NOTE 12 - ASSET RETIREMENT OBLIGATIONS
The following is a summary of our asset retirement obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
March 31,
2021
|
|
December 31,
2020
|
Asset retirement obligations1
|
$
|
310
|
|
|
$
|
342
|
|
Less: current portion
|
12
|
|
|
7
|
|
Long-term asset retirement obligations
|
$
|
298
|
|
|
$
|
335
|
|
|
|
|
|
1 Includes $158 million and $190 million related to our active operations as of March 31, 2021 and December 31, 2020, respectively.
|
The accrued closure obligation provides for contractual and legal obligations related to our indefinitely idled and closed operations and for the eventual closure of our active operations. The closure date for each of our active mine sites was determined based on the exhaustion date of the remaining mineral reserves and the amortization of the related asset and accretion of the liability is recognized over the estimated mine lives. The closure date and expected timing of the capital requirements to meet our obligations for our indefinitely idled or closed mines is determined based on the unique circumstances of each property. For indefinitely idled or closed mines, the accretion of the liability is recognized over the anticipated timing of remediation. As the majority of our asset retirement obligations at our steelmaking operations have indeterminate settlement dates, asset retirement obligations have been recorded at present values using estimated ranges of the economic lives of the underlying assets.
The following is a roll forward of our asset retirement obligation liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
2021
|
|
2020
|
Asset retirement obligation as of January 1
|
$
|
342
|
|
|
$
|
165
|
|
Increase (decrease) from Acquisitions
|
(34)
|
|
|
14
|
|
Accretion expense
|
3
|
|
|
2
|
|
Remediation payments
|
(1)
|
|
|
—
|
|
Asset retirement obligation as of March 31
|
$
|
310
|
|
|
$
|
181
|
|
The decrease from Acquisitions for the three months ended March 31, 2021, relates to measurement period adjustments as a result of the preliminary purchase price allocation of the AM USA Transaction.
NOTE 13 - CAPITAL STOCK
Underwritten Public Offering
On February 11, 2021, we sold 20 million of our common shares and 40 million common shares were sold by an affiliate of ArcelorMittal, in an underwritten public offering. In each case, shares were sold at a price per share of $16.12. Prior to this sale, ArcelorMittal held approximately 78 million common shares, which were issued as a part of the consideration in connection with the AM USA Transaction. We did not receive any proceeds from the sale of the 40 million common shares sold on behalf of ArcelorMittal. We used the net proceeds from the offering, plus cash on hand, to redeem $322 million aggregate principal amount of our outstanding 9.875% 2025 Senior Secured Notes.
Acquisition of AK Steel
As more fully described in NOTE 3 - ACQUISITIONS, we acquired AK Steel on March 13, 2020. At the effective time of the AK Steel Merger, each share of AK Steel common stock issued and outstanding prior to the effective time of the AK Steel Merger was converted into, and became exchangeable for, 0.400 Cliffs common shares, par value $0.125 per share. We issued a total of 127 million common shares in connection with the AK Steel Merger at a fair value of $618 million. Following the closing of the AK Steel Merger, AK Steel's common stock was de-listed from the New York Stock Exchange.
Acquisition of ArcelorMittal USA
As more fully described in NOTE 3 - ACQUISITIONS, we acquired ArcelorMittal USA on December 9, 2020. Pursuant to the terms of the AM USA Transaction Agreement, we issued 78,186,671 common shares and 583,273 shares of a new series of our Serial Preferred Stock, Class B, without par value, designated as the “Series B Participating Redeemable Preferred Stock,” in each case to an indirect, wholly owned subsidiary of ArcelorMittal as part of the consideration paid by us in connection with the closing of the AM USA Transaction.
Preferred Stock
We have 3,000,000 shares of Serial Preferred Stock, Class A, without par value, of which, none are issued or outstanding. We also have 4,000,000 shares of Serial Preferred Stock, Class B, without par value, authorized, of which, 583,273 shares are issued and outstanding as described above.
Dividends
The below table summarizes our dividend activity during 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Dividend Declared per Common Share
|
2/18/2020
|
|
4/3/2020
|
|
4/15/2020
|
|
$
|
0.06
|
|
12/2/2019
|
|
1/3/2020
|
|
1/15/2020
|
|
0.06
|
|
Subsequent to the dividend paid on April 15, 2020, our Board suspended future dividends.
NOTE 14 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables reflect the changes in Accumulated other comprehensive loss related to Cliffs shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
Postretirement Benefit Liability,
net of tax
|
|
Foreign Currency Translation
|
|
Derivative Financial Instruments, net of tax
|
|
Accumulated Other Comprehensive Loss
|
December 31, 2020
|
$
|
(135)
|
|
|
$
|
3
|
|
|
$
|
(1)
|
|
|
$
|
(133)
|
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
(1)
|
|
|
8
|
|
|
7
|
|
Net (gain) loss reclassified from accumulated other comprehensive loss
|
7
|
|
|
—
|
|
|
(1)
|
|
|
6
|
|
March 31, 2021
|
$
|
(128)
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
(120)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
Postretirement Benefit Liability, net of tax
|
|
Foreign
Currency Translation
|
|
Derivative Financial Instruments,
net of tax
|
|
Accumulated Other Comprehensive Loss
|
December 31, 2019
|
$
|
(316)
|
|
|
$
|
—
|
|
|
$
|
(3)
|
|
|
$
|
(319)
|
|
Other comprehensive loss before reclassifications
|
—
|
|
|
(1)
|
|
|
(5)
|
|
|
(6)
|
|
Net loss reclassified from accumulated other comprehensive loss
|
6
|
|
|
—
|
|
|
2
|
|
|
8
|
|
March 31, 2020
|
$
|
(310)
|
|
|
$
|
(1)
|
|
|
$
|
(6)
|
|
|
$
|
(317)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects the details about Accumulated other comprehensive loss components reclassified from Cliffs shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
|
Details about Accumulated Other Comprehensive Loss Components
|
|
|
|
|
|
Amount of (Gain)/Loss Reclassified into Income, Net of Tax
|
|
Affected Line Item in the Statement of Unaudited Condensed Consolidated Operations
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Amortization of pension and OPEB liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
|
|
|
$
|
9
|
|
|
$
|
7
|
|
|
Other non-operating income
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
|
|
|
(2)
|
|
|
(1)
|
|
|
Income tax benefit (expense)
|
Net of taxes
|
|
|
|
|
|
$
|
7
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
|
|
|
|
$
|
(1)
|
|
|
$
|
3
|
|
|
Cost of goods sold
|
Income tax benefit
|
|
|
|
|
|
—
|
|
|
(1)
|
|
|
Income tax benefit (expense)
|
Net of taxes
|
|
|
|
|
|
$
|
(1)
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period, net of tax
|
|
|
|
|
|
$
|
6
|
|
|
$
|
8
|
|
|
|
NOTE 15 - RELATED PARTIES
We have certain co-owned joint ventures with companies from the steel and mining industries, including integrated steel companies, their subsidiaries and other downstream users of steel and iron ore products.
Hibbing is a co-owned joint venture in which we own 85.3% and U.S. Steel owns 14.7% as of March 31, 2021. As a result of the AM USA Transaction, we acquired an additional 62.3% ownership stake in the Hibbing mine and became the majority owner and mine manager. Prior to the AM USA Transaction, ArcelorMittal was a related party due to its ownership interest in Hibbing. As such, for the three months ended March 31, 2020, certain long-term contracts with ArcelorMittal resulted in Revenues from related parties. As of March 31, 2020, we owned 23% of Hibbing.
Revenues from related parties were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
2021
|
|
2020
|
Revenue from related parties
|
|
|
|
|
$
|
77
|
|
|
$
|
11
|
|
Revenues
|
|
|
|
|
$
|
4,049
|
|
|
$
|
359
|
|
Related party revenues as a percent of Revenues
|
|
|
|
|
2
|
%
|
|
3
|
%
|
Purchases from related parties
|
|
|
|
|
$
|
27
|
|
|
$
|
3
|
|
The following table presents the classification of related party assets and liabilities in the Statements of Unaudited Condensed Consolidated Financial Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
Balance Sheet Location of Assets (Liabilities)
|
|
March 31,
2021
|
|
December 31,
2020
|
Accounts receivable, net
|
|
$
|
30
|
|
|
$
|
2
|
|
|
|
|
|
|
Accounts payable
|
|
(9)
|
|
|
(6)
|
|
|
|
|
|
|
NOTE 16 - VARIABLE INTEREST ENTITIES
SunCoke Middletown
We purchase all the coke and electrical power generated from SunCoke Middletown’s plant under long-term supply agreements and have committed to purchase all the expected production from the facility through 2032. We consolidate SunCoke Middletown as a VIE because we are the primary beneficiary despite having no ownership interest in SunCoke Middletown. SunCoke Middletown had income before income taxes of $17 million and $4 million for the three months ended March 31, 2021 and 2020, respectively, that was included in our consolidated income before income taxes.
The assets of the consolidated VIE can only be used to settle the obligations of the consolidated VIE and not obligations of the Company. The creditors of SunCoke Middletown do not have recourse to the assets or general credit of the Company to satisfy liabilities of the VIE. The Statements of Unaudited Condensed Consolidated Financial Position includes the following amounts for SunCoke Middletown:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
March 31,
2021
|
|
December 31,
2020
|
Cash and cash equivalents
|
$
|
4
|
|
|
$
|
5
|
|
Inventories
|
22
|
|
|
21
|
|
Property, plant and equipment, net
|
304
|
|
|
308
|
|
Accounts payable
|
(12)
|
|
|
(15)
|
|
Other assets (liabilities), net
|
1
|
|
|
(10)
|
|
Noncontrolling interests
|
(319)
|
|
|
(309)
|
|
NOTE 17 - EARNINGS PER SHARE
The following table summarizes the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions, Except Per Share Amounts)
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
2021
|
|
2020
|
Income (loss) from continuing operations
|
|
|
|
|
$
|
57
|
|
|
$
|
(50)
|
|
Income from continuing operations attributable to noncontrolling interest
|
|
|
|
|
(16)
|
|
|
(3)
|
|
Net income (loss) from continuing operations attributable to Cliffs shareholders
|
|
|
|
|
41
|
|
|
(53)
|
|
Income from discontinued operations, net of tax
|
|
|
|
|
—
|
|
|
1
|
|
Net income (loss) attributable to Cliffs shareholders
|
|
|
|
|
$
|
41
|
|
|
$
|
(52)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
490
|
|
298
|
Redeemable preferred shares
|
|
|
|
|
58
|
|
—
|
Convertible senior notes
|
|
|
|
|
19
|
|
—
|
Employee stock plans
|
|
|
|
|
4
|
|
—
|
Diluted
|
|
|
|
|
571
|
|
298
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share attributable to Cliffs shareholders - basic1:
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
$
|
0.08
|
|
|
$
|
(0.18)
|
|
Discontinued operations
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
$
|
0.08
|
|
|
$
|
(0.18)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share attributable to Cliffs shareholders - diluted:
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
$
|
0.07
|
|
|
$
|
(0.18)
|
|
Discontinued operations
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
$
|
0.07
|
|
|
$
|
(0.18)
|
|
|
|
|
|
|
|
|
|
1 For the three months ended March 31, 2021, basic earnings per share is calculated by dividing Net income (loss) attributable to Cliffs shareholders, less $4 million of earnings attributed to Series B Participating Redeemable Preferred Stock, by the weighted average number of basic common shares outstanding during the period presented.
|
For the three months ended March 31, 2020, we had 2 million shares related to employee stock plans that were excluded from the diluted EPS calculation as they were anti-dilutive. There was no dilution during the three months ended March 31, 2020 related to the common share equivalents for the convertible senior notes as our common shares average price did not rise above the conversion price.
NOTE 18 - COMMITMENTS AND CONTINGENCIES
Purchase Commitments
We purchase portions of the principal raw materials required for our steel manufacturing operations under annual and multi-year agreements, some of which have minimum quantity requirements. We also use large volumes of natural gas, electricity and industrial gases in our steel manufacturing operations. We negotiate most of our purchases of chrome, industrial gases and a portion of our electricity under multi-year agreements. Our purchases of coke are made under annual or multi-year agreements with periodic price adjustments. We typically purchase coal under annual fixed-price agreements. We also purchase certain transportation services under multi-year contracts with minimum quantity requirements.
Contingencies
We are currently the subject of, or party to, various claims and legal proceedings incidental to our current and historical operations. These claims and legal proceedings are subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include monetary damages, additional funding requirements or an injunction. If an unfavorable ruling were to occur, there exists the possibility of a material adverse effect on the financial position and results of operations for the period in which the ruling occurs or future periods. However, based on currently available information we do not believe that any pending claims or legal proceedings will result in a material adverse effect in relation to our consolidated financial statements.
Environmental Contingencies
Although we believe our operating practices have been consistent with prevailing industry standards, hazardous materials may have been released at operating sites or third-party sites in the past, including operating sites that we no longer own. If we reasonably can, we estimate potential remediation expenditures for those sites where future remediation efforts are probable based on identified conditions, regulatory requirements or contractual obligations arising from the sale of a business or facility. For sites involving government required investigations, we typically make an estimate of potential remediation expenditures only after the investigation is complete and when we better understand the nature and scope of the remediation. In general, the material factors in these estimates include the costs associated with investigations, delineations, risk assessments, remedial work, governmental response and oversight, site monitoring, and preparation of reports to the appropriate environmental agencies.
The following is a summary of our environmental obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
March 31,
2021
|
|
December 31,
2020
|
Environmental obligations
|
$
|
134
|
|
|
$
|
135
|
|
Less: current portion
|
20
|
|
|
18
|
|
Long-term environmental obligations
|
$
|
114
|
|
|
$
|
117
|
|
We cannot predict the ultimate costs for each site with certainty because of the evolving nature of the investigation and remediation process. Rather, to estimate the probable costs, we must make certain assumptions. The most significant of these assumptions is for the nature and scope of the work that will be necessary to investigate and remediate a particular site and the cost of that work. Other significant assumptions include the cleanup technology that will be used, whether and to what extent any other parties will participate in paying the investigation and remediation costs, reimbursement of past response costs and future oversight costs by governmental agencies, and the reaction of the governing environmental agencies to the proposed work plans. Costs for future investigation and remediation are not discounted to their present value, unless the amount and timing of the cash disbursements are readily known. To the extent that we have been able to reasonably estimate future liabilities, we do not believe that there is a reasonable possibility that we will incur a loss or losses that exceed the amounts we accrued for the environmental matters discussed below that would, either individually or in the aggregate, have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, since we recognize amounts in the consolidated financial statements in accordance with GAAP that exclude potential losses that are not probable or that may not be currently estimable, the ultimate costs of these environmental matters may be higher than the liabilities we currently have recorded in our consolidated financial statements.
Pursuant to RCRA, which governs the treatment, handling and disposal of hazardous waste, the EPA and authorized state environmental agencies may conduct inspections of RCRA-regulated facilities to identify areas where there have been releases of hazardous waste or hazardous constituents into the environment and may order the facilities to take corrective action to remediate such releases. Likewise, the EPA or the states may require closure or post-closure care of residual, industrial and hazardous waste management units, including, but not limited to, landfills and deep injection wells. Environmental regulators have the authority to inspect all of our facilities. While we cannot predict the future actions of these regulators, it is possible that they may identify conditions in future inspections of these facilities that they believe require corrective action.
Pursuant to CERCLA, the EPA and state environmental authorities have conducted site investigations at some of our facilities and other third-party facilities, portions of which previously may have been used for disposal of materials that are currently regulated. The results of these investigations are still pending, and we could be directed to spend funds for remedial activities at the former disposal areas. Because of the uncertain status of these
investigations, however, we cannot reasonably predict whether or when such spending might be required or its magnitude.
On April 29, 2002, AK Steel entered a mutually agreed-upon administrative order with the consent of the EPA pursuant to Section 122 of CERCLA to perform a RI/FS of the Hamilton plant site located in New Miami, Ohio. The plant ceased operations in 1990 and all of its former structures have been demolished. AK Steel submitted the investigation portion of the RI/FS and completed supplemental studies. Until the RI/FS is complete, we cannot reasonably estimate the additional costs, if any, we may incur for potentially required remediation of the site or when we may incur them.
EPA Administrative Order In Re: Ashland Coke
On September 26, 2012, the EPA issued an order under Section 3013 of RCRA requiring a plan to be developed for investigation of four areas at the Ashland Works coke plant. The Ashland Works coke plant ceased operations in 2011 and all of its former structures have been demolished and removed. In 1981, AK Steel acquired the plant from Honeywell International Corporation (as successor to Allied Corporation), who had managed the coking operations there for approximately 60 years. In connection with the sale of the coke plant, Honeywell agreed to indemnify AK Steel against certain claims and obligations that could arise from the investigation, and we intend to pursue such indemnification from Honeywell, if necessary. We cannot reasonably estimate how long it will take to complete the site investigation. On March 10, 2016, the EPA invited AK Steel to participate in settlement discussions regarding an enforcement action. Settlement discussions between the parties are ongoing, though whether the parties will reach agreement and any such agreement’s terms are uncertain. Until the site investigation is complete, we cannot reasonably estimate the costs, if any, we may incur for potential additional required remediation of the site or when we may incur them.
Burns Harbor Water Issues
In August 2019, ArcelorMittal Burns Harbor LLC (n/k/a Cleveland-Cliffs Burns Harbor LLC) suffered a loss of the blast furnace cooling water recycle system, which led to the discharge of cyanide and ammonia in excess of the Burns Harbor plant's NPDES permit limits. Since that time, the facility has taken numerous steps to prevent recurrence and maintain compliance with its NPDES permit. Since the August 2019 event, we have been engaged in settlement discussions with the U.S. Department of Justice, the EPA and the State of Indiana to resolve any alleged violations of environmental laws or regulations. Also, ArcelorMittal Burns Harbor LLC was served with a subpoena on December 5, 2019, from the United States District Court for the Northern District of Indiana relating to the August 2019 event and has responded to the subpoena requests. In addition, the plaintiffs in Environmental Law & Policy Center et al. v. ArcelorMittal Burns Harbor LLC et al. (U.S. District Court, N.D. Indiana Case No. 19-cv-473), which was filed on December 20, 2019, have alleged violations resulting from the August 2019 event and other Clean Water Act claims. Although we cannot accurately estimate the amount of civil penalty, the cost of any injunctive relief requirements, or the costs to resolve third-party claims, including potential natural resource damages claims, they are likely to exceed the reporting threshold in total.
In addition to the foregoing matters, we are or may be involved in proceedings with various regulatory authorities that may require us to pay fines, comply with more rigorous standards or other requirements or incur capital and operating expenses for environmental compliance. We believe that the ultimate disposition of any such proceedings will not have, individually or in the aggregate, a material adverse effect on our consolidated financial condition, results of operations or cash flows.
Tax Matters
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained when challenged by the taxing authorities. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective tax rate in a given period could be materially affected. An unfavorable tax settlement would require use of our cash and result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution. Refer to NOTE 11 - INCOME TAXES for further information.
Other Contingencies
In addition to the matters discussed above, there are various pending and potential claims against us and our subsidiaries involving product liability, commercial, employee benefits and other matters arising in the ordinary course of business. Because of the considerable uncertainties that exist for any claim, it is difficult to reliably or accurately estimate what the amount of a loss would be if a claimant prevails. If material assumptions or factual understandings we rely on to evaluate exposure for these contingencies prove to be inaccurate or otherwise change, we may be required to record a liability for an adverse outcome. If, however, we have reasonably evaluated potential future liabilities for all of these contingencies, including those described more specifically above, it is our opinion, unless we otherwise noted, that the ultimate liability from these contingencies, individually or in the aggregate, should not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
NOTE 19 - SUBSEQUENT EVENTS
We have evaluated subsequent events through the date of financial statement issuance.
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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Management's Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and other factors that may affect our future results. We believe it is important to read our Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020, as well as other publicly available information.
Overview
Cleveland-Cliffs is the largest flat-rolled steel producer in North America. Founded in 1847 as a mine operator, we are also the largest producer of iron ore pellets in North America. In 2020, we acquired two major steelmakers, AK Steel and ArcelorMittal USA, vertically integrating our legacy iron ore business with quality-focused steel production and emphasis on the automotive end market. Our fully integrated portfolio includes custom-made pellets and HBI; flat-rolled carbon steel, stainless, electrical, plate, tinplate and long steel products; and carbon and stainless steel tubing, hot and cold stamping and tooling. Headquartered in Cleveland, Ohio, we employ approximately 25,000 people across our mining, steel and downstream manufacturing operations in the United States and Canada.
Economic Overview
The fundamentals for our business have rebounded strongly since the COVID-19 pandemic disruption that occurred during 2020. The price for domestic HRC, the most significant index in driving our revenues and profitability, currently is at an all-time high, as a direct result of favorable supply-demand dynamics following the pandemic. The HRC index averaged $1,201 per net ton for the first quarter of 2021, 105% higher than the same period last year.
The dramatic increase in the HRC price is a result of both supply and demand factors. Healthy consumer balance sheets have driven strong demand for light vehicles and consumer goods, such as HVAC products and appliances. In addition, demand from machinery and equipment producers has remained robust. On the supply side, spot steel availability remains very limited as steel production in the U.S. has not recovered from the facility shutdowns that occurred during the early pandemic period. Import penetration has grown slightly but remains lower than its prior five-year average due to healthy demand globally as well as trade restrictions such as the Section 232 tariffs.
Along with these supply-demand factors, pricing for HRC has also risen due to the rise in price of steelmaking input costs both domestically and globally, most notably for iron units. The price of busheling scrap, a necessary input for flat-rolled steel production in EAFs in the U.S., averaged $535 per long ton during the first quarter of 2021, a 70% increase from the prior-year period. We expect the price of busheling scrap to remain elevated due to decreasing prime scrap generation from original equipment manufacturers and the growth of EAF capacity in the U.S., along with a push for expanded EAF production in China. As we are fully-integrated and have primarily a blast furnace footprint, the rising prices for busheling scrap in the U.S. bolster our competitive advantage, as we source the majority of our iron feedstock from our stable-cost mining and pelletizing operations in Minnesota and Michigan. The rising price of busheling scrap should also benefit the profitability of our HBI sold externally, and provide greater cost savings potential for HBI used internally.
The price of iron ore has also risen dramatically over the past year, which along with strong demand, has been an important factor in rising steel prices globally. The Platts 62% Price averaged $167 per metric ton in the first quarter of 2021, an 88% increase compared to the same period in 2020. While playing a role in increased prices of steel, we also directly benefit from higher iron ore prices for the portion of iron ore pellets we sell to third parties.
The largest market for our steel products is the automotive industry in North America, which makes light vehicle production a key driver of demand. In the first quarter of 2021, North American light vehicle production was approximately 3.6 million units, a 5% reduction from the prior year’s comparable period. The reduction is primarily due to the global semiconductor shortage. In addition to the semiconductor shortage, production in North America has also experienced weather‐related and other supply chain disruptions, including a petrochemical shortage. In light of these production outages, we have been able to redirect certain volumes intended for this end market to the spot market, where demand is strong and pricing is at an all-time high.
During the first quarter of 2021, light vehicle sales in the U.S. saw a SAAR of approximately 16.7 million units with 3.7 million passenger cars and 13.0 million light trucks sold. The first quarter average represents an 11% increase over the first quarter of 2020. However, the most recent sales data from March reflected an increase in sales to a SAAR of 17.9 million units, the highest sales rate in 41 months, leaving dealer inventories at multi-year lows.
Competitive Strengths
As the largest flat-rolled steel producer in North America, we benefit from having the size and scale necessary in a competitive, capital intensive business. Our sizeable operating footprint provides us with the operational leverage, flexibility and cost performance to achieve competitive margins throughout the business cycle. We also have a unique vertically integrated profile, which begins at the mining stage and goes all the way through the manufacturing of steel products, including stamping, tooling and tubing. This positioning gives us both lower and more predictable costs throughout the supply chain and more control over both our manufacturing inputs and our end product destination.
Our legacy business of producing iron ore pellets, our primary steelmaking raw material input, is another competitive advantage. Mini-mills (producers using EAFs) now comprise about 70% of steel production in the U.S. Their primary iron input is scrap metal, which has unpredictable and often volatile pricing. By controlling our iron ore pellet supply, our primary steelmaking raw material feedstock can be secured at a stable and predictable cost, and not subject to factors outside of our control.
We are also the largest supplier of automotive-grade steel in the U.S. Compared to other steel end markets, automotive steel is generally higher quality and more operationally and technologically intensive to produce. As such, it often generates higher through-the-cycle margins, making it a desirable end market for the steel industry. With our continued technological innovation, as well as leading delivery performance, we expect to remain the leader in supplying this industry.
We offer the most comprehensive flat-rolled steel product selection in the industry, along with several complementary products and services. A sampling of this offering includes advanced high-strength steel, hot-dipped galvanized, aluminized, galvalume, electrogalvanized, galvanneal, HRC, cold-rolled coil, plate, tinplate, grain oriented electrical steel, non-oriented electrical steel, stainless steels, tool & die, stamped components, rail and slabs. Across the quality spectrum and the supply chain, our customers can frequently find the solutions they need from our product selection.
We are the first and the only producer of HBI in the Great Lakes region. Construction of our Toledo, Ohio, direct reduction plant was completed in the fourth quarter of 2020. From this modern plant, we produce a high-quality scrap and pig iron alternative. Ore-based metallics that compete with our HBI generally have to be imported from locations like Russia, Ukraine and Brazil. With increasing tightness in the scrap market and our own internal needs for scrap and metallics, we expect our Toledo direct reduction plant to support healthy Steelmaking margins for us going forward.
Strategy
Optimizing Our Fully-Integrated Steelmaking Footprint
We have transformed into a fully-integrated steel enterprise with the size and scale to achieve improved through-the-cycle margins and are the largest flat-rolled steel producer in North America.
Now that the AM USA Transaction is completed, our focus is on the integration of these facilities within our footprint. These assets build upon our existing high-end steelmaking and raw material capabilities, and also open up new markets to us. The combination provides us the additional scale and technical capabilities necessary in a
competitive and increasingly quality-focused marketplace. We have ample opportunities to implement improvements in logistics, procurement, utilization and quality.
We expect the AM USA Transaction to improve our production capabilities, flexibility, and cost performance. We have targeted approximately $150 million of potential cost synergies through asset optimization, economies of scale, and duplicative overhead savings. The transaction also provided us additional access to non-automotive industries with pricing correlated to the U.S. HRC index, which currently is at an all-time high.
Maximizing Our Commercial Strengths
With the Acquisitions completed, we now have enhanced our offering to a full suite of flat steel products encompassing all steps of the steel manufacturing process. We have increased our industry-leading market share in the automotive sector, where our portfolio of high-end products will deliver a broad range of differentiated solutions for this highly sought after customer base.
We believe we have the broadest flat steel product offering in North America, and can meet customer needs from a variety of end markets and quality specifications. We have several finishing and downstream facilities with advanced technological capabilities.
We are also proponents of the “value over volume” approach in terms of steel supply. We take our leadership role in the industry very seriously and intend to manage our steel output in a responsible manner.
Expanding to New Markets
Our Toledo direct reduction plant allows us to offer another unique, high-quality product to discerning raw material buyers. EAF steelmakers primarily use scrap for their iron feedstock, and our HBI offers a sophisticated alternative with less impurities, allowing other steelmakers to increase the quality of their respective end-steel products and reduce reliance on imported metallics.
The completed Acquisitions provide other potential outlets for HBI, as it can also be used in our integrated steel operations to increase productivity and help to reduce carbon footprint, allowing for more cost efficient and environmentally friendly steelmaking.
We are also seeking to expand our customer base with the rapidly growing and desirable electric vehicle market. At this time, we believe the North American automotive industry is approaching a monumental inflection point, with the adoption of electrical motors in passenger vehicles. As this market grows, it will require more advanced steel applications to meet the needs of electric vehicle producers and consumers. With our unique technical capabilities, we believe we are positioned better than any other North American steelmaker to supply the steel and parts necessary to fill these needs.
Improving Financial Flexibility
Given the cyclicality of our business, it is important to us to be in the financial position to easily withstand any negative demand or pricing pressure we may encounter. As such, our top priority for the allocation of our free cash flow is to improve our balance sheet via the reduction of long-term debt. During the COVID-19 pandemic, we were able to issue secured debt to provide insurance capital through the uncertain industry conditions that the pandemic caused. Now that business conditions have improved and we expect to generate healthy free cash flow during 2021, we have the ability to lower our long-term debt balance.
We anticipate that the current strong market environment will provide us ample opportunities to reduce our debt with our own free cash flow generation. We will also continue to review the composition of our debt, as we are interested in both extending our average maturity profile and increasing our ratio of unsecured debt to secured debt, which we demonstrated by executing a series of favorable debt and equity capital markets transactions during February 2021. These actions will better prepare us to navigate more easily through potentially volatile industry conditions in the future.
Enhance our Environmental Sustainability
As we transform, our commitment to operating our business in a more environmentally responsible manner remains constant. One of the most important issues impacting our industry, our stakeholders and our planet is climate change. As a result, we are continuing Cliffs’ proactive approach by committing to reduce GHG emissions 25% from 2017 levels by 2030. This goal represents combined Scope 1 (direct) and Scope 2 (indirect) GHG emission reductions across all of our operations.
Prior to setting this goal with our newly acquired steel assets, we exceeded our previous 26% GHG reduction target at our legacy facilities six years ahead of our 2025 goal. In 2019, we reduced our combined Scope 1 and Scope 2 GHG emissions by 42% on a mass basis from 2005 baseline levels. Our goal is to further reduce those emissions in coming years.
Additionally, many of our steel assets have improved plant and energy efficiency through participation in programs like the U.S. Department of Energy’s Better Plants program and the EPA’s Energy Star program. With our longstanding focus on plant and energy efficiency, we aim to build on our previous successes across our newly integrated enterprise.
Our GHG reduction commitment is based on executing the following five strategic priorities:
•Developing domestically sourced, high quality iron ore feedstock and utilizing natural gas in the production of HBI;
•Implementing energy efficiency and clean energy projects;
•Investing in the development of carbon capture technology;
•Enhancing our GHG emissions transparency and sustainability focus; and
•Supporting public policies that facilitate GHG reduction in the domestic steel industry.
Recent Developments
Labor Agreements
On April 12, 2021, we reached a tentative agreement with the USW for a new 53-month labor contract for our Mansfield Works employees that is effective as of April 1, 2021. The new contract will cover approximately 300 USW-represented workers.
Financing Transactions
On February 11, 2021, we sold 20 million of our common shares and 40 million common shares were sold by an affiliate of ArcelorMittal, in an underwritten public offering. In each case, shares were sold at a price per share of $16.12. Prior to this sale, ArcelorMittal held approximately 78 million common shares, which were issued as a part of the consideration in connection with the AM USA Transaction. We did not receive any proceeds from the sale of the 40 million common shares sold on behalf of ArcelorMittal. We used the net proceeds from the offering, plus cash on hand, to redeem $322 million aggregate principal amount of our outstanding 9.875% 2025 Senior Secured Notes.
On February 17, 2021, we issued $500 million aggregate principal amount of 4.625% 2029 Senior Notes and $500 million aggregate principal amount of 4.875% 2031 Senior Notes in an offering that was exempt from the registration requirements of the Securities Act. We used the net proceeds from the notes offering to redeem all of the outstanding 4.875% 2024 Senior Secured Notes and 6.375% 2025 Senior Notes issued by Cleveland-Cliffs Inc. and all of the outstanding 7.625% 2021 AK Senior Notes, 7.50% 2023 AK Senior Notes and 6.375% 2025 AK Senior Notes issued by AK Steel Corporation (n/k/a Cleveland-Cliffs Steel Corporation), and pay fees and expenses in connection with such redemptions, and reduce borrowings under our ABL Facility.
Refer to NOTE 8 - DEBT AND CREDIT FACILITIES for further detail.
Results of Operations
Overview
For the three months ended March 31, 2021, we had Net income of $57 million, compared to a Net loss of $49 million for the prior-year period. Our Revenues, diluted EPS and Adjusted EBITDA for the three months ended March 31, 2021 and 2020 were as follows:
See "— Results of Operations — Adjusted EBITDA" below for a reconciliation of our Net income (loss) to Adjusted EBITDA.
Revenues
During the three months ended March 31, 2021, our consolidated Revenues were $4.0 billion, an increase of $3.7 billion, compared to the prior-year period. The increase was primarily due to the addition of 3.9 million net tons of steel shipments from our Steelmaking segment as a result of the Acquisitions.
Revenues by Product Line
The following represents our Revenues by product line:
Revenues by Market
The following table represents our consolidated Revenues and percentage of revenues to each of the markets we supply:
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(In Millions)
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Three Months Ended March 31,
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2021
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2020
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Revenue
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%
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Revenue
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%
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Automotive
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$
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1,392
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|
34
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%
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$
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118
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33
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%
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Infrastructure and Manufacturing
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964
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24
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%
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43
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12
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%
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Distributors and Converters
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1,263
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31
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%
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|
54
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15
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%
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Steel Producers
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430
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11
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%
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|
144
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|
|
40
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%
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Total revenues
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$
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4,049
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$
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359
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Operating Costs
Cost of goods sold
Cost of goods sold increased by $3.4 billion for the three months ended March 31, 2021, as compared to the prior-year period, primarily due to the addition of 3.9 million net tons of steel shipments resulting from the Acquisitions.
Selling, general and administrative expenses
As a result of the Acquisitions, our Selling, general and administrative expenses increased by $67 million during the three months ended March 31, 2021, as compared to the prior-year period.
Acquisition-related costs
The Acquisition-related costs of $13 million for the three months ended March 31, 2021, includes severance of $11 million and other various third-party expenses related to the Acquisitions of $2 million. The Acquisition-related costs of $42 million for the three months ended March 31, 2020, includes severance of $19 million and $23 million of other various third-party expenses related to the AK Steel Merger. Refer to NOTE 3 - ACQUISITIONS for further information on the Acquisitions.
Miscellaneous – net
Miscellaneous – net decreased by $9 million for the three months ended March 31, 2021, as compared to the prior-year period, which was primarily due to expenses incurred at our Toledo direct reduction plant recorded in Miscellaneous – net prior to start of production in December 2020.
Other Income (Expense)
Interest expense, net
Interest expense, net increased by $61 million for the three months ended March 31, 2021, as compared to the prior-year period, primarily due to the incremental debt that we incurred in connection with the AK Steel Merger, along with borrowings on the ABL Facility, and a decrease in capitalized interest during the current year due to the completion of the Toledo direct reduction plant.
Gain (loss) on extinguishment of debt
The loss on extinguishment of debt of $66 million for the three months ended March 31, 2021, primarily relates to the repurchase of $322 million in aggregate principal amount of 9.875% 2025 Senior Secured Notes using the net proceeds from the issuance of 20 million common shares. Additionally, we repurchased $535 million in aggregate principal amount of our outstanding senior notes of various series using the net proceeds from the issuance of the 4.625% 2029 Senior Notes and 4.875% 2031 Senior Notes, along with cash on hand. Refer to NOTE 8 - DEBT AND CREDIT FACILITIES for further details.
Net periodic benefit credits other than service cost component
The increase of $41 million in Net periodic benefit credits other than service cost component primarily relates to an increase in the expected return on pension and voluntary employee benefit association trust assets acquired as a result of the Acquisitions. Refer to NOTE 10 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further details.
Income Taxes
Our effective tax rate is impacted by permanent items, primarily depletion. It also is affected by discrete items that may occur in any given period, but are not consistent from period to period. The following represents a summary of our tax provision and corresponding effective rates:
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(In Millions)
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Three Months Ended
March 31,
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2021
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2020
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Income tax benefit (expense)
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$
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(9)
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$
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51
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Effective tax rate
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|
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14
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%
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|
51
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%
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The difference in the effective rate and income tax expense from the comparable prior-year period primarily relates to the mix of income as well as discrete items recorded in each period.
Our 2021 estimated annual effective tax rate before discrete items is 19%. This estimated annual effective tax rate differs from the U.S. statutory rate of 21%, primarily due to the deduction for percentage depletion in excess of cost depletion. The 2020 estimated annual effective tax rate before discrete items at March 31, 2020 was 47%. The decrease in the estimated annual effective tax rate before discrete items is driven by the change in the mix of income.
Adjusted EBITDA
We evaluate performance 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 industry, although it is not necessarily comparable to similarly titled measures used by other companies. 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.
The following table provides a reconciliation of our Net income (loss) to Adjusted EBITDA:
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(In Millions)
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Three Months Ended
March 31,
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|
|
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|
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2021
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2020
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Net income (loss)
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$
|
57
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|
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$
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(49)
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Less:
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Interest expense, net
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(92)
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(31)
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Income tax benefit (expense)
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(9)
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51
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Depreciation, depletion and amortization
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(217)
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(35)
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Total EBITDA
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|
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$
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375
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$
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(34)
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Less:
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EBITDA of noncontrolling interests1
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$
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22
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$
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4
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Gain (loss) on extinguishment of debt
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|
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(66)
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3
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|
Severance costs
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|
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|
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(11)
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|
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(19)
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Acquisition-related costs excluding severance costs
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|
|
|
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(2)
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(23)
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Amortization of inventory step-up
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|
|
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(81)
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(23)
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Impact of discontinued operations
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—
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1
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Total Adjusted EBITDA
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$
|
513
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$
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23
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1 EBITDA of noncontrolling interests includes $16 million and $3 million for income and $6 million and $1 million for depreciation, depletion and amortization for the three months ended March 31, 2021 and 2020, respectively.
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The following table provides a summary of our Adjusted EBITDA by segment:
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(In Millions)
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|
|
Three Months Ended
March 31,
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|
|
|
|
|
2021
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2020
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Adjusted EBITDA:
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|
|
|
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|
|
Steelmaking
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$
|
537
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$
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44
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|
Other Businesses
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|
|
|
|
11
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|
2
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|
Corporate and eliminations
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(35)
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(23)
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Total Adjusted EBITDA
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$
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513
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$
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23
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Adjusted EBITDA from our Steelmaking segment increased by $493 million for the three months ended March 31, 2021, compared to the prior-year period. The results were favorably impacted by the operating results related to the acquired steelmaking operations.
Adjusted EBITDA from Corporate and eliminations primarily relates to Selling, general and administrative expenses at our Corporate headquarters.
Steelmaking
The following is a summary of our Steelmaking segment results included in our consolidated financial statements for the three months ended March 31, 2021 and 2020. The results for the three months ended March 31, 2021, include full period results for all Steelmaking operations. The results for the three months ended March 31, 2020, include AK Steel operations subsequent to March 13, 2020, and our results from operations previously reported as part of our Mining and Pelletizing segment.
The following is a summary of our Steelmaking segment operating results:
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|
|
|
Three Months Ended
March 31,
|
|
2021
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|
2020
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Operating Results - In Millions
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|
|
|
Revenues
|
$
|
3,919
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|
|
$
|
337
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|
Cost of goods sold
|
$
|
(3,644)
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|
|
$
|
(335)
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|
Selling Price - Per Ton
|
|
|
|
Average net selling price per net ton of steel products
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$
|
900
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|
|
$
|
980
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|
The average net selling price per ton for the three months ended March 31, 2021, reflects changes in mix associated with the first full quarter of ownership of ArcelorMittal USA, reducing the overall contribution of higher-priced coated, stainless and electrical steel products.
The following table represents our Steelmaking segment Revenues by product line:
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|
(Dollars In Millions,
Sales Volumes In Thousands)
|
|
Three Months Ended
March 31,
|
|
2021
|
|
2020
|
|
Revenue
|
|
Volume1
|
|
Revenue
|
|
Volume1
|
Hot-rolled steel
|
$
|
895
|
|
|
1,182
|
|
|
$
|
19
|
|
|
31
|
|
Cold-rolled steel
|
632
|
|
|
748
|
|
|
28
|
|
|
40
|
|
Coated steel
|
1,308
|
|
|
1,369
|
|
|
90
|
|
|
99
|
|
Stainless and electrical steel
|
363
|
|
|
167
|
|
|
56
|
|
|
27
|
|
Plate Steel
|
244
|
|
|
275
|
|
|
—
|
|
|
—
|
|
Other steel products
|
289
|
|
|
403
|
|
|
—
|
|
|
—
|
|
Iron products
|
70
|
|
|
600
|
|
|
142
|
|
|
1,351
|
|
Other
|
118
|
|
|
N/A
|
|
2
|
|
|
N/A
|
Total
|
$
|
3,919
|
|
|
|
|
$
|
337
|
|
|
|
|
|
|
|
|
|
|
|
1 All steel product volumes are stated in net tons. Iron product volumes are stated in long tons.
|
Operating Results
Steelmaking revenues for the three months ended March 31, 2021, increased by $3,582 million compared to the prior-year period due to the addition of sales following the Acquisitions. The three months ended March 31, 2021 included results of the operations acquired in the Acquisitions for a full quarter, compared to the three months ended March 31, 2020, which included the operating results from AK Steel during the period of March 13, 2020 through March 31, 2020. Results for the three months ended March 31, 2021 were impacted positively by the increase in the price for domestic HRC, which is the most significant index in driving our revenues and profitability. The HRC index averaged $1,201 per net ton for the first quarter of 2021, 105% higher than the same period last year and currently at an all-time high as a direct result of favorable supply-demand dynamics following the pandemic.
Cost of goods sold for the three months ended March 31, 2021, increased by $3,309 million compared to the prior-year period predominantly due to additional sales resulting from the Acquisitions.
As a result, Adjusted EBITDA was $537 million for the three months ended March 31, 2021, compared to $44 million for the prior-year period. Refer to "— Results of Operations" above for additional information.
Production
During the first three months of 2021, we produced 4.8 million net tons of raw steel, 6.9 million long tons of iron ore products and 0.7 million net tons of coke. Our Columbus and Monessen facilities acquired through the AM USA Transaction are temporarily idled due to impacts of the COVID-19 pandemic. We anticipate restarting our Columbus facility during the second quarter of 2021. During the first three months of 2020, we produced 0.3 million net tons of raw steel and 4.8 million long tons of iron ore pellets.
Liquidity, Cash Flows and Capital Resources
Our primary sources of liquidity are Cash and cash equivalents and cash generated from our operations, availability under the ABL Facility and other financing activities. Our capital allocation decision-making process is focused on preserving healthy liquidity levels while maintaining the strength of our balance sheet and creating financial flexibility to manage through the inherent cyclical demand for our products and volatility in commodity prices. We are focused on maximizing the cash generation of our operations, reducing debt, and aligning capital investments with our strategic priorities and the requirements of our business plan, including regulatory and permission-to-operate related projects.
Following the onset of the COVID-19 pandemic in the U.S. in 2020, our primary focus was to maintain adequate levels of liquidity to manage through a potentially prolonged economic downturn. Now that business conditions have improved and we expect to generate healthy free cash flow during remaining nine months of 2021, we believe we will have the ability to lower our long-term debt balance. We also look at the composition of our debt, as we are interested in both extending our maturity profile and increasing our ratio of unsecured debt to secured debt. These actions will better prepare us to navigate more easily through potentially volatile industry conditions in the future. In furtherance of these goals, we consummated certain financing transactions in February 2021.
On February 11, 2021, we sold 20 million common shares at a price per share of $16.12. We used the net proceeds from the offering, plus cash on hand, to redeem $322 million aggregate principal amount of our outstanding 9.875% 2025 Senior Secured Notes. Prior to such use, the net proceeds were used to temporarily reduce the outstanding borrowings under our ABL Facility.
On February 17, 2021, we issued $500 million aggregate principal amount of 4.625% 2029 Senior Notes and $500 million aggregate principal amount of 4.875% 2031 Senior Notes in an offering that was exempt from the registration requirements of the Securities Act. We used the net proceeds from the notes offerings to redeem all of the outstanding 4.875% 2024 Senior Secured Notes and 6.375% 2025 Senior Notes issued by Cleveland-Cliffs Inc. and all of the outstanding 7.625% 2021 AK Senior Notes, 7.50% 2023 AK Senior Notes and 6.375% 2025 AK Senior Notes issued by AK Steel Corporation (n/k/a Cleveland-Cliffs Steel Corporation), and pay fees and expenses in connection with such redemptions, and reduce borrowings under our ABL Facility.
The application of the net proceeds to us from the February 2021 financing transactions shifted our debt horizon by providing a four-year window in which none of our long-term senior notes are due clearing the way for us to fully focus on operational integration.
Based on our outlook for the next 12 months, which is subject to continued changing demand from customers and volatility in domestic steel prices, we expect to have ample liquidity through cash generated from operations and availability under our ABL Facility sufficient to meet the needs of our operations and service our debt obligations.
The following discussion summarizes the significant items impacting our cash flows during the three months ended March 31, 2021 and 2020 as well as expected impacts to our future cash flows over the next 12 months. Refer to the Statements of Unaudited Condensed Consolidated Cash Flows for additional information.
Operating Activities
Net cash used by operating activities was $379 million and $164 million for the three months ended March 31, 2021 and 2020, respectively. The increase in cash used by operating activities during the first three months of 2021, compared to 2020, was driven by the increasing receivables due to rising prices, unwind of the ArcelorMittal USA factoring agreement and the 2020 pension contributions that were deferred under the CARES Act to January 2021.
Our U.S. Cash and cash equivalents balance at March 31, 2021 was $91 million, or 86% of our consolidated Cash and cash equivalents balance, excluding cash related to our consolidated VIE of $4 million.
Investing Activities
Net cash used by investing activities was $135 million and $1,007 million for the three months ended March 31, 2021 and 2020, respectively. We had capital expenditures, including capitalized interest, of $136 million and $138 million for the three months ended March 31, 2021 and 2020, respectively. We had cash outflows, including deposits and capitalized interest, for the development of the Toledo direct reduction plant of $28 million and $112 million for the three months ended March 31, 2021 and 2020, respectively. Additionally, we spent approximately $108 million and $26 million on sustaining capital expenditures during the three months ended March 31, 2021 and 2020, respectively. Sustaining capital spend includes infrastructure, mobile equipment, fixed equipment, product quality, environment, health and safety.
During the first three months of 2020, we had net cash outflows of $869 million for the acquisition of AK Steel, net of cash acquired, which included $590 million used to repay the former AK Steel Corporation revolving credit facility and $324 million used to purchase outstanding 7.50% 2023 AK Senior Notes.
We anticipate total cash used for capital expenditures during the next 12 months to be between $650 and $700 million.
Financing Activities
Net cash provided by financing activities was $512 million and $1,005 million for the three months ended March 31, 2021 and 2020, respectively. Cash inflows from financing activities for the three months ended March 31, 2021, included the issuance of $500 million aggregate principal amount of 4.625% 2029 Senior Notes, issuance of $500 million aggregate principal amount of 4.875% 2031 Senior Notes, issuance of 20 million common shares for net proceeds of $322 million and net borrowings of $148 million under credit facilities. We used the net proceeds from the issuance of the 20 million common shares, and cash on hand, to repurchase $322 million in aggregate principal amount of 9.875% 2025 Senior Secured Notes. We used the net proceeds from the issuances of the 4.625% 2029 Senior Notes and 4.875% 2031 Senior Notes to redeem all of the outstanding 4.875% 2024 Senior Secured Notes and 6.375% 2025 Senior Notes issued by Cleveland-Cliffs Inc. and all of the outstanding 7.625% 2021 AK Senior Notes, 7.50% 2023 AK Senior Notes and 6.375% 2025 AK Senior Notes issued by AK Steel Corporation (n/k/a Cleveland-Cliffs Steel Corporation), and pay fees and expenses in connection with such redemptions, and reduce borrowings under our ABL Facility.
Net cash provided by financing activities for the three months ended March 31, 2020, primarily related to the issuance of $725 million aggregate principal amount of 6.75% 2026 Senior Secured Notes and borrowings of $800 million under the ABL Facility. The net proceeds from the issuance of the 6.75% 2026 Senior Secured Notes, along with cash on hand, were used to purchase $373 million aggregate principal amount of 7.625% 2021 AK Senior Notes and $367 million aggregate principal amount of 7.50% 2023 AK Senior Notes and to pay for the $44 million of debt issuance costs.
We anticipate future uses of cash and cash provided by financing activities during the next 12 months to include opportunistic debt transactions as part of our liability management strategy, in addition to, providing supplemental financing to meet cash requirements for business improvement opportunities.
Capital Resources
The following represents a summary of key liquidity measures:
|
|
|
|
|
|
|
(In Millions)
|
|
March 31,
2021
|
Cash and cash equivalents
|
$
|
110
|
|
Less: Cash and cash equivalents from VIE's
|
(4)
|
|
Total cash and cash equivalents
|
$
|
106
|
|
|
|
Available borrowing base on ABL Facility1
|
$
|
3,500
|
|
Borrowings
|
(1,630)
|
|
Letter of credit obligations
|
(272)
|
|
Borrowing capacity available
|
$
|
1,598
|
|
|
|
1 As of March 31, 2021, the ABL Facility had a maximum borrowing base of $3.5 billion. The available borrowing base is determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment.
|
|
|
|
|
Our primary sources of funding are cash and cash equivalents, which totaled $106 million as of March 31, 2021, cash generated by our business, availability under the ABL Facility and other financing activities. The combination of cash and availability under the ABL Facility gives us $1.7 billion in liquidity entering the second quarter of 2021, which is expected to be adequate to fund operations, letter of credit obligations, sustaining and expansion capital expenditures and other cash commitments for at least the next 12 months.
As of March 31, 2021, we were in compliance with the ABL Facility liquidity requirements and, therefore, the springing financial covenant requiring a minimum fixed charge coverage ratio of 1.0 to 1.0 was not applicable.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain arrangements that are not reflected on our Statements of Unaudited Condensed Consolidated Financial Position. These arrangements include minimum "take or pay" purchase commitments, such as minimum electric power demand charges, minimum coal, diesel and natural gas purchase commitments, minimum railroad transportation commitments and minimum port facility usage commitments, and financial instruments with off-balance sheet risk, such as bank letters of credit and bank guarantees.
Information about our Guarantors and the Issuer of our Guaranteed Securities
The accompanying summarized financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered,” and Rule 13-01 "Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralized a Registrant's Securities." Certain of our subsidiaries (the "Guarantor subsidiaries") have fully and unconditionally, and jointly and severally, guaranteed the obligations under (a) the 5.75% 2025 Senior Notes, the 5.875% 2027 Senior Notes, the 7.00% 2027 Senior Notes, the 4.625% 2029 Senior Notes and the 4.875% 2031 Senior Notes issued by Cleveland-Cliffs Inc. on a senior unsecured basis and (b) the 6.75% 2026 Senior Secured Notes and the 9.875% 2025 Senior Secured Notes on a senior secured basis. See NOTE 8 - DEBT AND CREDIT FACILITIES for further information.
The following presents the summarized financial information on a combined basis for Cleveland-Cliffs Inc. (parent company and issuer of the guaranteed obligations) and the Guarantor subsidiaries, collectively referred to as the obligated group. Transactions between the obligated group have been eliminated. Information for the non-Guarantor subsidiaries was excluded from the combined summarized financial information of the obligated group.
Each Guarantor subsidiary is consolidated by Cleveland-Cliffs Inc. as of March 31, 2021. Refer to Exhibit 22, incorporated herein by reference, for the detailed list of entities included within the obligated group as of March 31, 2021.
The guarantee of a Guarantor subsidiary with respect to Cliffs' 5.75% 2025 Senior Notes, the 6.75% 2026 Senior Secured Notes, the 5.875% 2027 Senior Notes, the 7.00% 2027 Senior Notes, the 9.875% 2025 Senior Secured Notes, the 4.625% 2029 Senior Notes and the 4.875% 2031 Senior Notes will be automatically and unconditionally released and discharged, and such Guarantor subsidiary’s obligations under the guarantee and the related indentures (the “Indentures”) will be automatically and unconditionally released and discharged, upon the occurrence of any of the following, along with the delivery to the trustee of an officer’s certificate and an opinion of counsel, each stating that all conditions precedent provided for in the applicable Indenture relating to the release and discharge of such Guarantor subsidiary’s guarantee have been complied with:
(a) any sale, exchange, transfer or disposition of such Guarantor subsidiary (by merger, consolidation, or the sale of) or the capital stock of such Guarantor subsidiary after which the applicable Guarantor subsidiary is no longer a subsidiary of the Company or the sale of all or substantially all of such Guarantor subsidiary’s assets (other than by lease), whether or not such Guarantor subsidiary is the surviving entity in such transaction, to a person which is not the Company or a subsidiary of the Company; provided that (i) such sale, exchange, transfer or disposition is made in compliance with the applicable Indenture, including the covenants regarding consolidation, merger and sale of assets and, as applicable, dispositions of assets that constitute notes collateral, and (ii) all the obligations of such Guarantor subsidiary under all debt of the Company or its subsidiaries terminate upon consummation of such transaction;
(b) designation of any Guarantor subsidiary as an “excluded subsidiary” (as defined in the Indentures); or
(c) defeasance or satisfaction and discharge of the Indentures.
Each entity in the summarized combined financial information follows the same accounting policies as described in the consolidated financial statements. The accompanying summarized combined financial information does not reflect investments of the obligated group in non-Guarantor subsidiaries. The financial information of the obligated group is presented on a combined basis; intercompany balances and transactions within the obligated group have been eliminated. The obligated group's amounts due from, amounts due to, and transactions with, non-Guarantor subsidiaries and related parties have been presented in separate line items.
Summarized Combined Financial Information of the Issuer and Guarantor Subsidiaries:
The following table is summarized combined financial information from the Statements of Unaudited Condensed Consolidated Financial Position of the obligated group:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
March 31, 2021
|
|
December 31, 2020
|
Current assets
|
$
|
5,491
|
|
|
$
|
4,903
|
|
Non-current assets
|
10,160
|
|
|
10,535
|
|
Current liabilities
|
(2,810)
|
|
|
(2,767)
|
|
Non-current liabilities
|
(10,508)
|
|
|
(10,563)
|
|
|
|
|
|
The following table is summarized combined financial information from the Statements of Unaudited Condensed Consolidated Operations of the obligated group:
|
|
|
|
|
|
|
(In Millions)
|
|
Three Months Ended
|
|
March 31, 2021
|
Revenues
|
$
|
3,979
|
|
Cost of goods sold
|
(3,724)
|
|
Income from continuing operations
|
32
|
|
Net income
|
33
|
|
Net income attributable to Cliffs shareholders
|
34
|
|
As of March 31, 2021 and December 31, 2020, the obligated group had the following balances with non-Guarantor subsidiaries and other related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
March 31, 2021
|
|
December 31, 2020
|
Balances with non-Guarantor subsidiaries:
|
|
|
|
Accounts receivable, net
|
$
|
29
|
|
|
$
|
69
|
|
Accounts payable
|
(25)
|
|
|
(17)
|
|
|
|
|
|
Balances with other related parties:
|
|
|
|
Accounts receivable, net
|
$
|
30
|
|
|
$
|
2
|
|
|
|
|
|
Accounts payable
|
(9)
|
|
|
(6)
|
|
|
|
|
|
Additionally, for the three months ended March 31, 2021, the obligated group had Revenues of $77 million and Cost of goods sold of $59 million, in each case with other related parties.
Market Risks
We are subject to a variety of risks, including those caused by changes in commodity prices and interest rates. We have established policies and procedures to manage such risks; however, certain risks are beyond our control.
Pricing Risks
In the ordinary course of business, we are exposed to market risk and price fluctuations related to the sale of our products, which are impacted primarily by market prices for HRC, and the purchase of energy and raw materials used in our operations, which are impacted by market prices for electricity, natural gas, ferrous and stainless steel scrap, chrome, coal, coke, nickel and zinc. Our strategy to address market risk has generally been to obtain competitive prices for our products and services and allow operating results to reflect market price movements dictated by supply and demand; however, we make forward physical purchases and enter into hedge contracts to manage exposure to price risk related to the purchases of certain raw materials and energy used in the production process.
Our financial results can vary for our operations as a result of fluctuations in market prices. We attempt to mitigate these risks by aligning fixed and variable components in our customer pricing contracts, supplier purchasing agreements and derivative financial instruments.
Some customer contracts have fixed-pricing terms, which increase our exposure to fluctuations in raw material and energy costs. To reduce our exposure, we enter into annual, fixed-price agreements for certain raw materials. Some of our existing multi-year raw material supply agreements have required minimum purchase quantities. Under adverse economic conditions, those minimums may exceed our needs. Absent exceptions for force majeure and other circumstances affecting the legal enforceability of the agreements, these minimum purchase requirements may compel us to purchase quantities of raw materials that could significantly exceed our anticipated needs or pay damages to the supplier for shortfalls. In these circumstances, we would attempt to negotiate agreements for new purchase quantities. There is a risk, however, that we would not be successful in reducing purchase quantities, either through negotiation or litigation. If that occurred, we would likely be required to purchase more of a particular raw material in a particular year than we need, negatively affecting our results of operations and cash flows.
Certain of our customer contracts include variable-pricing mechanisms that adjust selling prices in response to changes in the costs of certain raw materials and energy, while other of our customer contracts exclude such mechanisms. We may enter multi-year purchase agreements for certain raw materials with similar variable-price mechanisms, allowing us to achieve natural hedges between the customer contracts and supplier purchase agreements. Therefore, in some cases, price fluctuations for energy (particularly natural gas and electricity), raw materials (such as scrap, chrome, zinc and nickel) or other commodities may be, in part, passed on to customers rather than absorbed solely by us. There is a risk, however, that the variable-price mechanisms in the sales contracts may not necessarily change in tandem with the variable-price mechanisms in our purchase agreements, negatively affecting our results of operations and cash flows.
Our strategy to address volatile natural gas rates and electricity rates includes improving efficiency in energy usage, identifying alternative providers and utilizing the lowest cost alternative fuels. If we are unable to align fixed and variable components between customer contracts and supplier purchase agreements, we use cash-settled commodity price swaps and options to hedge the market risk associated with the purchase of certain of our raw materials and energy requirements. Additionally, we routinely use these derivative instruments to hedge a portion of our natural gas, electricity and zinc requirements. Our hedging strategy is designed to protect us from excessive pricing volatility. However, since we do not typically hedge 100% of our exposure, abnormal price increases in any of these commodity markets might still negatively affect operating costs. The following table summarizes the impact of a 10% and 25% change in market price from the March 31, 2021 estimated price on our derivative instruments, thereby impacting our pre-tax income by the same amount.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
|
Positive or Negative Effect on
Pre-tax Income
|
Commodity Derivative
|
|
10% Increase or Decrease
|
|
25% Increase or Decrease
|
Natural gas
|
|
$
|
22
|
|
|
$
|
54
|
|
Electricity
|
|
1
|
|
|
3
|
|
Zinc
|
|
1
|
|
|
1
|
|
Valuation of Goodwill and Other Long-Lived Assets
We assign goodwill arising from acquired companies to the reporting units that are expected to benefit from the synergies of the acquisition. Goodwill is tested on a qualitative basis for impairment at the reporting unit level on an annual basis (October 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of a reporting unit. As necessary, should our qualitative test indicate that it is more likely than not that the fair value of a reporting unit is less than its carry amount, we perform a quantitative test to determine the amount of impairment, if any, to the carrying value of the reporting unit and its associated goodwill.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and if a quantitative assessment is deemed necessary in determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow methodology, which considers forecasted cash flows discounted at an estimated weighted average cost of capital. Assessing the recoverability of our goodwill requires significant assumptions regarding the estimated future cash flows and other factors to determine the fair value of a reporting unit, including, among other things, estimates related to forecasts of future revenues, expected Adjusted EBITDA, expected capital expenditures and working capital requirements, which are based upon our long-range plan estimates. The assumptions used to calculate the fair value of a reporting unit may change from year to year based on operating results, market conditions and other factors. Changes in these assumptions could materially affect the determination of fair value for each reporting unit.
Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that would indicate that the carrying value of the assets may not be recoverable. Such indicators may include: a significant decline in expected future cash flows; a sustained, significant decline in market pricing; a significant adverse change in legal or environmental factors or in the business climate; changes in estimates of our recoverable reserves; and unanticipated competition. Any adverse change in these factors could have a significant impact on the recoverability of our long-lived assets and could have a material impact on our consolidated statements of operations and statement of financial position.
A comparison of each asset group's carrying value to the estimated undiscounted net future cash flows expected to result from the use of the assets, including cost of disposition, is used to determine if an asset is recoverable. Projected future cash flows reflect management's best estimate of economic and market conditions over the projected period, including growth rates in revenues and costs, and estimates of future expected changes in operating margins and capital expenditures. If the carrying value of the asset group is higher than its undiscounted net future cash flows, the asset group is measured at fair value and the difference is recorded as a reduction to the long-lived assets. We estimate fair value using a market approach, an income approach or a cost approach. For the three months ended March 31, 2021, we concluded that an event triggering the need for an impairment assessment did not occur.
Interest Rate Risk
Interest payable on our senior notes is at fixed rates. Interest payable under our ABL Facility is at a variable rate based upon the applicable base rate plus the applicable base rate margin depending on the excess availability. As of March 31, 2021, we had $1,630 million outstanding under the ABL Facility. An increase in prevailing interest rates would increase interest expense and interest paid for any outstanding borrowings from the ABL Facility. For example, a 100 basis point change to interest rates under the ABL Facility at the current borrowing level would result in a change of $17 million to interest expense on an annual basis.
Supply Concentration Risks
Many of our operations and mines rely on one source each of electric power and natural gas. A significant interruption or change in service or rates from our energy suppliers could materially impact our production costs, margins and profitability.
Forward-Looking Statements
This report contains statements that constitute "forward-looking statements" within the meaning of the federal securities laws. As a general matter, forward-looking statements relate to anticipated trends and expectations rather than historical matters. Forward-looking statements are subject to uncertainties and factors relating to our operations and business environment that are difficult to predict and may be beyond our control. Such uncertainties and factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements. These statements speak only as of the date of this report, and we undertake no ongoing obligation, other than that imposed by law, to update these statements. Uncertainties and risk factors that could affect our future performance and cause results to differ from the forward-looking statements in this report include, but are not limited to:
•disruptions to our operations relating to the COVID-19 pandemic, including the heightened risk that a significant portion of our workforce or on-site contractors may suffer illness or otherwise be unable to perform their ordinary work functions;
•continued volatility of steel and iron ore market prices, which directly and indirectly impact the prices of the products that we sell to our customers;
•uncertainties associated with the highly competitive and cyclical steel industry and our reliance on the demand for steel from the automotive industry, which has been experiencing a trend toward light weighting that could result in lower steel volumes being consumed;
•potential weaknesses and uncertainties in global economic conditions, excess global steelmaking capacity, oversupply of iron ore, prevalence of steel imports and reduced market demand, including as a result of the COVID-19 pandemic;
•severe financial hardship, bankruptcy, temporary or permanent shutdowns or operational challenges, due to the COVID-19 pandemic or otherwise, of one or more of our major customers, including customers in the automotive market, key suppliers or contractors, which, among other adverse effects, could lead to reduced demand for our products, increased difficulty collecting receivables, and customers and/or suppliers asserting force majeure or other reasons for not performing their contractual obligations to us;
•risks related to U.S. government actions with respect to Section 232, the USMCA and/or other trade agreements, tariffs, treaties or policies, as well as the uncertainty of obtaining and maintaining effective antidumping and countervailing duty orders to counteract the harmful effects of unfairly traded imports;
•impacts of existing and increasing governmental regulation, including climate change and other environmental regulation that may be proposed under the Biden Administration, and related costs and liabilities, including failure to receive or maintain required operating and environmental permits, approvals, modifications or other authorizations of, or from, any governmental or regulatory authority and costs related to implementing improvements to ensure compliance with regulatory changes, including potential financial assurance requirements;
•potential impacts to the environment or exposure to hazardous substances resulting from our operations;
•our ability to maintain adequate liquidity, our level of indebtedness and the availability of capital could limit cash flow necessary to fund working capital, planned capital expenditures, acquisitions, and other general corporate purposes or ongoing needs of our business;
•adverse changes in credit ratings, interest rates, foreign currency rates and tax laws;
•limitations on our ability to realize some or all of our deferred tax assets, including our NOLs;
•our ability to realize the anticipated synergies and benefits of the Acquisitions and to successfully integrate the businesses of AK Steel and ArcelorMittal USA into our existing businesses, including uncertainties associated with maintaining relationships with customers, vendors and employees;
•additional debt we assumed, incurred or issued in connection with the Acquisitions, as well as additional debt we incurred in connection with enhancing our liquidity during the COVID-19 pandemic, may negatively impact our credit profile and limit our financial flexibility;
•known and unknown liabilities we assumed in connection with the Acquisitions, including significant environmental, pension and OPEB obligations;
•the ability of our customers, joint venture partners and third-party service providers to meet their obligations to us on a timely basis or at all;
•supply chain disruptions or changes in the cost or quality of energy sources or critical raw materials and supplies, including iron ore, industrial gases, graphite electrodes, scrap, chrome, zinc, coke and coal;
•liabilities and costs arising in connection with any business decisions to temporarily idle or permanently close a mine or production facility, which could adversely impact the carrying value of associated assets and give rise to impairment charges or closure and reclamation obligations, as well as uncertainties associated with restarting any previously idled mine or production facility;
•problems or disruptions associated with transporting products to our customers, moving products internally among our facilities or suppliers transporting raw materials to us;
•uncertainties associated with natural or human-caused disasters, adverse weather conditions, unanticipated geological conditions, critical equipment failures, infectious disease outbreaks, tailings dam failures and other unexpected events;
•our level of self-insurance and our ability to obtain sufficient third-party insurance to adequately cover potential adverse events and business risks;
•disruptions in, or failures of, our information technology systems, including those related to cybersecurity;
•our ability to successfully identify and consummate any strategic investments or development projects, cost-effectively achieve planned production rates or levels, and diversify our product mix and add new customers;
•our actual economic iron ore and coal reserves or reductions in current mineral estimates, including whether we are able to replace depleted reserves with additional mineral bodies to support the long-term viability of our operations;
•the outcome of any contractual disputes with our customers, joint venture partners, lessors, or significant energy, raw material or service providers, or any other litigation or arbitration;
•our ability to maintain our social license to operate with our stakeholders, including by fostering a strong reputation and consistent operational and safety track record;
•our ability to maintain satisfactory labor relations with unions and employees;
•availability of workers to fill critical operational positions and potential labor shortages caused by the COVID-19 pandemic, as well as our ability to attract, hire, develop and retain key personnel, including within the acquired AK Steel and ArcelorMittal USA businesses;
•unanticipated or higher costs associated with pension and OPEB obligations resulting from changes in the value of plan assets or contribution increases required for unfunded obligations; and
•potential significant deficiencies or material weaknesses in our internal control over financial reporting.
For additional factors affecting our business, refer to Part II – Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. You are urged to carefully consider these risk factors.
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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Information regarding our market risk is presented under the caption "Market Risks," which is included in our Annual Report on Form 10-K for the year ended December 31, 2020, and Part I – Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q.