Quarterly Report (10-q)

Date : 10/23/2019 @ 2:43PM
Source : Edgar (US Regulatory)
Stock : Cleveland Cliffs Inc (CLF)
Quote : 6.35  -0.11 (-1.70%) @ 1:00AM
Cleveland Cliffs share price Chart
After Hours
Last Trade
Last $ 6.26 ▼ -0.09 (-1.42%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             .
Commission File Number: 1-8944
CLF-LOGOA01A01A11.JPG
CLEVELAND-CLIFFS INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Ohio
 
34-1464672
 
 
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
 
200 Public Square,
Cleveland,
Ohio
 
44114-2315
 
 
(Address of Principal Executive Offices)
 
(Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (216694-5700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common shares, par value $0.125 per share
 
CLF
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes                                           No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes                                           No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes                                          No  
The number of shares outstanding of the registrant’s common shares, par value $0.125 per share, was 270,082,088 as of October 21, 2019.




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
Page Number
 
 
 
 
 
 
DEFINITIONS
 
1
 
 
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2019 and December 31, 2018
 
2
 
 
 
Statements of Unaudited Condensed Consolidated Operations for the Three and Nine Months Ended September 30, 2019 and 2018
 
4
 
 
 
Statements of Unaudited Condensed Consolidated Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018
 
5
 
 
 
Statements of Unaudited Condensed Consolidated Cash Flows for the Nine Months Ended September 30, 2019 and 2018
 
6
 
 
 
Statements of Unaudited Condensed Consolidated Changes in Equity for the Three and Nine Months Ended September 30, 2019 and 2018
 
7
 
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
9
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
41
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
54
 
 
Item 4.
Controls and Procedures
 
54
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
56
 
 
Item 1A.
Risk Factors
 
56
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
57
 
 
Item 4.
Mine Safety Disclosures
 
57
 
 
Item 5.
Other Information
 
57
 
 
Item 6.
Exhibits
 
58
 
 
 
 
 
 
 
Signatures
 
59
 
 
 
 
 



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

1


PART I
Item 1.
Financial Statements
Statements of Unaudited Condensed Consolidated Financial Position
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions)
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
399.3

 
$
823.2

Accounts receivable, net
164.9

 
226.7

Finished goods inventories
162.2

 
77.8

Work-in-process inventories
55.2

 
10.1

Supplies and other inventories
110.8

 
93.2

Derivative assets
72.8

 
91.5

Income tax receivable, current
58.7

 
117.3

Other current assets
40.7

 
39.8

TOTAL CURRENT ASSETS
1,064.6

 
1,479.6

PROPERTY, PLANT AND EQUIPMENT, NET
1,769.9

 
1,286.0

OTHER ASSETS
 
 
 
Deposits for property, plant and equipment
41.6

 
83.0

Income tax receivable, non-current
62.7

 
121.3

Deferred income taxes
437.5

 
464.8

Other non-current assets
114.9

 
94.9

TOTAL OTHER ASSETS
656.7

 
764.0

TOTAL ASSETS
$
3,491.2

 
$
3,529.6

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

2


Statements of Unaudited Condensed Consolidated Financial Position
Cleveland-Cliffs Inc. and Subsidiaries - (Continued)
 
(In Millions)
 
September 30,
2019
 
December 31,
2018
LIABILITIES
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
212.8

 
$
186.8

Accrued employment costs
57.3

 
74.0

Accrued interest
34.1

 
38.4

Derivative liabilities
32.6

 
3.7

Partnership distribution payable

 
43.5

Other current liabilities
121.7

 
121.8

TOTAL CURRENT LIABILITIES
458.5

 
468.2

PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES
233.2

 
248.7

ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
179.1

 
172.0

LONG-TERM DEBT
2,109.1

 
2,092.9

OTHER LIABILITIES
151.4

 
123.6

TOTAL LIABILITIES
3,131.3

 
3,105.4

COMMITMENTS AND CONTINGENCIES (REFER TO NOTE 19)

 

EQUITY
 
 
 
SHAREHOLDERS' EQUITY
 
 
 
Preferred Stock - no par value
 
 
 
Class A - 3,000,000 shares authorized
 
 
 
Class B - 4,000,000 shares authorized
 
 
 
Common Shares - par value $0.125 per share
 
 
 
Authorized - 600,000,000 shares (2018 - 600,000,000 shares);
 
 
 
Issued - 301,886,794 shares (2018 - 301,886,794 shares);
 
 
 
Outstanding - 270,075,445 shares (2018 - 292,611,569 shares)
37.7

 
37.7

Capital in excess of par value of shares
3,867.7

 
3,916.7

Retained deficit
(2,889.0
)
 
(3,060.2
)
Cost of 31,811,349 common shares in treasury (2018 - 9,275,225 shares)
(390.9
)
 
(186.1
)
Accumulated other comprehensive loss
(265.6
)
 
(283.9
)
TOTAL EQUITY
359.9

 
424.2

TOTAL LIABILITIES AND EQUITY
$
3,491.2

 
$
3,529.6

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

3


Statements of Unaudited Condensed Consolidated Operations
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions, Except Per Share Amounts)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
 
 
 
 
Product
$
515.0

 
$
684.7

 
$
1,357.8

 
$
1,525.9

Freight
40.6

 
57.1

 
98.0

 
110.2


555.6

 
741.8

 
1,455.8

 
1,636.1

COST OF GOODS SOLD
(400.7
)
 
(480.2
)
 
(1,007.0
)
 
(1,028.5
)
SALES MARGIN
154.9

 
261.6

 
448.8

 
607.6

OTHER OPERATING EXPENSE
 
 
 
 
 
 
 
Selling, general and administrative expenses
(25.5
)
 
(29.1
)
 
(82.2
)
 
(78.9
)
Miscellaneous – net
(7.8
)
 
(7.0
)
 
(19.0
)
 
(18.7
)
 
(33.3
)
 
(36.1
)
 
(101.2
)
 
(97.6
)
OPERATING INCOME
121.6

 
225.5

 
347.6

 
510.0

OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest expense, net
(25.3
)
 
(29.5
)
 
(76.5
)
 
(93.1
)
Gain (loss) on extinguishment of debt

 

 
(18.2
)
 
0.2

Other non-operating income
0.3

 
4.3

 
1.3

 
13.1

 
(25.0
)
 
(25.2
)
 
(93.4
)
 
(79.8
)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
96.6

 
200.3

 
254.2

 
430.2

INCOME TAX EXPENSE
(4.8
)
 
(0.5
)
 
(23.1
)
 
(14.4
)
INCOME FROM CONTINUING OPERATIONS
91.8

 
199.8

 
231.1

 
415.8

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX
(0.9
)
 
238.0

 
(1.5
)
 
102.8

NET INCOME
$
90.9

 
$
437.8

 
$
229.6

 
$
518.6

 
 
 
 
 
 
 
 
EARNINGS (LOSS) PER COMMON SHARE – BASIC
 
 
 
 
 
 
 
Continuing operations
$
0.34

 
$
0.67

 
$
0.83

 
$
1.40

Discontinued operations

 
0.80

 
(0.01
)
 
0.35

 
$
0.34

 
$
1.47

 
$
0.82

 
$
1.75

EARNINGS (LOSS) PER COMMON SHARE – DILUTED
 
 
 
 
 
 
 
Continuing operations
$
0.33

 
$
0.64

 
$
0.80

 
$
1.37

Discontinued operations

 
0.77

 

 
0.34

 
$
0.33

 
$
1.41

 
$
0.80

 
$
1.71

AVERAGE NUMBER OF SHARES (IN THOUSANDS)
 
 
 
 
 
 
 
Basic
269,960

 
297,878

 
278,418

 
297,587

Diluted
276,578

 
310,203

 
287,755

 
303,518

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

4


Statements of Unaudited Condensed Consolidated Comprehensive Income
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
NET INCOME
$
90.9

 
$
437.8

 
$
229.6

 
$
518.6

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

 
6.8

 
17.3

 
20.2

Changes in foreign currency translation

 
(228.3
)
 

 
(225.4
)
Changes in derivative financial instruments, net of tax
0.4

 
0.3

 
1.0

 
0.8

OTHER COMPREHENSIVE INCOME (LOSS)
6.2

 
(221.2
)
 
18.3

 
(204.4
)
TOTAL COMPREHENSIVE INCOME
$
97.1

 
$
216.6

 
$
247.9

 
$
314.2

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

5


Statements of Unaudited Condensed Consolidated Cash Flows
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions)
 
Nine Months Ended
September 30,
 
2019
 
2018
OPERATING ACTIVITIES
 
 
 
Net income
$
229.6

 
$
518.6

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
63.1

 
68.6

Deferred income taxes
22.7

 

Loss (gain) on extinguishment of debt
18.2

 
(0.2
)
Change in derivatives
48.4

 
(136.4
)
Gain on foreign currency translation

 
(228.1
)
Other
49.4

 
5.7

Changes in operating assets and liabilities:
 
 
 
Receivables and other assets
156.5

 
96.2

Inventories
(129.4
)
 
(57.1
)
Payables, accrued expenses and other liabilities
(70.4
)
 
(78.6
)
Net cash provided by operating activities
388.1

 
188.7

INVESTING ACTIVITIES
 
 
 
Purchase of property, plant and equipment
(447.9
)
 
(111.4
)
Deposits for property, plant and equipment
(12.8
)
 
(83.3
)
Other investing activities
11.2

 
21.0

Net cash used by investing activities
(449.5
)
 
(173.7
)
FINANCING ACTIVITIES
 
 
 
Repurchase of common shares
(252.9
)
 

Dividends paid
(45.1
)
 

Proceeds from issuance of debt
720.9

 

Debt issuance costs
(6.8
)
 
(1.5
)
Repurchase of debt
(729.3
)
 
(16.3
)
Distributions of partnership equity
(44.2
)
 
(44.2
)
Other financing activities
(9.5
)
 
(45.7
)
Net cash used by financing activities
(366.9
)
 
(107.7
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH

 
(2.3
)
DECREASE IN CASH AND CASH EQUIVALENTS, INCLUDING CASH CLASSIFIED WITHIN OTHER CURRENT ASSETS RELATED TO DISCONTINUED OPERATIONS
(428.3
)
 
(95.0
)
LESS: DECREASE IN CASH AND CASH EQUIVALENTS FROM DISCONTINUED OPERATIONS, CLASSIFIED WITHIN OTHER CURRENT ASSETS
(4.4
)
 
(13.8
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(423.9
)
 
(81.2
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
823.2

 
978.3

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
399.3

 
$
897.1

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

6


Statements of Unaudited Condensed Consolidated Changes in Equity
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions)
 
Number
of
Common
Shares Outstanding
 
Par Value of Common
Shares Issued
 
Capital in
Excess of
Par Value
of Shares
 
Retained
Deficit
 
Common
Shares
in
Treasury
 
Accumulated
Other
Comprehensive
Loss
 
Total
December 31, 2018
292.6

 
$
37.7

 
$
3,916.7

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

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(22.1
)
 

 

 
(22.1
)
Other comprehensive income

 

 

 

 

 
8.4

 
8.4

Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(13.7
)
Stock and other incentive plans
1.7

 

 
(56.5
)
 

 
46.5

 

 
(10.0
)
Common share repurchases
(11.5
)
 

 

 

 
(124.3
)
 

 
(124.3
)
Common share dividends ($0.05 per share)

 

 

 
(14.5
)
 

 

 
(14.5
)
March 31, 2019
282.8

 
$
37.7

 
$
3,860.2

 
$
(3,096.8
)
 
$
(263.9
)
 
$
(275.5
)
 
$
261.7

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
160.8

 

 

 
160.8

Other comprehensive income

 

 

 

 

 
3.7

 
3.7

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
164.5

Stock and other incentive plans
0.1

 

 
3.4

 

 
1.2

 

 
4.6

Common share repurchases
(12.9
)
 

 

 

 
(128.6
)
 

 
(128.6
)
Common share dividends ($0.06 per share)

 

 

 
(16.6
)
 

 

 
(16.6
)
June 30, 2019
270.0

 
$
37.7

 
$
3,863.6

 
$
(2,952.6
)
 
$
(391.3
)
 
$
(271.8
)
 
$
285.6

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
90.9

 

 

 
90.9

Other comprehensive income

 

 

 

 

 
6.2

 
6.2

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
97.1

Stock and other incentive plans
0.1

 

 
4.1

 

 
0.4

 

 
4.5

Common share dividends ($0.10 per share)

 

 

 
(27.3
)
 

 

 
(27.3
)
September 30, 2019
270.1

 
$
37.7

 
$
3,867.7

 
$
(2,889.0
)
 
$
(390.9
)
 
$
(265.6
)
 
$
359.9


7


 
(In Millions)
 
Number
of
Common
Shares Outstanding
 
Par Value of Common
Shares Issued
 
Capital in
Excess of
Par Value
of Shares
 
Retained
Deficit
 
Common
Shares
in
Treasury
 
Accumulated
Other
Comprehensive
Loss
 
Non-Controlling Interest
 
Total
December 31, 2017
297.4

 
$
37.7

 
$
3,933.9

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

 
$
(444.1
)
Adoption of accounting standard

 

 

 
34.0

 

 

 

 
34.0

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(84.3
)
 

 

 

 
(84.3
)
Other comprehensive income

 

 

 

 

 
7.7

 

 
7.7

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

 

 
(15.8
)
 

 
17.7

 

 

 
1.9

March 31, 2018
297.7

 
$
37.7

 
$
3,918.1

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

 
$
(484.8
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
165.1

 

 

 

 
165.1

Other comprehensive income

 

 

 

 

 
9.1

 

 
9.1

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
174.2

Distributions to noncontrolling interest

 

 

 
 
 

 

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

 

 
0.2

 

 
4.3

 

 

 
4.5

June 30, 2018
297.8

 
$
37.7

 
$
3,918.3

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

 
$
(306.3
)
Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
437.8

 

 

 

 
437.8

Other comprehensive loss

 

 

 

 

 
(221.2
)
 
 
 
(221.2
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
216.6

Stock and other incentive plans
0.2

 

 
(5.0
)
 

 
8.5

 

 

 
3.5

September 30, 2018
298.0

 
$
37.7

 
$
3,913.3

 
$
(3,654.7
)
 
$
(139.1
)
 
$
(243.4
)
 
$

 
$
(86.2
)

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

8


Cleveland-Cliffs Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations, comprehensive income, cash flows and changes in equity for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019 or any other future period. 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, 2018.
We have two reportable segments - the Mining and Pelletizing segment and the Metallics segment. Unless otherwise noted, discussion of our business and results of operations in this Quarterly Report on Form 10-Q refers to our continuing operations.
As more fully described in the Form 10-K for the year ended December 31, 2018, in 2018 we committed to a course of action leading to the permanent closure of the Asia Pacific Iron Ore mining operations. As a result of our exit, management determined that our Asia Pacific Iron Ore operating segment met the criteria to be classified as held for sale and a discontinued operation under ASC Topic 205, Presentation of Financial Statements. As such, all Asia Pacific Iron Ore operating segment results are classified within discontinued operations. Refer to NOTE 13 - DISCONTINUED OPERATIONS for further information.
Basis of Consolidation
The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, including the following operations as of September 30, 2019:
Name
 
Location
 
Business Segment
 
Status of Operations
Northshore
 
Minnesota
 
Mining and Pelletizing
 
Active
United Taconite
 
Minnesota
 
Mining and Pelletizing
 
Active
Tilden
 
Michigan
 
Mining and Pelletizing
 
Active
Empire
 
Michigan
 
Mining and Pelletizing
 
Indefinitely Idled
Toledo HBI
 
Ohio
 
Metallics
 
Construction Stage

Intercompany transactions and balances are eliminated upon consolidation.
Equity Method Investments
Our 23% ownership interest in Hibbing is recorded as an equity method investment. As of September 30, 2019 and December 31, 2018, our investment in Hibbing was $14.0 million and $15.4 million, respectively, classified as Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position.
Foreign Currency
Our financial statements are prepared with the U.S. dollar as the reporting currency and the functional currency of all subsidiaries is the U.S. dollar. 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, requiring all remaining Australian denominated monetary balances to be remeasured through the Statements of Unaudited Condensed Consolidated Operations.

9


As a result of the liquidation of the Australian subsidiaries' assets, the historical impact of foreign currency translation recorded in Accumulated other comprehensive loss in the Statements of Unaudited Condensed Consolidated Financial Position of $228.1 million was reclassified and recognized as a gain in Income (loss) from discontinued operations, net of tax in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2018. Refer to NOTE 13 - DISCONTINUED OPERATIONS for further information regarding our Australian subsidiaries.
Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the audited financial statements for the fiscal year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the SEC. There have been no material changes in our significant accounting policies and estimates from those disclosed therein.
NOTE 2 - NEW ACCOUNTING STANDARDS
Issued and Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases except for short-term leases. For lessees, leases are classified as either operating or finance leases. We adopted this standard on its effective date of January 1, 2019 using the optional alternative approach, which requires application of the new guidance at the beginning of the standard's effective date. Adoption of the updated standard did not have a material effect on our consolidated financial statements.
Issued and Not Effective
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326), which introduces a new accounting model, Current Expected Credit Losses ("CECL"). CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. CECL utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. We plan to adopt this standard on its effective date of January 1, 2020, and do not expect the standard to have a material effect on our consolidated financial statements.
NOTE 3 - SEGMENT REPORTING
In alignment with our strategic goals, our Company’s continuing operations are organized and managed in two operating segments according to our differentiated products. Our Mining and Pelletizing segment is a major supplier of iron ore pellets to the North American steel industry from our mines and pellet plants located in Michigan and Minnesota. Our Metallics segment includes our HBI production plant in Toledo, Ohio, which is currently under construction and expected to be completed during the first half of 2020. During the second quarter of 2019, Northshore mine began supplying DR-grade pellets to our Metallics segment, which will be used as feedstock for the HBI production plant when we begin production in 2020. All intersegment sales were eliminated in consolidation.
We evaluate performance based on sales margin, defined as revenues less cost of goods sold identifiable to each segment. Additionally, we evaluate performance on a segment basis, as well as a consolidated basis, based on EBITDA and Adjusted EBITDA. These measures are used by management, investors, lenders and other external users of our financial statements to assess our operating performance and to compare operating performance to other companies in the iron ore industry. In addition, management believes EBITDA and Adjusted EBITDA are useful measures to assess the earnings power of the business without the impact of capital structure and can be used to assess our ability to service debt and fund future capital expenditures in the business.

10


The following tables present a summary of our reportable segments including a reconciliation of segment revenues to total Revenues from product sales and services, segment sales margin to total Sales margin and a reconciliation of Net income to EBITDA and Adjusted EBITDA:    
 
(In Millions)
 
Three Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2019
 
Mining and Pelletizing
 
Metallics
 
Total
 
Mining and Pelletizing
 
Metallics
 
Total
Operating segment revenues from product sales and services
$
590.6

 
$

 
$
590.6

 
$
1,494.8

 
$

 
$
1,494.8

Elimination of intersegment revenues
(35.0
)
 

 
(35.0
)
 
(39.0
)
 

 
(39.0
)
Total revenues from product sales and services
$
555.6

 
$

 
$
555.6

 
$
1,455.8

 
$

 
$
1,455.8

 
 
 
 
 
 
 
 
 
 
 
 
Operating segment sales margin
$
165.8

 
$

 
$
165.8

 
$
461.3

 
$

 
$
461.3

Elimination of intersegment sales margin
(10.9
)
 

 
(10.9
)
 
(12.5
)
 

 
(12.5
)
Total sales margin
$
154.9

 
$

 
$
154.9

 
$
448.8

 
$

 
$
448.8

Revenues from product sales and services of $741.8 million and $1,636.1 million, respectively, and sales margin of $261.6 million and $607.6 million, respectively, related to our Mining and Pelletizing segment accounted for all of our consolidated revenues and sales margin for the three and nine months ended September 30, 2018.


11


 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
90.9

 
$
437.8

 
$
229.6

 
$
518.6

Less:
 
 
 
 
 
 
 
Interest expense, net
(25.4
)
 
(29.7
)
 
(76.8
)
 
(95.5
)
Income tax expense
(4.8
)
 
(0.5
)
 
(23.1
)
 
(14.4
)
Depreciation, depletion and amortization
(22.2
)
 
(19.2
)
 
(63.1
)
 
(68.6
)
EBITDA
$
143.3

 
$
487.2

 
$
392.6

 
$
697.1

Less:
 
 
 
 
 
 
 
Impact of discontinued operations
$
(0.8
)
 
$
238.2

 
$
(1.2
)
 
$
120.4

Gain (loss) on extinguishment of debt

 

 
(18.2
)
 
0.2

Severance costs

 

 
(1.7
)
 

Foreign exchange remeasurement

 
(0.2
)
 

 
(0.7
)
Impairment of long-lived assets

 
(1.1
)
 

 
(1.1
)
Adjusted EBITDA
$
144.1

 
$
250.3

 
$
413.7

 
$
578.3

 
 
 
 
 
 
 
 
EBITDA:
 
 
 
 
 
 
 
Mining and Pelletizing
$
177.5

 
$
273.1

 
$
494.9

 
$
641.6

Metallics
(2.1
)
 
(1.0
)
 
(4.0
)
 
(2.5
)
Corporate and Other (including discontinued operations)
(32.1
)
 
215.1

 
(98.3
)
 
58.0

Total EBITDA
$
143.3

 
$
487.2

 
$
392.6

 
$
697.1

 
 
 
 
 
 
 
 
Adjusted EBITDA:
 
 
 
 
 
 
 
Mining and Pelletizing
$
182.7

 
$
279.5

 
$
510.7

 
$
657.9

Metallics
(2.1
)
 
(1.0
)
 
(4.0
)
 
(2.5
)
Corporate
(36.5
)
 
(28.2
)
 
(93.0
)
 
(77.1
)
Total Adjusted EBITDA
$
144.1

 
$
250.3

 
$
413.7

 
$
578.3

The following table summarizes our depreciation, depletion and amortization and capital additions:
 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Depreciation, depletion and amortization:
 
 
 
 
 
 
 
Mining and Pelletizing
$
20.8

 
$
17.8

 
$
58.9

 
$
49.2

Corporate
1.4

 
1.4

 
4.2

 
4.2

Total depreciation, depletion and amortization
$
22.2

 
$
19.2

 
$
63.1

 
$
53.4

 
 
 
 
 
 
 
 
Capital additions1:
 
 
 
 
 
 
 
Mining and Pelletizing
$
22.1

 
$
51.8

 
$
104.5

 
$
97.2

Metallics
160.5

 
40.6

 
398.0

 
143.6

Corporate
2.1

 
0.2

 
3.1

 
1.1

Total capital additions
$
184.7

 
$
92.6

 
$
505.6

 
$
241.9

 
 
 
 
 
 
 
 
1 Refer to NOTE 16 - CASH FLOW INFORMATION for additional information.


12


A summary of assets by segment is as follows:
 
(In Millions)
 
September 30,
2019
 
December 31,
2018
Assets:
 
 
 
Mining and Pelletizing
$
1,793.9

 
$
1,694.1

Metallics
708.5

 
265.9

Total segment assets
2,502.4

 
1,960.0

Corporate and Other (including discontinued operations)
988.8

 
1,569.6

Total assets
$
3,491.2

 
$
3,529.6


NOTE 4 - REVENUE
We sell primarily a single product, iron ore pellets, in the North American market. Revenue is recognized generally when iron ore is delivered to our customers. Revenue is measured at the point that control transfers and represents the amount of consideration we expect to receive in exchange for transferring goods. We offer standard payment terms to our customers, generally requiring settlement within 30 days.
We enter into supply contracts of varying lengths to provide customers iron ore pellets to use in their blast furnaces. Blast furnaces run continuously with a constant feed of iron ore and, once shut down, cannot easily be restarted. As a result, we ship iron ore in large quantities for storage and use by customers at a later date. Customers do not simultaneously receive and consume the iron ore. Based on our assessment of the factors that indicate the pattern of satisfaction, we transfer control of the iron ore at a point in time upon shipment or delivery of the product. The customer is able to direct the use of, and obtain substantially all of the benefits from, the product at the time the product is delivered.
Most of our customer supply agreements specify a provisional price, which is used for initial billing and cash collection. Revenue recorded in accordance with Topic 606 is calculated using the expected revenue rate at the point when control transfers. The final settlement includes market inputs for a specified period of time, which may vary by customer, but typically include one or more of the following published rates: Platts 62% Price, Atlantic Basin pellet premiums, Platts international indexed freight rates and changes in specified PPI, including industrial commodities, fuel and steel. Changes in the expected revenue rate from the date control transfers through final settlement of contract terms is recorded in accordance with Topic 815. Refer to NOTE 12 - DERIVATIVE INSTRUMENTS for further information on how our estimated and final revenue rates are determined.
A supply agreement with one customer provides for supplemental revenue or refunds based on the 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 or refunds are recorded in accordance with ASC Topic 815. Refer to NOTE 12 - DERIVATIVE INSTRUMENTS for further information on supplemental revenue or refunds.
Included within Revenues from product sales and services related to Topic 815 is a derivative loss of $40.9 million and a derivative gain of $43.4 million for the three and nine months ended September 30, 2019, respectively, and derivative gains of $135.9 million and $334.4 million for the three and nine months ended September 30, 2018, respectively.
Deferred Revenue
The table below summarizes our deferred revenue balances:
 
(In Millions)
 
Deferred Revenue (Current)
 
Deferred Revenue (Long-Term)
 
2019
 
2018
 
2019
 
2018
Opening balance as of January 1
$
21.0

 
$
23.8

 
$
38.5

 
$
51.4

Closing balance as of September 30
18.3

 
16.1

 
30.0

 
42.8

Decrease
$
(2.7
)
 
$
(7.7
)
 
$
(8.5
)
 
$
(8.6
)


13


The terms of one of our pellet supply agreements required supplemental payments to be paid by the customer during the period 2009 through 2012. Installment amounts received under this arrangement in excess of sales were classified as Other current liabilities and Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position upon receipt of payment. Revenue is recognized over the life of the supply agreement, which extends until 2022, in equal annual installments. As of September 30, 2019 and December 31, 2018, installment amounts received in excess of sales totaled $42.8 million and $51.3 million, respectively, related to this agreement. As of September 30, 2019 and December 31, 2018, deferred revenue of $12.8 million was recorded in Other current liabilities and $30.0 million and $38.5 million, respectively, was recorded as long-term in Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position, related to this agreement.
Due to the payment terms and the timing of cash receipts near a period end, cash receipts can exceed shipments for certain customers. Revenue recognized on these transactions totaling $5.5 million and $8.2 million was deferred and included in Other current liabilities in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2019 and December 31, 2018, respectively.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the carrying value of each of the major classes of our depreciable assets:
 
(In Millions)
 
September 30,
2019
 
December 31,
2018
Land rights and mineral rights
$
549.7

 
$
549.6

Office and information technology
72.9

 
70.0

Buildings
101.2

 
87.2

Mining equipment
577.0

 
548.5

Processing equipment
755.5

 
645.8

Electric power facilities
58.7

 
58.7

Land improvements
23.8

 
23.8

Asset retirement obligation
14.8

 
14.8

Other
29.2

 
25.2

Construction-in-progress
668.9

 
284.8

 
2,851.7

 
2,308.4

Allowance for depreciation and depletion
(1,081.8
)
 
(1,022.4
)
 
$
1,769.9

 
$
1,286.0


We recorded capitalized interest into property, plant and equipment of $7.0 million and $16.9 million for the three and nine months ended September 30, 2019, respectively, and $1.8 million and $3.9 million for the three and nine months ended September 30, 2018, respectively.

14


NOTE 6 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt:
(In Millions)
September 30, 2019
Debt Instrument
 
Annual Effective
Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Unamortized Discounts
 
Total Debt
Secured Notes:
 
 
 
 
 
 
 
 
 
 
$400 Million 4.875% 2024 Senior Notes
 
5.00%
 
$
400.0

 
$
(4.9
)
 
$
(1.9
)
 
$
393.2

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

 
(4.8
)
 
(67.7
)
 
243.8

$1.075 Billion 5.75% 2025 Senior Notes
 
6.01%
 
473.3

 
(3.8
)
 
(5.8
)
 
463.7

$750 Million 5.875% 2027 Senior Notes
 
6.49%
 
750.0

 
(6.5
)
 
(28.0
)
 
715.5

$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
298.4

 
(2.2
)
 
(3.3
)
 
292.9

ABL Facility
 
N/A
 
450.0

 
N/A

 
N/A

 

Long-term debt
 
 
 
 
 
 
 
 
 
$
2,109.1

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

 
$
(5.7
)
 
$
(2.2
)
 
$
392.1

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

 
(0.2
)
 

 
123.8

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

 
(5.5
)
 
(75.6
)
 
235.2

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

 
(9.9
)
 
(14.6
)
 
1,048.8

$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
298.4

 
(2.3
)
 
(3.3
)
 
292.8

ABL Facility
 
N/A
 
450.0

 
N/A

 
N/A

 

Fair Value Adjustment to Interest Rate Hedge
 
 
 
 
 
 
 
 
 
0.2

Long-term debt
 
 
 
 
 
 
 
 
 
$
2,092.9


$750 Million 5.875% Senior Notes due 2027 Offering
On May 13, 2019, we entered into an indenture among the Company, the guarantors party thereto and U.S. Bank National Association, as trustee, relating to the issuance of $750 million aggregate principal amount of 5.875% 2027 Senior Notes. The 5.875% 2027 Senior Notes were issued at 96.125% of face value. The 5.875% 2027 Senior Notes were issued in a private transaction exempt from the registration requirements of the Securities Act of 1933. Pursuant to the registration rights agreement executed as part of this offering, we agreed to file a registration statement with the SEC with respect to a registered offer to exchange the 5.875% 2027 Senior Notes for publicly registered notes within 365 days of the closing date, with all significant terms and conditions remaining the same.
The 5.875% 2027 Senior Notes bear interest at a rate of 5.875% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2019. The 5.875% 2027 Senior Notes mature on June 1, 2027.

15


The 5.875% 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 5.875% 2027 Senior Notes are guaranteed on a senior unsecured basis by our material direct and indirect wholly-owned domestic subsidiaries and, therefore, are structurally senior to any of our existing and future indebtedness that is not guaranteed by such guarantors and are structurally subordinated to all existing and future indebtedness and other liabilities of our subsidiaries that do not guarantee the 5.875% 2027 Senior Notes.
The 5.875% 2027 Senior Notes may be redeemed, in whole or in part, at any time at our option not less than 30 days nor more than 60 days after prior notice is sent to the holders of the 5.875% 2027 Senior Notes. The following is a summary of redemption prices for our 5.875% 2027 Senior Notes:
Redemption Period
 
Redemption Price1
 
Restricted Amount
Prior to June 1, 2022 - using proceeds of equity issuance
 
105.875
%
 
Up to 35% of original aggregate principal
Prior to June 1, 20222
 
100.000
 
 
 
Beginning on June 1, 2022
 
102.938
 
 
 
Beginning on June 1, 2023
 
101.958
 
 
 
Beginning on June 1, 2024
 
100.979
 
 
 
Beginning on June 1, 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 5.875% 2027 Senior Notes, we will be required to offer to purchase the notes at a purchase price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest, if any, to, but not including, the date of purchase.
The terms of the 5.875% 2027 Senior Notes contain certain customary covenants; however, there are no financial covenants.
Debt issuance costs of $6.8 million were incurred related to the offering of the 5.875% 2027 Senior Notes and are included in Long-term debt in the Statements of Unaudited Condensed Consolidated Financial Position.
Debt Extinguishments - 2019
The net proceeds from the issuance of $750 million aggregate principal amount of 5.875% 2027 Senior Notes, along with cash on hand, were used to redeem in full all of our outstanding 4.875% 2021 Senior Notes and to fund the repurchase of $600 million aggregate principal amount of our outstanding 5.75% 2025 Senior Notes in a tender offer. The following is a summary of the debt extinguished and the respective loss on extinguishment:
 
 
(In Millions)
 
 
Nine Months Ended
September 30, 2019
Debt Instrument
 
Debt Extinguished
 
(Loss) on Extinguishment
$700 Million 4.875% 2021 Senior Notes
 
$
124.0

 
$
(5.3
)
$1.075 Billion 5.75% 2025 Senior Notes
 
600.0

 
(12.9
)
 
 
$
724.0

 
$
(18.2
)


16


Debt Extinguishments - 2018
The following is a summary of the debt extinguished with cash and the respective gain on extinguishment:
 
 
(In Millions)
 
 
Three Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2018
Debt Instrument
 
Debt Extinguished
 
Gain on Extinguishment
 
Debt Extinguished
 
Gain on Extinguishment
$400 Million 5.90% 2020 Senior Notes
 
$

 
$