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 June 30, 2020



	☐	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

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 399,198,070 as of July 27, 2020.

Table of Contents

TABLE OF CONTENTS


			Page Number

DEFINITIONS				1

PART I - FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Statements of Unaudited Condensed Consolidated Financial Position as of June 30, 2020 and December 31, 2019		3
		Statements of Unaudited Condensed Consolidated Operations for the Three and Six Months Ended June 30, 2020 and 2019		4
		Statements of Unaudited Condensed Consolidated Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2020 and 2019		5
		Statements of Unaudited Condensed Consolidated Cash Flows for the Six Months Ended June 30, 2020 and 2019		6
		Statements of Unaudited Condensed Consolidated Changes in Equity for the Three and Six Months Ended June 30, 2020 and 2019		7
		Notes to Unaudited Condensed Consolidated Financial Statements		8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		41
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		61
	Item 4.	Controls and Procedures		62

PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings		63
	Item 1A.	Risk Factors		63
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		63
	Item 4.	Mine Safety Disclosures		63
	Item 5.	Other Information		63
	Item 6.	Exhibits		64

Signatures				66

Table of Contents

DEFINITIONS

The following abbreviations or acronyms are used in the text. References in this report to the “Company,” “we,” “us,” “our” and “Cliffs” are to Cleveland-Cliffs Inc. and subsidiaries, collectively, unless stated otherwise or the context indicates otherwise.



Abbreviation or acronym		Term
ABL Facility		Asset-Based Revolving Credit Agreement, by and among Bank of America, N.A., as Agent, the Lenders that are parties thereto, as the Lenders, and Cleveland-Cliffs Inc., as Parent and a Borrower, dated as of March 13, 2020, as amended
Adjusted EBITDA		EBITDA excluding certain items such as EBITDA of noncontrolling interests, extinguishment of debt, severance, acquisition-related costs, amortization of inventory step-up, impacts of discontinued operations and intersegment corporate allocations of selling, general and administrative costs
AK Coal		AK Coal Resources, Inc., an indirect, wholly owned subsidiary of AK Steel, and related coal mining operations
AK Steel		AK Steel Holding Corporation and its consolidated subsidiaries, including AK Steel Corporation, its direct, wholly owned subsidiary, collectively, unless stated otherwise or the context indicates otherwise
AK Tube		AK Tube LLC, an indirect, wholly owned subsidiary of AK Steel
AMT		Alternative Minimum Tax
AOCI		Accumulated Other Comprehensive Income (Loss)
ArcelorMittal USA		ArcelorMittal USA LLC (including many of its United States affiliates, subsidiaries and representatives. References to ArcelorMittal USA comprise all such relationships unless a specific ArcelorMittal USA entity is referenced)
ASC		Accounting Standards Codification
Atlantic Basin pellet premium		Platts Atlantic Basin Blast Furnace 65% Fe pellet premium
Board		The Board of Directors of Cleveland-Cliffs Inc.
CARES Act		Coronavirus Aid, Relief, and Economic Security Act
CECL		Current Expected Credit Losses
CERCLA		Comprehensive Environmental Response, Compensation and Liability Act
Compensation Committee		Compensation and Organization Committee of the Board
COVID-19		A novel strain of coronavirus that the World Health Organization declared a global pandemic in March 2020
Dodd-Frank Act		Dodd-Frank Wall Street Reform and Consumer Protection Act
DR-grade		Direct Reduction-grade
EAF		Electric Arc Furnace
EBITDA		Earnings before interest, taxes, depreciation and amortization
Empire		Empire Iron Mining Partnership
EPA		U.S. Environmental Protection Agency
ERISA		Employee Retirement Income Security Act of 1974, as amended
Exchange Act		Securities Exchange Act of 1934, as amended
Fe		Iron
FILO		First-in, last-out
Former ABL Facility		Amended and Restated Syndicated Facility Agreement by and among Bank of America, N.A., as Administrative Agent, the Lenders that are parties thereto, as the Lenders, Cleveland-Cliffs Inc., as Parent and a Borrower, and the Subsidiaries of Parent party thereto, as Borrowers, dated as of March 30, 2015, as amended and restated as of February 28, 2018, and as further 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
IRBs		Industrial Revenue Bonds
LIBOR		London Interbank Offered Rate
LIFO		Last-in, first-out
Long ton		2,240 pounds
Merger		The merger of Merger Sub with and into AK Steel, with AK Steel surviving the merger as a wholly owned subsidiary of Cliffs, subject to the terms and conditions set forth in the Merger Agreement, effective as of March 13, 2020
Merger Agreement		Agreement and Plan of Merger, dated as of December 2, 2019, among Cliffs, AK Steel and Merger Sub
Merger Sub		Pepper Merger Sub Inc., a direct, wholly owned subsidiary of Cliffs prior to the Merger
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 benefits
Platts 62% Price		Platts IODEX 62% Fe Fines cost and freight North China
Precision Partners		PPHC Holdings, LLC (an indirect, wholly owned subsidiary of AK Steel) and its subsidiaries, collectively, unless stated otherwise or the context indicates otherwise
RCRA		Resource Conservation and Recovery Act
SEC		U.S. Securities and Exchange Commission
Section 232		Section 232 of the Trade Expansion Act of 1962, as amended
Securities Act		Securities Act of 1933, as amended

Table of Contents



Abbreviation or acronym		Term
SunCoke Middletown		Middletown Coke Company, LLC, a subsidiary of SunCoke Energy, Inc.
Tilden		Tilden Mining Company L.C.
Topic 805		ASC Topic 805, Business Combinations
Topic 815		ASC Topic 815, Derivatives and Hedging
United Taconite		United Taconite LLC
U.S.		United States of America
U.S. Steel		Ontario Hibbing Company, a subsidiary of United States Steel Corporation and a participant in Hibbing
USMCA		United States-Mexico-Canada Agreement
VIE		Variable Interest Entity

Table of Contents

PART I



Item 1.	Financial Statements

Statements of Unaudited Condensed Consolidated Financial Position

Cleveland-Cliffs Inc. and Subsidiaries



	(In Millions)
	June 30, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	73.7		$	352.6
Accounts receivable, net	482.2			94.0
Inventories	1,933.6			317.4
Income tax receivable, current	62.6			58.6
Other current assets	90.2			75.3
Total current assets	2,642.3			897.9
Non-current assets:
Property, plant and equipment, net	4,547.9			1,929.0
Goodwill	139.3			2.1
Intangible assets, net	192.6			48.1
Income tax receivable, non-current	4.1			62.7
Deferred income taxes	506.5			459.5
Right-of-use asset, operating lease	213.0			11.7
Other non-current assets	245.0			92.8
TOTAL ASSETS	$	8,490.7		$	3,503.8
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	504.8		$	193.2
Accrued liabilities	288.3			126.3
Other current liabilities	244.9			89.9
Total current liabilities	1,038.0			409.4
Non-current liabilities:
Long-term debt	4,451.6			2,113.8
Operating lease liability, non-current	191.5			10.5
Intangible liabilities, net	72.3			—
Pension and OPEB liabilities	1,159.6			311.5
Asset retirement obligations	181.1			163.2
Other non-current liabilities	278.4			137.5
TOTAL LIABILITIES	7,372.5			3,145.9
Commitments and contingencies (See Note 18)
Equity:
Common shares - par value $0.125 per share
Authorized - 600,000,000 shares (2019 - 600,000,000 shares);
Issued - 428,645,866 shares (2019 - 301,886,794 shares);
Outstanding - 399,159,988 shares (2019 - 270,084,005 shares)	53.6			37.7
Capital in excess of par value of shares	4,443.6			3,872.1
Retained deficit	(3,042.5		)	(2,842.4		)
Cost of 29,485,878 common shares in treasury (2019 - 31,802,789 shares)	(355.9		)	(390.7		)
Accumulated other comprehensive loss	(305.9		)	(318.8		)
Total Cliffs shareholders' equity	792.9			357.9
Noncontrolling interest	325.3			—
TOTAL EQUITY	1,118.2			357.9
TOTAL LIABILITIES AND EQUITY	$	8,490.7		$	3,503.8

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

Table of Contents

Statements of Unaudited Condensed Consolidated Operations

Cleveland-Cliffs Inc. and Subsidiaries



	(In Millions, Except Per Share Amounts)
	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Revenues	$	1,092.7		$	743.2		$	1,417.2		$	900.2
Realization of deferred revenue	—			—			34.6			—
Operating costs:
Cost of goods sold	(1,207.5		)	(480.2		)	(1,563.5		)	(606.3		)
Selling, general and administrative expenses	(62.1		)	(29.4		)	(89.6		)	(56.7		)
Acquisition-related costs	(18.4		)	—			(60.9		)	—
Miscellaneous – net	(13.1		)	(6.8		)	(25.0		)	(11.2		)
Total operating costs	(1,301.1		)	(516.4		)	(1,739.0		)	(674.2		)
Operating income (loss)	(208.4		)	226.8			(287.2		)	226.0
Other income (expense):
Interest expense, net	(68.7		)	(26.1		)	(99.7		)	(51.2		)
Gain (loss) on extinguishment of debt	129.4			(17.9		)	132.6			(18.2		)
Other non-operating income	15.2			0.6			21.2			1.0
Total other income (expense)	75.9			(43.4		)	54.1			(68.4		)
Income (loss) from continuing operations before income taxes	(132.5		)	183.4			(233.1		)	157.6
Income tax benefit (expense)	24.7			(22.0		)	76.1			(18.3		)
Income (loss) from continuing operations	(107.8		)	161.4			(157.0		)	139.3
Income (loss) from discontinued operations, net of tax	(0.3		)	(0.6		)	0.3			(0.6		)
Net income (loss)	(108.1		)	160.8			(156.7		)	138.7
Income attributable to noncontrolling interest	(15.8		)	—			(19.3		)	—
Net income (loss) attributable to Cliffs shareholders	$	(123.9	)	$	160.8		$	(176.0	)	$	138.7

Earnings (loss) per common share attributable to Cliffs shareholders - basic
Continuing operations	$	(0.31	)	$	0.59		$	(0.51	)	$	0.49
Discontinued operations	—			—			—			—
	$	(0.31	)	$	0.59		$	(0.51	)	$	0.49
Earnings (loss) per common share attributable to Cliffs shareholders - diluted
Continuing operations	$	(0.31	)	$	0.57		$	(0.51	)	$	0.47
Discontinued operations	—			—			—			—
	$	(0.31	)	$	0.57		$	(0.51	)	$	0.47
Average number of shares (in thousands)
Basic	399,088			275,769			348,302			282,647
Diluted	399,088			285,479			348,302			293,580

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

Table of Contents

Statements of Unaudited Condensed Consolidated Comprehensive Income (Loss)

Cleveland-Cliffs Inc. and Subsidiaries



	(In Millions)
	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net income (loss)	$	(108.1	)	$	160.8		$	(156.7	)	$	138.7
Other comprehensive income (loss):
Changes in pension and OPEB, net of tax	6.0			5.8			11.6			11.5
Changes in foreign currency translation	0.7			—			(0.2		)	—
Changes in derivative financial instruments, net of tax	4.5			(2.1		)	1.5			0.6
Total other comprehensive income	11.2			3.7			12.9			12.1
Comprehensive income (loss)	(96.9		)	164.5			(143.8		)	150.8
Comprehensive income attributable to noncontrolling interests	(15.8		)	—			(19.3		)	—
Comprehensive income (loss) attributable to Cliffs shareholders	$	(112.7	)	$	164.5		$	(163.1	)	$	150.8

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

Table of Contents

Statements of Unaudited Condensed Consolidated Cash Flows

Cleveland-Cliffs Inc. and Subsidiaries



	(In Millions)
	Six Months Ended June 30,
	2020			2019
OPERATING ACTIVITIES
Net income (loss)	$	(156.7	)	$	138.7
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation, depletion and amortization	111.5			40.9
Amortization of inventory step-up	59.4			—
Deferred income taxes	(72.5		)	18.2
Loss (gain) on extinguishment of debt	(132.6		)	18.2
Loss (gain) on derivatives	8.0			(27.2		)
Other	(28.0		)	28.4
Changes in operating assets and liabilities, net of business combination:
Receivables and other assets	365.7			145.4
Inventories	(126.1		)	(148.7		)
Payables, accrued expenses and other liabilities	(327.9		)	(62.8		)
Net cash provided (used) by operating activities	(299.2		)	151.1
INVESTING ACTIVITIES
Purchase of property, plant and equipment	(282.9		)	(300.9		)
Acquisition of AK Steel, net of cash acquired	(869.3		)	—
Other investing activities	(0.2		)	8.5
Net cash used by investing activities	(1,152.4		)	(292.4		)
FINANCING ACTIVITIES
Repurchase of common shares	—			(252.9		)
Proceeds from issuance of debt	1,762.9			720.9
Debt issuance costs	(57.9		)	(6.8		)
Repurchase of debt	(999.5		)	(729.3		)
Borrowings under credit facilities	800.0			—
Repayments under credit facilities	(250.0		)	—
Dividends paid	(40.8		)	(28.9		)
Other financing activities	(43.6		)	(10.9		)
Net cash provided (used) by financing activities	1,171.1			(307.9		)
Decrease in cash and cash equivalents, including cash classified within other current assets related to discontinued operations	(280.5		)	(449.2		)
Less: decrease in cash and cash equivalents from discontinued operations, classified within other current assets	(1.6		)	(3.2		)
Net decrease in cash and cash equivalents	(278.9		)	(446.0		)
Cash and cash equivalents at beginning of period	352.6			823.2
Cash and cash equivalents at end of period	$	73.7		$	377.2

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

Table of Contents

Statements of Unaudited Condensed Consolidated Changes in Equity

Cleveland-Cliffs Inc. and Subsidiaries



	(In Millions)
	Number of Common Shares Outstanding	Par Value of Common Shares Issued		Capital in Excess of Par Value of Shares			Retained Deficit			Common Shares in Treasury			AOCI			Non-controlling Interests			Total
December 31, 2019	270.1	$	37.7	$	3,872.1		$	(2,842.4	)	$	(390.7	)	$	(318.8	)	$	—		$	357.9
Comprehensive income (loss)	—	—		—			(52.1		)	—			1.7			3.5			(46.9		)
Stock and other incentive plans	1.7	—		(23.6		)	—			25.7			—			—			2.1
Acquisition of AK Steel	126.8	15.9		601.7			—			—			—			329.8			947.4
Common share dividends ($0.06 per share)	—	—		—			(24.0		)	—			—			—			(24.0		)
Net distributions to noncontrolling interests	—	—		—			—			—			—			(5.5		)	(5.5		)
March 31, 2020	398.6	$	53.6	$	4,450.2		$	(2,918.5	)	$	(365.0	)	$	(317.1	)	$	327.8		$	1,231.0
Comprehensive income (loss)	—	—		—			(123.9		)	—			11.2			15.8			(96.9		)
Stock and other incentive plans	0.6	—		(6.6		)	—			9.1			—			—			2.5
Common share dividends	—	—		—			(0.1		)	—			—			—			(0.1		)
Net distributions to noncontrolling interests	—	—		—			—			—			—			(18.3		)	(18.3		)
June 30, 2020	399.2	$	53.6	$	4,443.6		$	(3,042.5	)	$	(355.9	)	$	(305.9	)	$	325.3		$	1,118.2



	(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			AOCI			Total
December 31, 2018	292.6		$	37.7	$	3,916.7		$	(3,060.2	)	$	(186.1	)	$	(283.9	)	$	424.2
Comprehensive income (loss)	—		—		—			(22.1		)	—			8.4			(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	—		—		—			160.8			—			3.7			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

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

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Notes to Unaudited Condensed Consolidated Financial Statements

Cleveland-Cliffs Inc. and Subsidiaries

NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Business, Consolidation and Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations, comprehensive income (loss), cash flows and changes in equity for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020 or any other future period. Due to the acquisition of AK Steel, certain balances have become material and are no longer being condensed in our Statements of Unaudited Condensed Consolidated Financial Position, such as balances for Right-of-use asset, operating lease and Operating lease liability, non-current. As a result, certain prior period amounts have been reclassified to conform with the current year presentation. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020.

Acquisition of AK Steel

On March 13, 2020, we consummated the Merger, pursuant to which, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub was merged with and into AK Steel, with AK Steel surviving the Merger as a wholly owned subsidiary of Cliffs. Refer to NOTE 3 - ACQUISITION OF AK STEEL for further information.

AK Steel is a leading North American producer of flat-rolled carbon, stainless and electrical steel products, primarily for the automotive, infrastructure and manufacturing markets. The acquisition of AK Steel has transformed us into a vertically integrated producer of value-added iron ore and steel products.

COVID-19

In response to the COVID-19 pandemic, we made various operational changes to adjust to the demand for our products. Although steel and iron ore production have been considered “essential” by the states in which we operate, certain of our facilities and construction activities were temporarily idled during the second quarter of 2020. Nearly all of these temporarily idled facilities were restarted as of June 30, 2020, with the exception of the Dearborn hot-end operations and Mansfield operations, which were restarted in July 2020, and the Northshore mine, which we plan to restart in early August 2020.

Basis of Consolidation

The unaudited condensed consolidated financial statements consolidate our accounts and the accounts of our wholly owned subsidiaries, all subsidiaries in which we have a controlling interest and two variable interest entities for which we are the primary beneficiary. All intercompany transactions and balances are eliminated upon consolidation.

Reportable Segments

The acquisition of AK Steel has transformed us into a vertically integrated producer of value-added iron ore and steel products and we are organized according to our differentiated products in two reportable segments - the new Steel and Manufacturing segment and the Mining and Pelletizing segment. Our new Steel and Manufacturing segment includes the assets acquired through the acquisition of AK Steel and our previously reported Metallics segment, and our Mining and Pelletizing segment includes our three active operating mines and our indefinitely idled mine.

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Investments in Affiliates

We have investments in several businesses accounted for using the equity method of accounting. We review an investment for impairment when circumstances indicate that a loss in value below its carrying amount is other than temporary. Investees and equity ownership percentages are presented below:



Investee	Segment Reported Within	Equity Ownership Percentage
Combined Metals of Chicago, LLC	Steel and Manufacturing	40.0%
Hibbing Taconite Company	Mining and Pelletizing	23.0%
Spartan Steel Coating, LLC	Steel and Manufacturing	48.0%

We recorded a basis difference for Spartan Steel of $32.5 million as part of our acquisition of AK Steel. The basis difference relates to the excess of the fair value over the investee's carrying amount of property, plant and equipment and will be amortized over the remaining useful lives of the underlying assets.

Significant Accounting Policies

A detailed description of our significant accounting policies can be found in the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC, which were updated and can be found in the unaudited condensed consolidated financial statements included in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 filed with the SEC. There have been no material changes in our significant accounting policies and estimates from those disclosed therein.

Recent Accounting Pronouncements

Issued and Adopted

On March 2, 2020, the SEC issued a final rule that amended the disclosure requirements related to certain registered securities under SEC Regulation S-X, Rule 3-10, which required separate financial statements for subsidiary issuers and guarantors of registered debt securities unless certain exceptions are met. The final rule replaces the previous requirement under Rule 3-10 to provide condensed consolidating financial information in the registrant’s financial statements with a requirement to provide alternative financial disclosures (which include summarized financial information of the parent and any issuers and guarantors, as well as other qualitative disclosures) in either the registrant’s Management's Discussion and Analysis of Financial Condition and Results of Operations or its financial statements, in addition to other simplifications. The final rule is effective for filings on or after January 4, 2021, and early adoption is permitted. We elected to early adopt this disclosure update for the period ended March 31, 2020. As a result, we have excluded the footnote disclosures required under the previous Rule 3-10, and applied the final rule by including the summarized financial information and qualitative disclosures in Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q and Exhibit 22.1, filed herewith.

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NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION

Revenues

The following table represents our consolidated Revenues (excluding intercompany revenues) by market:



	(In Millions)
	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Steel and Manufacturing:
Automotive	$	363.8	$	—	$	484.0	$	—
Infrastructure and manufacturing	203.4		—		247.4		—
Distributors and converters	147.9		—		201.2		—
Total Steel and Manufacturing	715.1		—		932.6		—
Mining and Pelletizing:
Steel producers¹	377.6		743.2		519.2		900.2
Total revenues	$	1,092.7	$	743.2	$	1,451.8	$	900.2

¹ Includes Realization of deferred revenue of $34.6 million for the six months ended June 30, 2020.

The following table represents our consolidated Revenues (excluding intercompany revenues) by product line:



	(In Millions)
	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Steel and Manufacturing:
Carbon steel	$	431.8	$	—	$	570.4	$	—
Stainless and electrical steel	222.5		—		281.9		—
Tubular products, components and other	60.8		—		80.3		—
Total Steel and Manufacturing	715.1		—		932.6		—
Mining and Pelletizing:
Iron ore¹	349.7		697.4		481.0		842.8
Freight	27.9		45.8		38.2		57.4
Total Mining and Pelletizing	377.6		743.2		519.2		900.2
Total revenues	$	1,092.7	$	743.2	$	1,451.8	$	900.2

¹ Includes Realization of deferred revenue of $34.6 million for the six months ended June 30, 2020.

We sell domestically to customers located primarily in the Midwestern, Southern and Eastern United States and to foreign customers, primarily in Canada, Mexico and Western Europe. Net revenues to customers located outside the United States were $176.0 million and $222.7 million for the three and six months ended June 30, 2020, respectively, and $136.4 million and $179.4 million for the three and six months ended June 30, 2019, respectively.

Allowance for Credit Losses

The following is a roll forward of our allowance for credit losses associated with Accounts receivable, net:



	(In Millions)
	2020		2019
Allowance for credit losses as of January 1	$	—	$	—
Increase in allowance	4.3		—
Allowance for credit losses as of June 30	$	4.3	$	—

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Inventories

The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position:



	(In Millions)
	June 30, 2020		December 31, 2019
Product inventories
Finished and semi-finished goods	$	1,026.4	$	114.1
Work-in-process	89.5		68.7
Raw materials	438.0		9.4
Total product inventories	1,553.9		192.2
Manufacturing supplies and critical spares	379.7		125.2
Inventories	$	1,933.6	$	317.4

Deferred Revenue

The table below summarizes our deferred revenue balances:



	(In Millions)
	Deferred Revenue (Current)						Deferred Revenue (Long-Term)
	2020			2019			2020			2019
Opening balance as of January 1	$	22.1		$	21.0		$	25.7		$	38.5
Net decrease	(17.2		)	(5.5		)	(25.7		)	(4.2		)
Closing balance as of June 30	$	4.9		$	15.5		$	—		$	34.3

Prior to the Merger, our iron ore pellet sales agreement with Severstal, subsequently assumed by AK Steel, required supplemental payments to be paid by the customer during the period 2009 through 2013. Installment amounts received under this arrangement in excess of sales were classified as deferred revenue in the Statements of Consolidated Financial Position upon receipt of payment and the revenue was recognized over the term of the supply agreement, which had extended until 2022, in equal annual installments. As a result of the termination of that iron ore pellet sales agreement, we realized $34.6 million of deferred revenue, which was recognized within Realization of deferred revenue in the Statements of Unaudited Condensed Consolidated Operations, during the six months ended June 30, 2020.

We have certain other sales agreements that require customers to pay in advance. Payments received pursuant to these agreements prior to revenue being recognized are recorded as deferred revenue in Other current liabilities.

Accrued Liabilities

The following table presents the detail of our Accrued liabilities in the Statements of Unaudited Condensed Consolidated Financial Position:



	(In Millions)
	June 30, 2020		December 31, 2019
Accrued employment costs	$	153.8	$	61.7
Accrued interest	71.5		29.0
Accrued dividends	1.1		17.8
Other	61.9		17.8
Accrued liabilities	$	288.3	$	126.3

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Cash Flow Information

A reconciliation of capital additions to cash paid for capital expenditures is as follows:



	(In Millions)
	Six Months Ended June 30,
	2020			2019
Capital additions	$	230.7		$	320.9
Less:
Non-cash accruals	(91.6		)	3.6
Right-of-use assets - finance leases	39.4			24.8
Grants	—			(8.4		)
Cash paid for capital expenditures including deposits	$	282.9		$	300.9

Cash payments (receipts) for income taxes and interest are as follows:



	(In Millions)
	Six Months Ended June 30,
	2020			2019
Taxes paid on income	$	0.2		$	0.1
Income tax refunds	(60.4		)	(117.9		)
Interest paid on debt obligations net of capitalized interest¹	63.0			53.2

¹ Capitalized interest was $23.3 million and $9.9 million for the six months ended June 30, 2020 and 2019, respectively.

Non-Cash Investing and Financing Activities



	(In Millions)
	Six Months Ended June 30,
	2020		2019
Fair value of common shares issued for consideration for business combination	$	617.6	$	—
Fair value of equity awards assumed from AK Steel acquisition	3.9		—

NOTE 3 - ACQUISITION OF AK STEEL

Transaction Overview

On March 13, 2020, pursuant to the Merger Agreement, we completed the acquisition of AK Steel, in which we were the acquirer. As a result of the Merger, each share of AK Steel common stock issued and outstanding immediately prior to the effective time of the Merger (other than excluded shares) was converted into the right to receive 0.400 Cliffs common shares and, if applicable, cash in lieu of any fractional Cliffs common shares.

The acquisition combined Cliffs, North America’s largest producer of iron ore pellets, with AK Steel, a leading producer of innovative flat-rolled carbon, stainless and electrical steel products, to create a vertically integrated producer of value-added iron ore and steel products. The combination is expected to create significant opportunities to generate additional value from market trends across the entire steel value chain and enable more consistent, predictable performance through normal market cycles. Together, Cliffs and AK Steel have a presence across the entire manufacturing process, from mining to pelletizing to the development and production of finished high value steel products, including Next Generation Advanced High Strength Steels for automotive and other markets. We expect the combination will generate additional cost synergies, which we have identified and already set into motion savings of approximately $150 million, primarily from consolidating corporate functions, reducing duplicative overhead costs, and procurement and energy cost savings, as well as operational and supply chain efficiencies. The combined company is well positioned to provide high-value iron ore and steel solutions to customers primarily across North America.

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Total net revenues for AK Steel for the most recent pre-acquisition year ended December 31, 2019 were $6,359.4 million. Following the acquisition, the operating results of AK Steel are included in our unaudited condensed consolidated financial statements and are reported as part of our Steel and Manufacturing segment. For the three months ended June 30, 2020, AK Steel generated Revenues of $715.1 million and a loss of $206.5 million included within Net income (loss) attributable to Cliffs shareholders, which included $36.2 million and $15.1 million related to amortization of the fair value inventory step-up and severance costs, respectively. For the period subsequent to the acquisition (March 13, 2020 through June 30, 2020), AK Steel generated Revenues of $932.6 million and a loss of $261.6 million included within Net income (loss) attributable to Cliffs shareholders, which included $59.4 million and $32.7 million related to amortization of the fair value inventory step-up and severance costs, respectively.

Additionally, we incurred acquisition-related costs excluding severance costs of $1.8 million and $25.0 million for the three and six months ended June 30, 2020, respectively, which were recorded in Acquisition-related costs on the Statements of Unaudited Condensed Consolidated Operations.

Refer to NOTE 7 - DEBT AND CREDIT FACILITIES for information regarding debt transactions executed in connection with the Merger.

The Merger was accounted for under the acquisition method of accounting for business combinations. The acquisition date fair value of the consideration transferred totaled $1.5 billion. The following tables summarize the consideration paid for AK Steel and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.

The fair value of the total purchase consideration was determined as follows:



	(In Millions)
Fair value of Cliffs common shares issued for AK Steel outstanding common stock	$	617.6
Fair value of replacement equity awards	3.9
Fair value of AK Steel debt	913.6
Total purchase consideration	$	1,535.1

The fair value of Cliffs common shares issued for outstanding shares of AK Steel common stock and with respect to Cliffs common shares underlying converted AK Steel equity awards that vested upon completion of the Merger is calculated as follows:



	(In Millions, Except Per Share Amounts)
Number of shares of AK Steel common stock issued and outstanding	316.9
Exchange ratio	0.400
Shares of Cliffs common shares issued to AK Steel stockholders	126.8
Price per share of Cliffs common shares	$	4.87
Fair value of Cliffs common shares issued for AK Steel outstanding common stock	$	617.6

The fair value of AK Steel's debt included in the consideration is calculated as follows:



	(In Millions)
Credit Facility	$	590.0
7.50% Senior Secured Notes due July 2023	323.6
Fair value of debt included in consideration	$	913.6

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Valuation Assumption and Preliminary Purchase Price Allocation

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

The preliminary purchase price allocation to assets acquired and liabilities assumed in the Merger was:



	(In Millions)
	Initial Allocation of Consideration			Measurement Period Adjustments			June 30, 2020
Cash and cash equivalents	$	37.7		$	2.0		$	39.7
Accounts receivable	666.0			(3.2		)	662.8
Inventories	1,562.8			(37.8		)	1,525.0
Other current assets	67.5			(14.5		)	53.0
Property, plant and equipment	2,184.4			2.9			2,187.3
Intangible assets	163.0			(15.0		)	148.0
Right of use asset, operating leases	225.9			(16.3		)	209.6
Other non-current assets	85.9			25.9			111.8
Accounts payable	(636.3		)	(2.9		)	(639.2		)
Accrued liabilities	(222.5		)	(2.1		)	(224.6		)
Other current liabilities	(181.8		)	7.0			(174.8		)
Long-term debt	(1,179.4		)	—			(1,179.4		)
Deferred income taxes	(19.7		)	(1.7		)	(21.4		)
Operating lease liability, non-current	(188.1		)	—			(188.1		)
Intangible liabilities	(140.0		)	65.0			(75.0		)
Pension and OPEB liabilities	(873.0		)	—			(873.0		)
Asset retirement obligations	(13.9		)	—			(13.9		)
Other non-current liabilities	(144.2		)	(5.7		)	(149.9		)
Net identifiable assets acquired	1,394.3			3.6			1,397.9
Goodwill	141.2			(4.0		)	137.2
Total net assets acquired	$	1,535.5		$	(0.4	)	$	1,535.1

During the second quarter of 2020, we made certain measurement period adjustments to the acquired assets and liabilities assumed due to clarification of information utilized to determine fair value during the measurement period. The Inventories measurement period adjustments of $37.8 million, resulted in a favorable impact of $7.8 million to Cost of goods sold for the three months ended June 30, 2020.

The goodwill resulting from the acquisition of AK Steel was assigned to Precision Partners, our downstream tooling and stamping operations, and AK Tube, our tubing operations, that are reporting units included in the Steel and Manufacturing segment. Goodwill is calculated as the excess of the purchase price over the net identifiable assets recognized and primarily represents the growth opportunities in lightweighting solutions to automotive customers, as well as any synergistic benefits to be realized from the acquisition of AK Steel. None of the goodwill is expected be deductible for income tax purposes.

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The preliminary purchase price allocated to identifiable intangible assets and liabilities acquired was:



	(In Millions)			Weighted Average Life (In Years)
Intangible assets:
Customer relationships	$	77.0		18
Developed technology	60.0			17
Trade names and trademarks	11.0			10
Total identifiable intangible assets	$	148.0		17
Intangible liabilities:
Above-market supply contracts	$	(75.0	)	12

The above-market supply contracts relate to the long-term coke and energy supply agreements with SunCoke Energy, which includes SunCoke Middletown, a consolidated VIE. Refer to NOTE 16 - VARIABLE INTEREST ENTITIES for further information.

Pro Forma Results

The following table provides unaudited pro forma financial information, prepared in accordance with Topic 805, for the three and six months ended June 30, 2020 and 2019, as if AK Steel had been acquired as of January 1, 2019:



	(In Millions)
	Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020			2019
Revenues	$	979.1		$	2,233.8	$	2,427.7		$	4,021.1
Net income (loss) attributable to Cliffs shareholders	(125.3		)	184.9		(163.7		)	128.3

The unaudited pro forma financial information has been calculated after applying our accounting policies and adjusting the historical results with pro forma adjustments, net of tax, that assume the acquisition occurred on January 1, 2019. Significant pro forma adjustments include the following:


1.	The elimination of intercompany revenues between Cliffs and AK Steel of $113.6 million and $259.2 million for the three and six months ended June 30, 2020, respectively, and $189.9 million and $257.3 million for the three and six months ended June 30, 2019, respectively.

The 2020 pro forma net loss was adjusted to exclude $36.2 million and $59.4 million of non-recurring inventory acquisition accounting adjustments incurred during the three and six months ended June 30, 2020, respectively. The 2019 pro forma net income was adjusted to include $18.5 million and $74.2 million of non-recurring inventory acquisition accounting adjustments for the three and six months ended June 30, 2019, respectively.


3.	The elimination of nonrecurring transaction costs incurred by Cliffs and AK Steel in connection with the Merger of $1.8 million and $28.4 million for the three and six months ended June 30, 2020, respectively.


4.	Total other pro forma adjustments included expense of $12.3 million and $1.0 million for the three and six months ended June 30, 2020, respectively, and expense of $4.0 million and $6.9 million for the three and six months ended June 30, 2019, respectively, primarily due to reduced interest and amortization expense, offset partially by additional depreciation expense and pension and OPEB expense.

The income tax impact of pro forma transaction adjustments that affect Net income (loss) attributable to Cliffs shareholders at a statutory rate of 24.3% resulted in an income tax benefit of $1.6 million and an income tax expense of $3.3 million for the three and six months ended June 30, 2020, respectively, and an income tax expense of $8.0 million and an income tax benefit of $2.8 million, for the three and six months ended June 30, 2019, respectively.

The unaudited pro forma financial information does not reflect the potential realization of synergies or cost savings, nor does it reflect other costs relating to the integration of the two companies. This unaudited pro forma financial

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information should not be considered indicative of the results that would have actually occurred if the acquisition had been consummated on January 1, 2019, nor are they indicative of future results.

NOTE 4 - SEGMENT REPORTING

Our Company is a vertically integrated producer of value-added iron ore and steel products. Our operations are organized and managed in two operating segments according to our upstream and downstream operations. Our Steel and Manufacturing segment is a leading producer of flat-rolled carbon, stainless and electrical steel products, primarily for the automotive, infrastructure and manufacturing, and distributors and converters markets. Our Steel and Manufacturing segment includes subsidiaries that provide customer solutions with carbon and stainless steel tubing products, advanced-engineered solutions, tool design and build, hot- and cold-stamped steel components, and complex assemblies. Construction of our HBI production plant in Toledo, Ohio, now included as part of our Steel and Manufacturing segment, is expected to be completed in the fourth quarter of 2020. 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. All intersegment transactions were eliminated in consolidation.

We evaluate performance on a segment basis, as well as a consolidated basis, based on Adjusted EBITDA, which is a non-GAAP measure. This measure is used by management, investors, lenders and other external users of our financial statements to assess our operating performance and to compare operating performance to other companies in the steel and iron ore industries. In addition, management believes Adjusted EBITDA is a useful measure to assess the earnings power of the business without the impact of capital structure and can be used to assess our ability to service debt and fund future capital expenditures in the business.

Our results by segment are as follows:



	(In Millions, Except Sales Tons)
	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Sales volume (in thousands):
Steel and Manufacturing (net tons)	619			—			818			—

Mining and Pelletizing sales (long tons)	4,759			6,227			6,893			7,777
Less: Intercompany sales (long tons)	(1,041		)	(38		)	(1,824		)	(38		)
Mining and Pelletizing consolidated sales (long tons)	3,718			6,189			5,069			7,739

Revenues:
Steel and Manufacturing net sales to external customers	$	715.1		$	—		$	932.6		$	—

Mining and Pelletizing net sales¹	489.0			747.2			718.4			904.2
Less: Intercompany sales	(111.4		)	(4.0		)	(199.2		)	(4.0		)
Mining and Pelletizing net sales to external customers	377.6			743.2			519.2			900.2

Total revenues	$	1,092.7		$	743.2		$	1,451.8		$	900.2

Adjusted EBITDA:
Steel and Manufacturing	$	(104.0	)	$	(1.1	)	$	(115.1	)	$	(1.9	)
Mining and Pelletizing	82.4			280.5			164.2			328.0
Corporate and eliminations	(60.4		)	(31.0		)	(108.4		)	(56.5		)
Total Adjusted EBITDA	$	(82.0	)	$	248.4		$	(59.3	)	$	269.6

¹ Includes Realization of deferred revenue of $34.6 million for the six months ended June 30, 2020.

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The following table provides a reconciliation of our consolidated Net income (loss) to total Adjusted EBITDA:



	(In Millions)
	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net income (loss)	$	(108.1	)	$	160.8		$	(156.7	)	$	138.7
Less:
Interest expense, net	(68.6		)	(26.3		)	(99.7		)	(51.4		)
Income tax benefit (expense)	24.7			(22.0		)	76.1			(18.3		)
Depreciation, depletion and amortization	(77.1		)	(21.0		)	(111.5		)	(40.9		)
Total EBITDA	$	12.9		$	230.1		$	(21.6	)	$	249.3
Less:
EBITDA of noncontrolling interests¹	$	20.5		$	—		$	25.1		$	—
Gain (loss) on extinguishment of debt	129.4			(17.9		)	132.6			(18.2		)
Severance costs	(16.6		)	—			(35.9		)	(1.7		)
Acquisition-related costs excluding severance costs	(1.8		)	—			(25.0		)	—
Amortization of inventory step-up	(36.2		)	—			(59.4		)	—
Impact of discontinued operations	(0.4		)	(0.4		)	0.3			(0.4		)
Total Adjusted EBITDA	$	(82.0	)	$	248.4		$	(59.3	)	$	269.6

¹ EBITDA of noncontrolling interests includes $15.8 million and $19.3 million for income and $4.7 million and $5.8 million of depreciation, depletion and amortization for the three and six months ended June 30, 2020, respectively.

The following summarizes our assets by segment:



	(In Millions)
	June 30, 2020		December 31, 2019
Assets:
Steel and Manufacturing	$	6,201.6	$	913.6
Mining and Pelletizing	1,685.1		1,643.1
Total segment assets	7,886.7		2,556.7
Corporate and Other (including discontinued operations)	604.0		947.1
Total assets	$	8,490.7	$	3,503.8

The following table summarizes our capital additions by segment:



	(In Millions)
	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Capital additions¹:
Steel and Manufacturing	$	55.6	$	155.1	$	178.8	$	237.5
Mining and Pelletizing	17.4		35.6		51.6		82.4
Corporate and Other	—		0.9		0.3		1.0
Total capital additions	$	73.0	$	191.6	$	230.7	$	320.9

¹ Refer to NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION for additional information.

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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)
	June 30, 2020			December 31, 2019
Land, land improvements and mineral rights	$	653.2		$	582.2
Buildings	454.4			157.8
Steel and Manufacturing equipment	2,147.9			42.0
Mining and Pelletizing equipment	1,448.6			1,413.6
Other	123.4			101.5
Construction-in-progress	1,058.3			730.3
Total property, plant and equipment¹	5,885.8			3,027.4
Allowance for depreciation and depletion	(1,337.9		)	(1,098.4		)
Property, plant and equipment, net	$	4,547.9		$	1,929.0

¹ Includes right-of-use assets related to finance leases of $93.7 million and $49.0 million as of June 30, 2020 and December 31, 2019, respectively.

We recorded capitalized interest into property, plant and equipment of $13.6 million and $23.3 million during the three and six months ended June 30, 2020, respectively, and $5.9 million and $9.9 million for the three and six months ended June 30, 2019, respectively.

We recorded depreciation and depletion expense of $75.3 million and $110.7 million for the three and six months ended June 30, 2020, respectively, and $20.9 million and $40.5 million for the three and six months ended June 30, 2019, respectively.

NOTE 6 - GOODWILL AND INTANGIBLE ASSETS AND LIABILITIES

Goodwill

The increase in the balance of Goodwill as of June 30, 2020, compared to December 31, 2019, is due to the preliminary assignment of $137.2 million to Goodwill in 2020 based on the preliminary purchase price allocation for the acquisition of AK Steel. The carrying amount of goodwill related to our Mining and Pelletizing segment was $2.1 million as of both June 30, 2020 and December 31, 2019.

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Intangible Assets and Liabilities

The following is a summary of our intangible assets and liabilities:

(In Millions)

Classification¹

Gross Amount

Accumulated Amortization

Net Amount

As of June 30, 2020

Intangible assets:

CLF

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