Attached files
file | filename |
---|---|
EX-95 - EXHIBIT 95 - CLEVELAND-CLIFFS INC. | clf-201893010xqex95.htm |
EX-32.2 - EXHIBIT 32.2 - CLEVELAND-CLIFFS INC. | clf-201893010xqex322.htm |
EX-32.1 - EXHIBIT 32.1 - CLEVELAND-CLIFFS INC. | clf-201893010xqex321.htm |
EX-31.2 - EXHIBIT 31.2 - CLEVELAND-CLIFFS INC. | clf-201893010xqex312.htm |
EX-31.1 - EXHIBIT 31.1 - CLEVELAND-CLIFFS INC. | clf-201893010xqex311.htm |
EX-10.1 - EXHIBIT 10.1 - CLEVELAND-CLIFFS INC. | clf-201893010xqex101.htm |
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, 2018
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 1-8944

CLEVELAND-CLIFFS INC.
(Exact Name of Registrant as Specified in Its Charter)
Ohio | 34-1464672 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
200 Public Square, Cleveland, Ohio | 44114-2315 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (216) 694-5700
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 $0.125 per share, was 298,018,441 as of October 17, 2018.
TABLE OF CONTENTS | |||||
Page Number | |||||
DEFINITIONS | |||||
PART I - FINANCIAL INFORMATION | |||||
Item 1. | Financial Statements | ||||
Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2018 and December 31, 2017 | |||||
Statements of Unaudited Condensed Consolidated Operations for the Three and Nine Months Ended September 30, 2018 and 2017 | |||||
Statements of Unaudited Condensed Consolidated Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017 | |||||
Statements of Unaudited Condensed Consolidated Cash Flows for the Nine Months Ended September 30, 2018 and 2017 | |||||
Notes to Unaudited Condensed Consolidated Financial Statements | |||||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | ||||
Item 4. | Controls and Procedures | ||||
PART II - OTHER INFORMATION | |||||
Item 1. | Legal Proceedings | ||||
Item 1A. | Risk Factors | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||||
Item 4. | Mine Safety Disclosures | ||||
Item 5. | Other Information | ||||
Item 6. | Exhibits | ||||
Signatures | |||||
DEFINITIONS
The following abbreviations or acronyms are used in the text. References in this report to the “Company,” “we,” “us,” “our” and “Cliffs” are to Cleveland-Cliffs Inc. and subsidiaries, collectively. References to “C$” refer to Canadian currency and “$” to United States currency.
Abbreviation or acronym | Term | |
A&R 2015 Equity Plan | Amended and Restated Cliffs Natural Resources Inc. 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 impacts of discontinued operations, foreign currency exchange remeasurement, extinguishment of debt, impairment of long-lived assets 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) | |
ALJ | Administrative Law Judge | |
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 | |
Canadian Entities | Bloom Lake Group, Wabush Group and certain other wholly-owned Canadian subsidiaries | |
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 | |
FERC | Federal Energy Regulatory Commission | |
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 | |
Koolyanobbing | Collective term for the operating deposits at Koolyanobbing, Mount Jackson and Windarling | |
Long ton | 2,240 pounds | |
LTVSMC | LTV Steel Mining Company | |
Metric ton | 2,205 pounds | |
MISO | Midcontinent Independent System Operator, Inc. | |
MMBtu | Million British Thermal Units | |
MSHA | U.S. Mine Safety and Health Administration | |
Monitor | FTI Consulting Canada Inc. | |
Net ton | 2,000 pounds | |
Northshore | Northshore Mining Company | |
OPEB | Other postretirement employment benefits | |
Platts 62% Price | Platts IODEX 62% Fe Fines Spot Price | |
SEC | U.S. Securities and Exchange Commission | |
SG&A | Selling, general and administrative | |
Securities Act | Securities Act of 1933, as amended | |
Senior Notes Due 2020 | 5.90% senior notes due March 2020 and 4.80% senior notes due October 2020 | |
SSR | System support resource | |
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 | |
USW | United Steelworkers | |
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, 2018 | December 31, 2017 | ||||||
ASSETS | |||||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 897.1 | $ | 978.3 | |||
Accounts receivable, net | 141.4 | 106.7 | |||||
Inventories | 187.9 | 138.4 | |||||
Supplies and other inventories | 88.2 | 88.8 | |||||
Derivative assets | 190.8 | 37.9 | |||||
Income tax receivable | 110.3 | 13.3 | |||||
Current assets of discontinued operations | 16.1 | 118.5 | |||||
Loans to and accounts receivable from the Canadian Entities | — | 51.6 | |||||
Other current assets | 18.8 | 11.1 | |||||
TOTAL CURRENT ASSETS | 1,650.6 | 1,544.6 | |||||
PROPERTY, PLANT AND EQUIPMENT, NET | 1,144.8 | 1,033.8 | |||||
OTHER ASSETS | |||||||
Deposits for property, plant and equipment | 94.6 | 17.8 | |||||
Income tax receivable | 113.6 | 235.3 | |||||
Non-current assets of discontinued operations | — | 20.3 | |||||
Other non-current assets | 121.4 | 101.6 | |||||
TOTAL OTHER ASSETS | 329.6 | 375.0 | |||||
TOTAL ASSETS | $ | 3,125.0 | $ | 2,953.4 |
(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, 2018 | December 31, 2017 | ||||||
LIABILITIES | |||||||
CURRENT LIABILITIES | |||||||
Accounts payable | $ | 140.8 | $ | 99.5 | |||
Accrued expenses | 95.1 | 79.1 | |||||
Accrued interest | 26.2 | 31.4 | |||||
Contingent claims | — | 55.6 | |||||
Partnership distribution payable | 43.1 | 44.2 | |||||
Current liabilities of discontinued operations | 14.2 | 75.0 | |||||
Other current liabilities | 61.3 | 67.4 | |||||
TOTAL CURRENT LIABILITIES | 380.7 | 452.2 | |||||
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES | 225.0 | 257.7 | |||||
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS | 174.4 | 167.7 | |||||
LONG-TERM DEBT | 2,300.0 | 2,304.2 | |||||
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS | 9.3 | 52.2 | |||||
OTHER LIABILITIES | 121.8 | 163.5 | |||||
TOTAL LIABILITIES | 3,211.2 | 3,397.5 | |||||
COMMITMENTS AND CONTINGENCIES (REFER TO NOTE 20) | |||||||
EQUITY | |||||||
CLIFFS SHAREHOLDERS' DEFICIT | |||||||
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 (2017 - 600,000,000 shares); | |||||||
Issued - 301,886,794 shares (2017 - 301,886,794 shares); | |||||||
Outstanding - 298,007,453 shares (2017 - 297,400,968 shares) | 37.7 | 37.7 | |||||
Capital in excess of par value of shares | 3,913.3 | 3,933.9 | |||||
Retained deficit | (3,654.7 | ) | (4,207.3 | ) | |||
Cost of 3,879,341 common shares in treasury (2017 - 4,485,826 shares) | (139.1 | ) | (169.6 | ) | |||
Accumulated other comprehensive loss | (243.4 | ) | (39.0 | ) | |||
TOTAL CLIFFS SHAREHOLDERS' DEFICIT | (86.2 | ) | (444.3 | ) | |||
NONCONTROLLING INTEREST | — | 0.2 | |||||
TOTAL DEFICIT | (86.2 | ) | (444.1 | ) | |||
TOTAL LIABILITIES AND DEFICIT | $ | 3,125.0 | $ | 2,953.4 |
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, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
REVENUES FROM PRODUCT SALES AND SERVICES | |||||||||||||||
Product | $ | 684.7 | $ | 530.7 | $ | 1,525.9 | $ | 1,195.0 | |||||||
Freight and venture partners' cost reimbursements | 57.1 | 66.0 | 110.2 | 159.2 | |||||||||||
741.8 | 596.7 | 1,636.1 | 1,354.2 | ||||||||||||
COST OF GOODS SOLD AND OPERATING EXPENSES | (480.2 | ) | (438.9 | ) | (1,028.5 | ) | (1,002.7 | ) | |||||||
SALES MARGIN | 261.6 | 157.8 | 607.6 | 351.5 | |||||||||||
OTHER OPERATING INCOME (EXPENSE) | |||||||||||||||
Selling, general and administrative expenses | (30.1 | ) | (23.8 | ) | (81.4 | ) | (75.5 | ) | |||||||
Miscellaneous – net | (6.0 | ) | (5.3 | ) | (16.2 | ) | 1.3 | ||||||||
(36.1 | ) | (29.1 | ) | (97.6 | ) | (74.2 | ) | ||||||||
OPERATING INCOME | 225.5 | 128.7 | 510.0 | 277.3 | |||||||||||
OTHER INCOME (EXPENSE) | |||||||||||||||
Interest expense, net | (29.5 | ) | (27.6 | ) | (93.1 | ) | (99.1 | ) | |||||||
Gain (loss) on extinguishment of debt | — | (88.6 | ) | 0.2 | (165.4 | ) | |||||||||
Other non-operating income | 4.3 | 2.6 | 13.1 | 7.6 | |||||||||||
(25.2 | ) | (113.6 | ) | (79.8 | ) | (256.9 | ) | ||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 200.3 | 15.1 | 430.2 | 20.4 | |||||||||||
INCOME TAX BENEFIT (EXPENSE) | (0.5 | ) | 7.2 | (14.4 | ) | 7.2 | |||||||||
INCOME FROM CONTINUING OPERATIONS | 199.8 | 22.3 | 415.8 | 27.6 | |||||||||||
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX | 238.0 | 30.6 | 102.8 | 25.6 | |||||||||||
NET INCOME | 437.8 | 52.9 | 518.6 | 53.2 | |||||||||||
LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST | — | 0.5 | — | 3.9 | |||||||||||
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | 437.8 | $ | 53.4 | $ | 518.6 | $ | 57.1 | |||||||
INCOME PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS – BASIC | |||||||||||||||
Continuing operations | $ | 0.67 | $ | 0.08 | $ | 1.40 | $ | 0.11 | |||||||
Discontinued operations | 0.80 | 0.10 | 0.35 | 0.09 | |||||||||||
$ | 1.47 | $ | 0.18 | $ | 1.75 | $ | 0.20 | ||||||||
INCOME PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS – DILUTED | |||||||||||||||
Continuing operations | $ | 0.64 | $ | 0.08 | $ | 1.37 | $ | 0.11 | |||||||
Discontinued operations | 0.77 | 0.10 | 0.34 | 0.08 | |||||||||||
$ | 1.41 | $ | 0.18 | $ | 1.71 | $ | 0.19 | ||||||||
AVERAGE NUMBER OF SHARES (IN THOUSANDS) | |||||||||||||||
Basic | 297,878 | 296,079 | 297,587 | 285,771 | |||||||||||
Diluted | 310,203 | 301,075 | 303,518 | 290,512 |
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, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | 437.8 | $ | 53.4 | $ | 518.6 | $ | 57.1 | |||||||
OTHER COMPREHENSIVE INCOME (LOSS) | |||||||||||||||
Changes in pension and other post-retirement benefits, net of tax | 6.8 | 7.5 | 20.2 | 18.9 | |||||||||||
Changes in foreign currency translation | (228.3 | ) | 0.5 | (225.4 | ) | (13.6 | ) | ||||||||
Changes in derivative financial instruments, net of tax | 0.3 | — | 0.8 | — | |||||||||||
OTHER COMPREHENSIVE INCOME (LOSS) | (221.2 | ) | 8.0 | (204.4 | ) | 5.3 | |||||||||
OTHER COMPREHENSIVE INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST | — | (5.7 | ) | — | (1.1 | ) | |||||||||
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | 216.6 | $ | 55.7 | $ | 314.2 | $ | 61.3 |
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, | |||||||
2018 | 2017 | ||||||
OPERATING ACTIVITIES | |||||||
Net income | $ | 518.6 | $ | 53.2 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation, depletion and amortization | 68.6 | 66.3 | |||||
Loss (gain) on extinguishment of debt | (0.2 | ) | 165.4 | ||||
Loss on deconsolidation | — | 16.3 | |||||
Gain on derivatives | (136.4 | ) | (47.5 | ) | |||
Gain on foreign currency translation | (228.1 | ) | — | ||||
Other | 5.7 | 19.0 | |||||
Changes in operating assets and liabilities: | |||||||
Receivables and other assets | 96.2 | 68.9 | |||||
Inventories | (57.1 | ) | (26.1 | ) | |||
Payables, accrued expenses and other liabilities | (78.6 | ) | (108.8 | ) | |||
Net cash provided by operating activities | 188.7 | 206.7 | |||||
INVESTING ACTIVITIES | |||||||
Purchase of property, plant and equipment | (111.4 | ) | (62.7 | ) | |||
Deposits for property, plant and equipment | (83.3 | ) | (16.2 | ) | |||
Proceeds on sales of assets | 18.5 | 2.2 | |||||
Other investing activities | 2.5 | (7.7 | ) | ||||
Net cash used by investing activities | (173.7 | ) | (84.4 | ) | |||
FINANCING ACTIVITIES | |||||||
Net proceeds from issuance of common shares | — | 661.3 | |||||
Proceeds from issuance of debt | — | 1,057.8 | |||||
Debt issuance costs | (1.5 | ) | (12.0 | ) | |||
Repurchase of debt | (16.3 | ) | (1,720.7 | ) | |||
Acquisition of noncontrolling interest | — | (105.0 | ) | ||||
Distributions of partnership equity | (44.2 | ) | (53.0 | ) | |||
Other financing activities | (45.7 | ) | (17.0 | ) | |||
Net cash used by financing activities | (107.7 | ) | (188.6 | ) | |||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | (2.3 | ) | 3.7 | ||||
DECREASE IN CASH AND CASH EQUIVALENTS, INCLUDING CASH CLASSIFIED WITHIN CURRENT ASSETS OF DISCONTINUED OPERATIONS | (95.0 | ) | (62.6 | ) | |||
LESS: INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CLASSIFIED WITHIN CURRENT ASSETS OF DISCONTINUED OPERATIONS | (13.8 | ) | 23.1 | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (81.2 | ) | (85.7 | ) | |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 978.3 | 312.8 | |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 897.1 | $ | 227.1 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
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 and cash flows 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, 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2018 or any other future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2017.
As more fully described in NOTE 16 - DISCONTINUED OPERATIONS, on January 25, 2018, we announced that we would accelerate the time frame for the planned closure of our Asia Pacific Iron Ore mining operations in Australia. On April 6, 2018, we committed to a course of action leading to the permanent closure of the Asia Pacific Iron Ore mining operations and, as planned, completed our final shipment in June 2018. Factors considered in this decision included increasingly discounted prices for lower-iron-content ore and the quality of the remaining iron ore reserves.
During June 2018, we completed a sale of the mobile equipment to a third party and entered into a definitive agreement to sell substantially all of the remaining assets of our Asia Pacific Iron Ore business to Mineral Resources Limited. The sale to Mineral Resources Limited was completed during August 2018. As of the period ended June 30, 2018, 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 205, Presentation of Financial Statements. As such, all current and historical Asia Pacific Iron Ore operating segment results are included in our financial statements and classified within discontinued operations.
We now operate in one reportable segment – U.S. Iron Ore. Unless otherwise noted, discussion of our business and results of operations in this Quarterly Report on Form 10-Q refers to our continuing operations.
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, 2018:
Name | Location | Status of Operations | ||
Northshore | Minnesota | Active | ||
United Taconite | Minnesota | Active | ||
Tilden | Michigan | Active | ||
Empire | Michigan | Indefinitely Idled | ||
Koolyanobbing1 | Western Australia | Substantially All Assets Sold | ||
1 During June 2018, we completed the final planned shipment from Asia Pacific Iron Ore and commenced selling its assets. As of September 30, 2018, substantially all of the Asia Pacific Iron Ore assets were sold. Refer to NOTE 16 - DISCONTINUED OPERATIONS. |
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, 2018 and December 31, 2017, our investment in Hibbing was $7.2 million and $11.0 million, respectively, classified as Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position.
7
Foreign Currency
Our financial statements are prepared with the U.S. dollar as the reporting currency. Historically, the functional currency of our Australian subsidiaries has been the Australian dollar. Concurrent with the sale of assets to Mineral Resources Limited in August 2018, management determined that there have been significant changes in economic factors related to our Australian subsidiaries. The change in economic factors is 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 has changed from the Australian dollar to the U.S. dollar and all Australian denominated monetary balances will be remeasured through the Statements of Unaudited Condensed Consolidated Operations on a prospective basis.
In addition, as a result of the liquidation of substantially all of the Australian subsidiaries' assets, the historical impact of foreign currency translation recorded in Accumulated other comprehensive loss in the Statements of Unaudited Condensed Consolidated Financial Position of $228.1 million was reclassified and recognized in Income from Discontinued Operations, net of tax in the Statements of Unaudited Condensed Consolidated Operations. Refer to NOTE 16 - DISCONTINUED OPERATIONS for further information regarding our Australian subsidiaries.
The functional currency of all other subsidiaries is the U.S. dollar. To the extent that monetary assets and liabilities, including short-term intercompany loans, are recorded in a currency other than the functional currency, these amounts are remeasured each reporting period, with the resulting gain or loss being recorded in the Statements of Unaudited Condensed Consolidated Operations. Transaction gains and losses resulting from remeasurement of short-term intercompany loans are included in Miscellaneous – net in the Statements of Unaudited Condensed Consolidated Operations.
The following represents the transaction gains and losses resulting from remeasurement:
(In Millions) | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Short-term intercompany loans | $ | (0.2 | ) | $ | 0.1 | $ | (0.5 | ) | $ | 16.7 | ||||||
Other | — | (1.4 | ) | (0.2 | ) | (2.7 | ) | |||||||||
Net impact of transaction gains (losses) resulting from remeasurement | $ | (0.2 | ) | $ | (1.3 | ) | $ | (0.7 | ) | $ | 14.0 |
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, 2017 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 other than those related to the adoption of Topic 606 and the change in functional currency related to our Australian subsidiaries. Refer to NOTE 2 - NEW ACCOUNTING STANDARDS for further information related to the adoption of Topic 606.
NOTE 2 - NEW ACCOUNTING STANDARDS
Adoption of New Accounting Standards
ASC Topic 606, Revenue from Contracts with Customers (Topic 606). On January 1, 2018, we adopted Topic 606 and applied it to all contracts that were not completed using the modified retrospective method. We recognized the cumulative effect of initially applying Topic 606 as an adjustment of $34.0 million to the opening balance of Retained deficit. The comparative period information has not been restated and continues to be reported under the accounting standards in effect for those periods. We do not expect that the adoption of Topic 606 will have a material impact to our annual net income on an ongoing basis.
Under Topic 606, revenue is generally recognized upon delivery to our customers, which is earlier than under the previous guidance. As an example, for certain iron ore shipments where revenue was previously recognized upon title transfer when payment was received, we now recognize revenue when control transfers, which is generally upon delivery. While we continue to retain title until we receive payment, we determined upon review of our customer contracts that the preponderance of control indicators pass to our customers' favor when we deliver our products; thus, we generally concluded that control transfers at that point. As a result of the adoption of Topic 606 and vessel deliveries not occurring
8
during the winter months because of the closure of the Soo Locks and the Welland Canal, our revenues and net income will be relatively lower than historical levels during the first quarter of each year and relatively higher than historical levels during the remaining three quarters in future years. However, the total amount of revenue recognized during the year should remain substantially the same as under previous accounting standards, assuming revenue rates and volumes are consistent between years.
9
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of Topic 606 were as follows:
($ in Millions) | ||||||||||||
Balance at December 31, 2017 | Adjustments due to Topic 606 | Balance at January 1, 2018 | ||||||||||
ASSETS | ||||||||||||
CURRENT ASSETS | ||||||||||||
Cash and cash equivalents | $ | 978.3 | $ | — | $ | 978.3 | ||||||
Accounts receivable, net | 106.7 | 76.6 | 183.3 | |||||||||
Inventories | 138.4 | (51.4 | ) | 87.0 | ||||||||
Supplies and other inventories | 88.8 | — | 88.8 | |||||||||
Derivative assets | 37.9 | 11.6 | 49.5 | |||||||||
Income tax receivable | 13.3 | — | 13.3 | |||||||||
Current assets of discontinued operations | 118.5 | — | 118.5 | |||||||||
Loans to and accounts receivable from the Canadian Entities | 51.6 | — | 51.6 | |||||||||
Other current assets | 11.1 | — | 11.1 | |||||||||
TOTAL CURRENT ASSETS | 1,544.6 | 36.8 | 1,581.4 | |||||||||
PROPERTY, PLANT AND EQUIPMENT, NET | 1,033.8 | — | 1,033.8 | |||||||||
OTHER ASSETS | ||||||||||||
Deposits for property, plant and equipment | 17.8 | — | 17.8 | |||||||||
Income tax receivable | 235.3 | — | 235.3 | |||||||||
Non-current assets of discontinued operations | 20.3 | — | 20.3 | |||||||||
Other non-current assets | 101.6 | — | 101.6 | |||||||||
TOTAL OTHER ASSETS | 375.0 | — | 375.0 | |||||||||
TOTAL ASSETS | $ | 2,953.4 | $ | 36.8 | $ | 2,990.2 | ||||||
LIABILITIES | ||||||||||||
CURRENT LIABILITIES | ||||||||||||
Accounts payable | $ | 99.5 | $ | 1.4 | $ | 100.9 | ||||||
Accrued expenses | 79.1 | — | 79.1 | |||||||||
Accrued interest | 31.4 | — | 31.4 | |||||||||
Contingent claims | 55.6 | — | 55.6 | |||||||||
Partnership distribution payable | 44.2 | — | 44.2 | |||||||||
Current liabilities of discontinued operations | 75.0 | — | 75.0 | |||||||||
Other current liabilities | 67.4 | 1.4 | 68.8 | |||||||||
TOTAL CURRENT LIABILITIES | 452.2 | 2.8 | 455.0 | |||||||||
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES | 257.7 | — | 257.7 | |||||||||
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS | 167.7 | — | 167.7 | |||||||||
LONG-TERM DEBT | 2,304.2 | — | 2,304.2 | |||||||||
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS | 52.2 | — | 52.2 | |||||||||
OTHER LIABILITIES | 163.5 | — | 163.5 | |||||||||
TOTAL LIABILITIES | 3,397.5 | 2.8 | 3,400.3 | |||||||||
EQUITY | ||||||||||||
CLIFFS SHAREHOLDERS' DEFICIT | (444.3 | ) | 34.0 | (410.3 | ) | |||||||
NONCONTROLLING INTEREST | 0.2 | — | 0.2 | |||||||||
TOTAL DEFICIT | (444.1 | ) | 34.0 | (410.1 | ) | |||||||
TOTAL LIABILITIES AND DEFICIT | $ | 2,953.4 | $ | 36.8 | $ | 2,990.2 |
10
The impact of adoption on our Statements of Unaudited Condensed Consolidated Operations and Statements of Unaudited Condensed Consolidated Financial Position is as follows:
($ in Millions) | |||||||||||||||||||||||
Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | ||||||||||||||||||||||
As Reported | Balances without Adoption of Topic 606 | Effect of Change | As Reported | Balances without Adoption of Topic 606 | Effect of Change | ||||||||||||||||||
REVENUES FROM PRODUCT SALES AND SERVICES | |||||||||||||||||||||||
Product | $ | 684.7 | $ | 675.6 | $ | 9.1 | $ | 1,525.9 | $ | 1,471.2 | $ | 54.7 | |||||||||||
Freight and venture partners' cost reimbursements | 57.1 | 56.5 | 0.6 | 110.2 | 107.7 | 2.5 | |||||||||||||||||
741.8 | 732.1 | 9.7 | 1,636.1 | 1,578.9 | 57.2 | ||||||||||||||||||
COST OF GOODS SOLD AND OPERATING EXPENSES | (480.2 | ) | (475.9 | ) | (4.3 | ) | (1,028.5 | ) | (1,006.6 | ) | (21.9 | ) | |||||||||||
SALES MARGIN | 261.6 | 256.2 | 5.4 | 607.6 | 572.3 | 35.3 | |||||||||||||||||
OTHER OPERATING EXPENSE | |||||||||||||||||||||||
Selling, general and administrative expenses | (30.1 | ) | (30.1 | ) | — | (81.4 | ) | (81.4 | ) | — | |||||||||||||
Miscellaneous – net | (6.0 | ) | (6.0 | ) | — | (16.2 | ) | (16.2 | ) | — | |||||||||||||
(36.1 | ) | (36.1 | ) | — | (97.6 | ) | (97.6 | ) | — | ||||||||||||||
OPERATING INCOME | 225.5 | 220.1 | 5.4 | 510.0 | 474.7 | 35.3 | |||||||||||||||||
OTHER INCOME (EXPENSE) | |||||||||||||||||||||||
Interest expense, net | (29.5 | ) | (29.5 | ) | — | (93.1 | ) | (93.1 | ) | — | |||||||||||||
Gain on extinguishment of debt | — | — | — | 0.2 | 0.2 | — | |||||||||||||||||
Other non-operating income | 4.3 | 4.3 | — | 13.1 | 13.1 | — | |||||||||||||||||
(25.2 | ) | (25.2 | ) | — | (79.8 | ) | (79.8 | ) | — | ||||||||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 200.3 | 194.9 | 5.4 | 430.2 | 394.9 | 35.3 | |||||||||||||||||
INCOME TAX EXPENSE | (0.5 | ) | (0.5 | ) | — | (14.4 | ) | (14.4 | ) | — | |||||||||||||
INCOME FROM CONTINUING OPERATIONS | 199.8 | 194.4 | 5.4 | 415.8 | 380.5 | 35.3 | |||||||||||||||||
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX | 238.0 | 238.0 | — | 102.8 | 102.8 | — | |||||||||||||||||
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | 437.8 | $ | 432.4 | $ | 5.4 | $ | 518.6 | $ | 483.3 | $ | 35.3 | |||||||||||
INCOME PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS – BASIC | |||||||||||||||||||||||
Continuing operations | $ | 0.67 | $ | 0.65 | $ | 0.02 | $ | 1.40 | $ | 1.28 | $ | 0.12 | |||||||||||
Discontinued operations | 0.80 | 0.80 | — | 0.35 | 0.35 | — | |||||||||||||||||
$ | 1.47 | $ | 1.45 | $ | 0.02 | $ | 1.75 | $ | 1.63 | $ | 0.12 | ||||||||||||
INCOME PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS – DILUTED | |||||||||||||||||||||||
Continuing operations | $ | 0.64 | $ | 0.62 | $ | 0.02 | $ | 1.37 | $ | 1.25 | $ | 0.12 | |||||||||||
Discontinued operations | 0.77 | 0.77 | — | 0.34 | 0.34 | — | |||||||||||||||||
$ | 1.41 | $ | 1.39 | $ | 0.02 | $ | 1.71 | $ | 1.59 | $ | 0.12 | ||||||||||||
AVERAGE NUMBER OF SHARES (IN THOUSANDS) | |||||||||||||||||||||||
Basic | 297,878 | 297,878 | 297,587 | 297,587 | |||||||||||||||||||
Diluted | 310,203 | 310,203 | 303,518 | 303,518 |
11
($ in Millions) | ||||||||||||
September 30, 2018 | ||||||||||||
As Reported | Balances without Adoption of Topic 606 | Effect of Change | ||||||||||
ASSETS | ||||||||||||
CURRENT ASSETS | ||||||||||||
Cash and cash equivalents | $ | 897.1 | $ | 897.1 | $ | — | ||||||
Accounts receivable, net | 141.4 | 34.8 | 106.6 | |||||||||
Inventories | 187.9 | 257.5 | (69.6 | ) | ||||||||
Supplies and other inventories | 88.2 | 88.2 | — | |||||||||
Derivative assets | 190.8 | 156.6 | 34.2 | |||||||||
Income tax receivable | 110.3 | 110.3 | — | |||||||||
Current assets of discontinued operations | 16.1 | 16.1 | — | |||||||||
Other current assets | 18.8 | 18.8 | — | |||||||||
TOTAL CURRENT ASSETS | 1,650.6 | 1,579.4 | 71.2 | |||||||||
PROPERTY, PLANT AND EQUIPMENT, NET | 1,144.8 | 1,144.8 | — | |||||||||
OTHER ASSETS | ||||||||||||
Deposits for property, plant and equipment | 94.6 | 94.6 | — | |||||||||
Income tax receivable | 113.6 | 113.6 | — | |||||||||
Other non-current assets | 121.4 | 121.4 | — | |||||||||
TOTAL OTHER ASSETS | 329.6 | 329.6 | — | |||||||||
TOTAL ASSETS | $ | 3,125.0 | $ | 3,053.8 | $ | 71.2 | ||||||
LIABILITIES | ||||||||||||
CURRENT LIABILITIES | ||||||||||||
Accounts payable | $ | 140.8 | $ | 140.1 | $ | 0.7 | ||||||
Accrued expenses | 95.1 | 95.1 | — | |||||||||
Accrued interest | 26.2 | 26.2 | — | |||||||||
Partnership distribution payable | 43.1 | 43.1 | — | |||||||||
Current liabilities of discontinued operations | 14.2 | 14.2 | — | |||||||||
Other current liabilities | 61.3 | 61.5 | (0.2 | ) | ||||||||
TOTAL CURRENT LIABILITIES | 380.7 | 380.2 | 0.5 | |||||||||
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES | 225.0 | 225.0 | — | |||||||||
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS | 174.4 | 174.4 | — | |||||||||
LONG-TERM DEBT | 2,300.0 | 2,300.0 | — | |||||||||
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS | 9.3 | 9.3 | — | |||||||||
OTHER LIABILITIES | 121.8 | 121.8 | — | |||||||||
TOTAL LIABILITIES | 3,211.2 | 3,210.7 | 0.5 | |||||||||
EQUITY | ||||||||||||
CLIFFS SHAREHOLDERS' DEFICIT | (86.2 | ) | (156.9 | ) | 70.7 | |||||||
TOTAL LIABILITIES AND DEFICIT | $ | 3,125.0 | $ | 3,053.8 | $ | 71.2 |
The adoption of Topic 606 did not have an impact on net cash flows in our Statements of Unaudited Condensed Consolidated Cash Flows.
ASU 2017-07, Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. On January 1, 2018, we adopted the amendments to ASC 715 regarding the presentation of net periodic pension and postretirement benefit costs. We retrospectively adopted the presentation of service cost
12
separate from the other components of net periodic costs. The interest cost, expected return on assets, amortization of prior service costs, net remeasurement, and other costs have been reclassified from Cost of goods sold and operating expenses, Selling, general and administrative expenses and Miscellaneous – net to Other non-operating income. We elected to apply the practical expedient, which allows us to reclassify amounts disclosed previously in our pension and other postretirement benefits footnote as the basis for applying retrospective presentation for comparative periods. On a prospective basis from adoption, only service costs will be included in amounts capitalized in inventory or property, plant, and equipment.
The effect of the retrospective presentation change related to the net periodic cost of our defined benefit pension and other postretirement employee benefits plans on our Statements of Unaudited Condensed Consolidated Operations was as follows:
($ in Millions) | |||||||||||||||||||||||
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | ||||||||||||||||||||||
As Revised | Without Adoption of ASU 2017-07 | Effect of Change | As Revised | Without Adoption of ASU 2017-07 | Effect of Change | ||||||||||||||||||
Cost of goods sold and operating expenses | $ | (438.9 | ) | $ | (439.5 | ) | $ | 0.6 | $ | (1,002.7 | ) | $ | (1,004.4 | ) | $ | 1.7 | |||||||
Selling, general and administrative expenses | $ | (23.8 | ) | $ | (21.8 | ) | $ | (2.0 | ) | $ | (75.5 | ) | $ | (69.6 | ) | $ | (5.9 | ) | |||||
Miscellaneous – net | $ | (5.3 | ) | $ | (4.9 | ) | $ | (0.4 | ) | $ | 1.3 | $ | 2.4 | $ | (1.1 | ) | |||||||
Operating income | $ | 128.7 | $ | 130.5 | $ | (1.8 | ) | $ | 277.3 | $ | 282.6 | $ | (5.3 | ) | |||||||||
Other non-operating income | $ | 2.6 | $ | 0.8 | $ | 1.8 | $ | 7.6 | $ | 2.3 | $ | 5.3 | |||||||||||
Net Income | $ | 52.9 | $ | 52.9 | $ | — | $ | 53.2 | $ | 53.2 | $ | — |
Recent Accounting Pronouncements
Issued and Not Effective
In August 2018, the FASB issued ASU No. 2018-14, Defined Benefit Plans (Topic 715-20) - Changes to the Disclosure Requirements for Defined Benefit Plans. Certain of the existing required disclosures were modified for clarification or removed and additional disclosures were added. The new standard is effective for the year ending December 31, 2020, will be applied on a retrospective basis and early adoption is permitted. Based on our analysis to date, the updated standard is not expected to have a material impact on our consolidated financial statements, but will affect our footnote disclosures. We expect to early adopt this new standard during the fourth quarter of 2018.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases except for short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the Statements of Unaudited Condensed Consolidated Operations. We plan to adopt the standard on its effective date of January 1, 2019. We will apply the standard on the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption as permitted by ASU 2018-11. Based on our analysis to date, the updated standard is not expected to have a material effect on our consolidated financial statements. For example, based on the future minimum payments under non-cancellable operating leases as of September 30, 2018, we would expect to record right–of–use assets and lease liabilities of approximately $19 million, discounted to fair value, in the Statements of Unaudited Condensed Consolidated Financial Position.
Issued and Adopted
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement. The new standard removes or modifies certain existing disclosure requirements and adds additional disclosure requirements. We have evaluated the impact of the adoption of this new accounting standard update and determined that it will not have a material effect on our consolidated financial statements. However, we do expect an overall reduction in both our quarterly and annual disclosures related to fair value measurement. We are adopting the standard effective for the period ended September 30, 2018.
13
NOTE 3 - SEGMENT REPORTING
We operate in one reportable segment – U.S. Iron Ore. U.S. Iron Ore 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.
We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold and operating expenses identifiable to each segment. Additionally, we evaluate performance on a segment basis, as well as a consolidated basis, based on EBITDA and Adjusted EBITDA. These measures allow management and investors to focus on our ability to service our debt as well as illustrate how the business and each operating segment are performing. Additionally, EBITDA and Adjusted EBITDA assist management and investors in their analysis and forecasting as these measures approximate the cash flows associated with operational earnings.
The following tables present a summary of our reportable segment including a reconciliation of segment sales margin to Income from Continuing Operations Before Income Taxes and a reconciliation of Net Income to EBITDA and Adjusted EBITDA:
(In Millions) | |||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Revenues from product sales and services: | |||||||||||||||||||||||||||
U.S. Iron Ore | $ | 741.8 | 100 | % | $ | 596.7 | 100 | % | $ | 1,636.1 | 100 | % | $ | 1,354.2 | 100 | % | |||||||||||
Sales margin | $ | 261.6 | $ | 157.8 | $ | 607.6 | $ | 351.5 | |||||||||||||||||||
Other operating expense | (36.1 | ) | (29.1 | ) | (97.6 | ) | (74.2 | ) | |||||||||||||||||||
Other expense | (25.2 | ) | (113.6 | ) | (79.8 | ) | (256.9 | ) | |||||||||||||||||||
Income from continuing operations before income taxes | $ | 200.3 | $ | 15.1 | $ | 430.2 | $ | 20.4 |
14
(In Millions) | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Net Income | $ | 437.8 | $ | 52.9 | $ | 518.6 | $ | 53.2 | |||||||
Less: | |||||||||||||||
Interest expense, net | (29.7 | ) | (28.9 | ) | (95.5 | ) | (103.1 | ) | |||||||
Income tax benefit (expense) | (0.5 | ) | 7.6 | (14.4 | ) | 6.8 | |||||||||
Depreciation, depletion and amortization | (19.2 | ) | (21.5 | ) | (68.6 | ) | (66.3 | ) | |||||||
EBITDA | $ | 487.2 | $ | 95.7 | $ | 697.1 | $ | 215.8 | |||||||
Less: | |||||||||||||||
Impact of discontinued operations | $ | 238.2 | $ | 34.8 | $ | 120.4 | $ | 41.3 | |||||||
Foreign exchange remeasurement | (0.2 | ) | (1.3 | ) | (0.7 | ) | 14.0 | ||||||||
Gain (loss) on extinguishment of debt | — | (88.6 | ) | 0.2 | (165.4 | ) | |||||||||
Impairment of long-lived assets | (1.1 | ) | — | (1.1 | ) | — | |||||||||
Adjusted EBITDA | $ | 250.3 | $ | 150.8 | $ | 578.3 | $ | 325.9 | |||||||
EBITDA | |||||||||||||||
U.S. Iron Ore | $ | 273.1 | $ | 168.9 | $ | 641.6 | $ | 381.8 | |||||||
Corporate and Other1 | 214.1 | (73.2 | ) | 55.5 | (166.0 | ) | |||||||||
Total EBITDA | $ | 487.2 | $ | 95.7 | $ | 697.1 | $ | 215.8 | |||||||
Adjusted EBITDA: | |||||||||||||||
U.S. Iron Ore | $ | 279.5 | $ | 174.2 | $ | 657.9 | $ | 399.8 | |||||||
Corporate and Other1 | (29.2 | ) | (23.4 | ) | (79.6 | ) | (73.9 | ) | |||||||
Total Adjusted EBITDA | $ | 250.3 | $ | 150.8 | $ | 578.3 | $ | 325.9 | |||||||
1Corporate and Other includes activity from discontinued operations and immaterial costs related to the HBI project. |
The following table summarizes our depreciation, depletion and amortization expense and capital additions:
(In Millions) | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Depreciation, depletion and amortization: | |||||||||||||||
U.S. Iron Ore | $ | 17.8 | $ | 16.5 | $ | 49.2 | $ | 49.6 | |||||||
Corporate and Other | 1.4 | 1.7 | 4.2 | 5.4 | |||||||||||
Total depreciation, depletion and amortization | $ | 19.2 | $ | 18.2 | $ | 53.4 | $ | 55.0 | |||||||
Capital additions1: | |||||||||||||||
U.S. Iron Ore | $ | 51.8 | $ | 19.2 | $ | 97.2 | $ | 70.9 | |||||||
Corporate and Other2 | 40.8 | 7.1 | 144.7 | 7.1 | |||||||||||
Total capital additions | $ | 92.6 | $ | 26.3 | $ | 241.9 | $ | 78.0 | |||||||
1 Includes cash paid for capital additions of $194.6 million, including deposits of $83.3 million, lease additions of $7.6 million, and an increase in non-cash accruals of $42.2 million, partially offset by governmental grants received of $2.5 million for the nine months ended September 30, 2018, compared to cash paid for capital additions of $77.4 million, including deposits of $16.2 million, and an increase in non-cash accruals of $0.6 million for the nine months ended September 30, 2017. | |||||||||||||||
2 Includes capital additions related to our HBI project. |
15
A summary of assets by segment is as follows:
(In Millions) | |||||||
September 30, 2018 | December 31, 2017 | ||||||
Assets: | |||||||
U.S. Iron Ore | $ | 1,798.8 | $ | 1,500.6 | |||
Corporate and Other1 | 1,310.1 | 1,314.0 | |||||
Assets of Discontinued Operations | 16.1 | 138.8 | |||||
Total assets | $ | 3,125.0 | $ | 2,953.4 | |||
1Corporate and Other includes assets related to the HBI project. |
NOTE 4 - REVENUE
We sell a single product, iron ore pellets, in the North American market. Generally, revenue is recognized 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 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.
Certain of our customer supply agreements specify a provisional price, which is used for initial billing and cash collection. Revenue recorded in accordance with Topic 606 is calculated using the expected revenue rate at the point when control transfers. The final settlement includes market inputs for a specified period of time, which may vary by customer, but typically include one or more of the following: Platts 62% Price, pellet premiums, international indexed freight rates and changes in specified Producer Price Indices, including industrial commodities, energy and steel. Changes in the expected revenue rate from the date control transfers through final settlement of contract terms is recorded in accordance with Topic 815. Refer to NOTE 15 - DERIVATIVE INSTRUMENTS for further information on how our estimated and final revenue rates are determined.
A supply agreement with one customer provides for supplemental revenue or refunds based on the average annual daily market price for hot-rolled coil steel at the time the iron ore is consumed in the customer’s blast furnaces. Since, in this case, control transfers prior to consumption, the supplemental revenue is recorded in accordance with ASC Topic 815. Refer to NOTE 15 - DERIVATIVE INSTRUMENTS for further information on supplemental revenue or refunds.
Included within Revenues from product sales and services is derivative revenue related to Topic 815 of $135.9 million and $334.4 million, for three and nine months ended September 30, 2018, respectively.
Practical expedients and exemptions
We have elected to treat all shipping and handling costs as fulfillment costs because a significant portion of these costs are incurred prior to control transfer.
We have various long-term sales contracts with minimum purchase and supply requirement provisions that extend beyond the current reporting period. The portion of our transaction price for these contracts that is allocated entirely to wholly unsatisfied performance obligations is based on market prices that have not yet been determined and therefore is variable in nature. As such, we have not disclosed the value of unsatisfied performance obligations pursuant to the practical expedient.
16
Deferred Revenue
The table below summarizes our deferred revenue balances:
Deferred Revenue (Current)1 | Deferred Revenue (Long-Term) | ||||||
Opening balance as of January 1, 2018 | $ | 23.8 | $ | 51.4 | |||
Closing balance as of September 30, 2018 | 16.1 | 42.8 | |||||
Decrease | $ | (7.7 | ) | $ | (8.6 | ) | |
1 The opening balance includes a $1.4 million adjustment from the December 31, 2017 balance due to the adoption of Topic 606. |
The terms of one of our pellet supply agreements required supplemental payments to be paid by the customer during the period 2009 through 2012, with the option to defer a portion of the 2009 monthly amount in exchange for interest payments until the deferred amount was repaid in 2013. 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, 2018 and December 31, 2017, installment amounts received in excess of sales totaled $55.6 million and $64.2 million, respectively, related to this agreement. As of September 30, 2018 and December 31, 2017, deferred revenue of $12.8 million was recorded in Other current liabilities and $42.8 million and $51.4 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 $3.3 million and $9.6 million was deferred and included in Other current liabilities in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2018 and December 31, 2017, respectively.
NOTE 5 - INVENTORIES
The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position:
(In Millions) | ||||||||
September 30, 2018 | December 31, 2017 | |||||||
Finished Goods | $ | 171.8 | $ | 127.1 | ||||
Work-in-Process | 16.1 | 11.3 | ||||||
Total Inventories | $ | 187.9 | $ | 138.4 |
17
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the value of each of the major classes of our consolidated depreciable assets:
(In Millions) | |||||||
September 30, 2018 | December 31, 2017 | ||||||
Land rights and mineral rights | $ | 549.6 | $ | 549.6 | |||
Office and information technology | 67.8 | 65.8 | |||||
Buildings | 84.1 | 85.2 | |||||
Mining equipment | 538.7 | 533.9 | |||||
Processing equipment | 619.0 | 610.9 | |||||
Electric power facilities | 58.7 | 56.9 | |||||
Land improvements | 24.2 | 23.7 | |||||
Asset retirement obligation | 16.9 | 16.9 | |||||
Other | 25.2 | 25.2 | |||||
Construction in-progress | 168.7 | 32.6 | |||||
2,152.9 | 2,000.7 | ||||||
Allowance for depreciation and depletion | (1,008.1 | ) | (966.9 | ) | |||
$ | 1,144.8 | $ | 1,033.8 |
NOTE 7 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt:
(In Millions) | ||||||||||||||||||
September 30, 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 | $ | (6.0 | ) | $ | (2.3 | ) | $ | 391.7 | |||||||
Unsecured Notes | ||||||||||||||||||
$400 Million 5.90% 2020 Senior Notes | 5.98% | 88.4 | (0.1 | ) | (0.1 | ) | 88.2 | |||||||||||
$500 Million 4.80% 2020 Senior Notes | 4.83% | 122.3 | (0.2 | ) | (0.1 | ) | 122.0 | |||||||||||
$700 Million 4.875% 2021 Senior Notes | 4.89% | 124.2 | (0.3 | ) | — | 123.9 | ||||||||||||
$316.25 Million 1.50% 2025 Convertible Senior Notes | 6.26% |