principal amount of variable-rate IRBs as of March 31, 2020 that is backed by a letter of credit. These IRBs contain certain customary covenants; however, there are no financial covenants.
Debt Extinguishments - 2020
On March 13, 2020, in connection with the Merger, we purchased $364.2 million aggregate principal amount of 7.625% 2021 AK Senior Notes and $310.7 million aggregate principal amount of 7.50% 2023 AK Senior Notes upon early settlement of tender offers made by Cliffs. The net proceeds from the offering of 6.75% 2026 Senior Secured Notes, along with a portion of the ABL Facility borrowings, were used to fund such purchases. As the 7.625% 2021 AK Senior Notes and 7.50% 2023 AK Senior Notes were recorded at fair value just prior to being purchased, there was no gain or loss on extinguishment.
Additionally, in connection with the final settlement of the tender offers, on March 27, 2020, we purchased $8.5 million aggregate principal amount of the 7.625% 2021 AK Senior Notes and $56.5 million aggregate principal amount of the 7.50% 2023 AK Senior Notes with cash on hand.
The following is a summary of the debt extinguished and the respective gain on extinguishment:
 
 
(In Millions)
 
 
Three Months Ended
March 31, 2020
Debt Instrument
 
Debt Extinguished
 
Gain on Extinguishment1
7.625% 2021 AK Senior Notes
 
$
372.7

 
$
0.4

7.50% 2023 AK Senior Notes
 
367.2

 
2.8

 
 
$
739.9

 
$
3.2

 
 
 
 
 
1 The gain on extinguishment relates to the March 27, 2020 purchases.

Subsequent to the period ended March 31, 2020, we issued $400 million aggregate principal amount of 9.875% 2025 Senior Secured Notes in a private placement transaction exempt from the registration requirements of the Securities Act. We intend to use the net proceeds from this offering for general corporate purposes, including to strengthen our balance sheet and increase our liquidity. We also issued an additional $555.2 million aggregate principal amount of 9.875% 2025 Senior Secured Notes in a subsequent private placement transaction exempt from the registration requirements of the Securities Act. We used the net proceeds from the offering of the additional 9.875% 2025 Senior Secured Notes to repurchase approximately $736.4 million aggregate principal amount of our outstanding senior notes, which resulted in a principal debt reduction of approximately $181.3 million. Refer to NOTE 21 - SUBSEQUENT EVENTS for further information.
Debt Extinguishments - 2019
The following is a summary of the debt extinguished with cash and the respective loss on extinguishment:
 
 
(In Millions)
 
 
Three Months Ended
March 31, 2019
Debt Instrument
 
Debt Extinguished
 
(Loss) on Extinguishment
4.875% 2021 Senior Notes
 
$
10.0

 
$
(0.3
)
 
 
$
10.0

 
$
(0.3
)

ABL Facility
On March 13, 2020, in connection with the Merger, we entered into a new ABL Facility with various financial institutions to replace and refinance Cliffs’ Former ABL Facility and AK Steel Corporation’s former revolving credit facility. The ABL Facility will mature upon the earlier of March 13, 2025 or 91 days prior to the maturity of certain other material debt and provides for up to $2.0 billion in borrowings, including a $555.0 million sublimit for the issuance of letters of credit and a $125.0 million sublimit for swingline loans. Availability under the ABL Facility is limited to an eligible borrowing base, as applicable, determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment.
The ABL Facility and certain bank products and hedge obligations are guaranteed by us and certain of our existing wholly owned U.S. subsidiaries and are required to be guaranteed by certain of our future U.S. subsidiaries. Amounts outstanding under the ABL Facility are secured by (i) a first-priority security interest in the accounts receivable and other rights to payment, inventory, as-extracted collateral, certain investment property, deposit accounts, securities accounts, certain general intangibles and commercial tort claims, certain mobile equipment, commodities accounts and other related assets of ours, the other borrowers and the guarantors, and proceeds and products of each of the foregoing (collectively, the “ABL Collateral”) and (ii) a second-priority security interest in substantially all of our assets and the assets of the other borrowers and the guarantors other than the ABL Collateral.
Borrowings under the ABL Facility bear interest, at our option, at a base rate or, if certain conditions are met, a LIBOR rate, in each case plus an applicable margin. We may amend this agreement to replace the LIBOR rate with one or more secured overnight financing based rates or an alternative benchmark rate, giving consideration to any evolving or then existing convention for similar dollar denominated syndicated credit facilities for such alternative benchmarks.
The ABL Facility contains customary representations and warranties and affirmative and negative covenants including, among others, covenants regarding the maintenance of certain financial ratios if certain conditions are triggered, covenants relating to financial reporting, covenants relating to the payment of dividends on, or purchase or redemption of, our capital stock, covenants relating to the incurrence or prepayment of certain debt, covenants relating to the incurrence of liens or encumbrances, covenants relating to compliance with laws, covenants relating to transactions with affiliates, covenants relating to mergers and sales of all or substantially all of our assets and limitations on changes in the nature of our business.
The ABL Facility provides for customary events of default, including, among other things, the event of nonpayment of principal, interest, fees or other amounts, a representation or warranty proving to have been materially incorrect when made, failure to perform or observe certain covenants within a specified period of time, a cross-default to certain material indebtedness, the bankruptcy or insolvency of the Company and certain of its subsidiaries, monetary judgment defaults of a specified amount, invalidity of any loan documentation, a change of control of the Company, and ERISA defaults resulting in liability of a specified amount. If an event of default exists (beyond any applicable grace or cure period), the administrative agent may, and at the direction of the requisite number of lenders shall, declare all amounts owing under the ABL Facility immediately due and payable, terminate such lenders’ commitments to make loans under the ABL Facility and/or exercise any and all remedies and other rights under the ABL Facility. For certain events of default related to insolvency and receivership, the commitments of the lenders will be automatically terminated and all outstanding loans and other amounts will become immediately due and payable.
On March 27, 2020, the ABL Facility was amended, by and among Cliffs, the lenders and the administrative agent. The amendment modified the ABL Facility to, among other things, provide for a new first-in, last-out tranche of
commitments in the aggregate amount of $150 million by exchanging existing commitments under the ABL Facility. The total commitments under the ABL Facility after giving effect to the amendment remain at $2.0 billion. The terms and conditions (other than the pricing) that apply to the first-in, last-out tranche are substantially the same as the terms and conditions that apply to the tranche A facility of the ABL Facility immediately prior to the amendment.
As of March 31, 2020, we were in compliance with the ABL Facility liquidity requirements and, therefore, the springing financial covenant requiring a minimum fixed charge coverage ratio of 1.0 to 1.0 was not applicable.
The following represents a summary of our borrowing capacity under the ABL Facility:
 
 
(In Millions)
 
 
March 31,
2020
Available borrowing base on ABL Facility1
 
$
1,789.3

Borrowings
 
(800.0
)
Letter of credit obligations2
 
(199.3
)
Borrowing capacity available
 
$
790.0


1 As of March 31, 2020, the ABL Facility has a maximum borrowing base of $2 billion. The available borrowing base is determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment.
2 We issued standby letters of credit with certain financial institutions in order to support business obligations including, but not limited to, workers' compensation, employee severance, IRBs and environmental obligations.
Debt Maturities
The following represents a summary of our maturities of debt instruments based on the principal amounts outstanding at March 31,