Company Quick10K Filing
Quick10K
Cleveland-Cliffs
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$10.22 283 $2,890
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-13 Other Events
8-K 2019-05-13 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-04-29 Other Events, Exhibits
8-K 2019-04-25 Earnings, Exhibits
8-K 2019-04-24 Shareholder Vote
8-K 2019-03-04 Officers
8-K 2019-02-12 Officers, Exhibits
8-K 2019-02-08 Earnings, Exhibits
8-K 2019-01-28 Officers, Exhibits
8-K 2019-01-28 Officers, Exhibits
8-K 2018-12-11 Officers, Exhibits
8-K 2018-10-19 Earnings, Exhibits
8-K 2018-07-20 Earnings, Exhibits
8-K 2018-04-24 Shareholder Vote
8-K 2018-04-20 Earnings, Exhibits
8-K 2018-04-06 Exit Costs
8-K 2018-02-28 Enter Agreement, Off-BS Arrangement
8-K 2018-01-25 Earnings, Exhibits
OMCL Omnicell 3,370
APY Apergy 2,960
GWB Great Western Bancorp 2,010
KNDI Kandi Technologies Group 263
CFMS Conformis 231
ICCH ICC Holdings 50
LGCY Legacy Reserves 48
OMEX Odyssey Marine Exploration 46
HCCC H/Cell Energy 0
ATAO Altair 0
CLF 2019-03-31
Part I
Item 1. Financial Statements
Note 1 - Basis of Presentation and Significant Accounting Policies
Note 2 - New Accounting Standards
Note 3 - Segment Reporting
Note 4 - Revenue
Note 5 - Inventories
Note 6 - Property, Plant and Equipment
Note 7 - Debt and Credit Facilities
Note 8 - Fair Value Measurements
Note 9 - Pensions and Other Postretirement Benefits
Note 10 - Stock Compensation Plans
Note 11 - Income Taxes
Note 12 - Environmental and Mine Closure Obligations
Note 13 - Derivative Instruments
Note 15 - Capital Stock
Note 16 - Accumulated Other Comprehensive Loss
Note 17 - Cash Flow Information
Note 18 - Related Parties
Note 19 - Earnings per Share
Note 20 - Commitments and Contingencies
Note 21 - Subsequent Events
Note 22 - Supplementary Guarantor Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 clf-201933110xqex101.htm
EX-10.2 clf-201933110xqex102.htm
EX-31.1 clf-201933110xqex311.htm
EX-31.2 clf-201933110xqex312.htm
EX-32.1 clf-201933110xqex321.htm
EX-32.2 clf-201933110xqex322.htm
EX-95 clf-201933110xqex95.htm

Cleveland-Cliffs Earnings 2019-03-31

CLF 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 clf-201933110xq.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission File Number: 1-8944
clf-logoa01a01a11.jpg
CLEVELAND-CLIFFS INC.
(Exact Name of Registrant as Specified in Its Charter)
Ohio
 
34-1464672
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
200 Public Square, Cleveland, Ohio
 
44114-2315
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (216) 694-5700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES                                           NO  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES                                           NO  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES                                           NO  
The number of shares outstanding of the registrant’s common shares, par value $0.125 per share, was 282,845,060 as of April 24, 2019.




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



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

1


PART I
Item 1.
Financial Statements
Statements of Unaudited Condensed Consolidated Financial Position
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions)
 
March 31,
2019
 
December 31,
2018
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
430.2

 
$
823.2

Accounts receivable, net
20.1

 
226.7

Inventories
312.7

 
87.9

Supplies and other inventories
97.3

 
93.2

Derivative assets
107.4

 
91.5

Income tax receivable, current
117.3

 
117.3

Other current assets
41.0

 
39.8

TOTAL CURRENT ASSETS
1,126.0

 
1,479.6

PROPERTY, PLANT AND EQUIPMENT, NET
1,410.3

 
1,286.0

OTHER ASSETS
 
 
 
Deposits for property, plant and equipment
68.3

 
83.0

Income tax receivable, non-current
121.3

 
121.3

Deferred income taxes
466.6

 
464.8

Other non-current assets
113.8

 
94.9

TOTAL OTHER ASSETS
770.0

 
764.0

TOTAL ASSETS
$
3,306.3

 
$
3,529.6

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

2


Statements of Unaudited Condensed Consolidated Financial Position
Cleveland-Cliffs Inc. and Subsidiaries - (Continued)
 
(In Millions)
 
March 31,
2019
 
December 31,
2018
LIABILITIES
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
171.7

 
$
186.8

Accrued employment costs
42.1

 
74.0

Accrued interest
23.0

 
38.4

Partnership distribution payable
43.8

 
43.5

Other current liabilities
113.4

 
125.5

TOTAL CURRENT LIABILITIES
394.0

 
468.2

PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES
244.2

 
248.7

ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
174.4

 
172.0

LONG-TERM DEBT
2,087.0

 
2,092.9

OTHER LIABILITIES
145.0

 
123.6

TOTAL LIABILITIES
3,044.6

 
3,105.4

COMMITMENTS AND CONTINGENCIES (REFER TO NOTE 20)

 

EQUITY
 
 
 
SHAREHOLDERS' EQUITY
 
 
 
Preferred Stock - no par value
 
 
 
Class A - 3,000,000 shares authorized
 
 
 
Class B - 4,000,000 shares authorized
 
 
 
Common Shares - par value $0.125 per share
 
 
 
Authorized - 600,000,000 shares (2018 - 600,000,000 shares);
 
 
 
Issued - 301,886,794 shares (2018 - 301,886,794 shares);
 
 
 
Outstanding - 282,839,140 shares (2018 - 292,611,569 shares)
37.7

 
37.7

Capital in excess of par value of shares
3,860.2

 
3,916.7

Retained deficit
(3,096.8
)
 
(3,060.2
)
Cost of 19,047,654 common shares in treasury (2018 - 9,275,225 shares)
(263.9
)
 
(186.1
)
Accumulated other comprehensive loss
(275.5
)
 
(283.9
)
TOTAL EQUITY
261.7

 
424.2

TOTAL LIABILITIES AND EQUITY
$
3,306.3

 
$
3,529.6

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

3


Statements of Unaudited Condensed Consolidated Operations
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions, Except Per Share Amounts)
 
Three Months Ended
March 31,
 
2019
 
2018
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
Product
$
145.4

 
$
169.2

Freight
11.6

 
10.8


157.0

 
180.0

COST OF GOODS SOLD
(126.1
)
 
(118.5
)
SALES MARGIN
30.9

 
61.5

OTHER OPERATING EXPENSE
 
 
 
Selling, general and administrative expenses
(28.1
)
 
(25.1
)
Miscellaneous – net
(3.6
)
 
(6.1
)
 
(31.7
)
 
(31.2
)
OPERATING INCOME (LOSS)
(0.8
)
 
30.3

OTHER INCOME (EXPENSE)
 
 
 
Interest expense, net
(25.1
)
 
(32.4
)
Other non-operating income
0.1

 
4.4

 
(25.0
)
 
(28.0
)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(25.8
)
 
2.3

INCOME TAX BENEFIT (EXPENSE)
3.7

 
(15.7
)
LOSS FROM CONTINUING OPERATIONS
(22.1
)
 
(13.4
)
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX

 
(70.9
)
NET LOSS
$
(22.1
)
 
$
(84.3
)
 
 
 
 
LOSS PER COMMON SHARE – BASIC
 
 
 
Continuing operations
$
(0.08
)
 
$
(0.05
)
Discontinued operations

 
(0.24
)
 
$
(0.08
)
 
$
(0.29
)
LOSS PER COMMON SHARE – DILUTED
 
 
 
Continuing operations
$
(0.08
)
 
$
(0.05
)
Discontinued operations

 
(0.24
)
 
$
(0.08
)
 
$
(0.29
)
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
 
 
 
Basic
289,525

 
297,266

Diluted
289,525

 
297,266

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

4


Statements of Unaudited Condensed Consolidated Comprehensive Loss
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions)
 
Three Months Ended
March 31,
 
2019
 
2018
NET LOSS
$
(22.1
)
 
$
(84.3
)
OTHER COMPREHENSIVE INCOME
 
 
 
Changes in pension and other post-retirement benefits, net of tax
5.7

 
6.7

Changes in foreign currency translation

 
0.7

Changes in derivative financial instruments, net of tax
2.7

 
0.3

OTHER COMPREHENSIVE INCOME
8.4

 
7.7

TOTAL COMPREHENSIVE LOSS
$
(13.7
)
 
$
(76.6
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


Statements of Unaudited Condensed Consolidated Cash Flows
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions)
 
Three Months Ended
March 31,
 
2019
 
2018
OPERATING ACTIVITIES
 
 
 
Net loss
$
(22.1
)
 
$
(84.3
)
Adjustments to reconcile net loss to net cash used by operating activities:
 
 
 
Depreciation, depletion and amortization
19.9

 
23.9

Gain on derivatives
(5.7
)
 
(40.8
)
Other
9.8

 
25.9

Changes in operating assets and liabilities:
 
 
 
Receivables and other assets
199.9

 
196.3

Inventories
(224.8
)
 
(193.0
)
Payables, accrued expenses and other liabilities
(88.2
)
 
(70.9
)
Net cash used by operating activities
(111.2
)
 
(142.9
)
INVESTING ACTIVITIES
 
 
 
Purchase of property, plant and equipment
(132.7
)
 
(12.4
)
Deposits for property, plant and equipment
(1.4
)
 
(59.0
)
Other investing activities
8.5

 

Net cash used by investing activities
(125.6
)
 
(71.4
)
FINANCING ACTIVITIES
 
 
 
Repurchase of common shares
(124.3
)
 

Dividends paid
(14.8
)
 

Repurchase of debt
(10.3
)
 

Other financing activities
(8.4
)
 
(7.0
)
Net cash used by financing activities
(157.8
)
 
(7.0
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH

 
0.2

DECREASE IN CASH AND CASH EQUIVALENTS, INCLUDING CASH CLASSIFIED WITHIN OTHER CURRENT ASSETS RELATED TO DISCONTINUED OPERATIONS
(394.6
)
 
(221.1
)
LESS: DECREASE IN CASH AND CASH EQUIVALENTS FROM DISCONTINUED OPERATIONS, CLASSIFIED WITHIN OTHER CURRENT ASSETS
(1.6
)
 

NET DECREASE IN CASH AND CASH EQUIVALENTS
(393.0
)
 
(221.1
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
823.2

 
978.3

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
430.2

 
$
757.2

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

6


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

 
$
37.7

 
$
3,916.7

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

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(22.1
)
 

 

 
(22.1
)
Other comprehensive income

 

 

 

 

 
8.4

 
8.4

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

 

 
(56.5
)
 

 
46.5

 

 
(10.0
)
Common stock repurchases
(11.5
)
 

 

 

 
(124.3
)
 

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

 

 

 
(14.5
)
 

 

 
(14.5
)
March 31, 2019
282.8

 
$
37.7

 
$
3,860.2

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

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

 
$
37.7

 
$
3,933.9

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

 
$
(444.1
)
Adoption of accounting standard

 

 

 
34.0

 

 

 

 
34.0

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(84.3
)
 

 

 

 
(84.3
)
Other comprehensive income

 

 

 

 

 
7.7

 

 
7.7

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

 

 
(15.8
)
 

 
17.7

 

 

 
1.9

March 31, 2018
297.7

 
$
37.7

 
$
3,918.1

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

 
$
(484.8
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7


Cleveland-Cliffs Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations, comprehensive loss and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019 or any other future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2018.
As more fully described in the Form 10-K for the year ended December 31, 2018, in 2018 we committed to a course of action leading to the permanent closure of the Asia Pacific Iron Ore mining operations and, as planned, completed our final shipment in June 2018. Factors considered in this decision included increasingly discounted prices for lower-iron-content ore and the quality of the remaining iron ore reserves.
During 2018, we sold all of the assets of our Asia Pacific Iron Ore business through a series of sales to third parties. As a result of our planned exit, management determined that our Asia Pacific Iron Ore operating segment met the criteria to be classified as held for sale and a discontinued operation under ASC Topic 205, Presentation of Financial Statements. As such, all Asia Pacific Iron Ore operating segment results are classified within discontinued operations. Refer to NOTE 14 - DISCONTINUED OPERATIONS for further information.
We have two reportable segments - the Mining and Pelletizing segment and the Metallics segment. Unless otherwise noted, discussion of our business and results of operations in this Quarterly Report on Form 10-Q refers to our continuing operations.
Basis of Consolidation
The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, including the following operations as of March 31, 2019:
Name
 
Location
 
Business Segment
 
Status of Operations
Northshore
 
Minnesota
 
Mining and Pelletizing
 
Active
United Taconite
 
Minnesota
 
Mining and Pelletizing
 
Active
Tilden
 
Michigan
 
Mining and Pelletizing
 
Active
Empire
 
Michigan
 
Mining and Pelletizing
 
Indefinitely Idled
Toledo HBI
 
Ohio
 
Metallics
 
Construction Stage
Intercompany transactions and balances are eliminated upon consolidation.
Equity Method Investments
Our 23% ownership interest in Hibbing is recorded as an equity method investment. As of March 31, 2019 and December 31, 2018, our investment in Hibbing was $10.8 million and $15.4 million, respectively, classified as Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position.
Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the audited financial statements for the fiscal year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the SEC. There have been no material changes in our significant accounting policies and estimates from those disclosed therein.

8


NOTE 2 - NEW ACCOUNTING STANDARDS
Issued and Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases except for short-term leases. For lessees, leases will be classified as either operating or finance leases in the Statements of Unaudited Condensed Consolidated Operations. We adopted this standard on its effective date of January 1, 2019 using the optional alternative approach, which requires application of the new guidance at the beginning of the standard's effective date. Adoption of the updated standard did not have a material effect on our consolidated financial statements.
Issued and Not Effective
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326), which introduces a new accounting model, CECL. CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. We plan to adopt this standard on its effective date of January 1, 2020, and are currently evaluating the impact of this standard on our financial statements.
NOTE 3 - SEGMENT REPORTING
In alignment with our strategic goals, our Company’s continuing operations are organized and managed in two operating segments according to our differentiated products. Our Mining and Pelletizing segment is a major supplier of iron ore pellets to the North American steel industry from our mines and pellet plants located in Michigan and Minnesota. In our Metallics segment, we are currently constructing an HBI production plant in Toledo, Ohio. We expect to complete construction and begin production in 2020.
We evaluate performance based on sales margin, defined as revenues less cost of goods sold identifiable to each segment. Additionally, we evaluate performance on a segment basis, as well as a consolidated basis, based on EBITDA and Adjusted EBITDA. These measures allow management and investors to focus on our ability to service our debt as well as illustrate how the business is performing.  Additionally, EBITDA and Adjusted EBITDA assist management and investors in their analysis and forecasting as these measures approximate the cash flows associated with operational earnings.
The following tables present a summary of our reportable segments including a reconciliation of segment sales margin to Income (loss) from Continuing Operations Before Income Taxes and a reconciliation of Net loss to EBITDA and Adjusted EBITDA:
 
(In Millions)
 
Three Months Ended
March 31,
 
2019
 
2018
Revenues from product sales and services:
 
 
 
Mining and Pelletizing
$
157.0

 
$
180.0

 
 
 
 
Sales margin:
 
 
 
Mining and Pelletizing
$
30.9

 
$
61.5

Other operating expense
(31.7
)
 
(31.2
)
Other expense
(25.0
)
 
(28.0
)
Income (loss) from continuing operations before income taxes
$
(25.8
)
 
$
2.3


9


 
(In Millions)
 
Three Months Ended
March 31,
 
2019
 
2018
Net loss
$
(22.1
)
 
$
(84.3
)
Less:
 
 
 
Interest expense, net
(25.1
)
 
(33.5
)
Income tax benefit (expense)
3.7

 
(15.7
)
Depreciation, depletion and amortization
(19.9
)
 
(23.9
)
EBITDA
$
19.2

 
$
(11.2
)
Less:
 
 
 
Foreign exchange remeasurement
$
0.1

 
$
(0.4
)
Impact of discontinued operations

 
(63.1
)
Loss on extinguishment of debt
(0.3
)
 

Severance costs
(1.7
)
 

Adjusted EBITDA
$
21.1

 
$
52.3

 
 
 
 
EBITDA:
 
 
 
Mining and Pelletizing
$
42.8

 
$
72.5

Metallics
(0.8
)
 
(0.3
)
Corporate and Other (including discontinued operations)
(22.8
)
 
(83.4
)
Total EBITDA
$
19.2

 
$
(11.2
)
 
 
 
 
Adjusted EBITDA:
 
 
 
Mining and Pelletizing
$
47.5

 
$
77.1

Metallics
(0.8
)
 
(0.3
)
Corporate
(25.6
)
 
(24.5
)
Total Adjusted EBITDA
$
21.1

 
$
52.3

The following table summarizes our depreciation, depletion and amortization expense and capital additions:
 
(In Millions)
 
Three Months Ended
March 31,
 
2019
 
2018
Depreciation, depletion and amortization:
 
 
 
Mining and Pelletizing
$
18.5

 
$
15.8

Corporate
1.4

 
1.4

Total depreciation, depletion and amortization
$
19.9

 
$
17.2

 
 
 
 
Capital additions1:
 
 
 
Mining and Pelletizing
$
46.8

 
$
18.7

Metallics
82.4

 
60.0

Corporate
0.1

 
0.2

Total capital additions
$
129.3

 
$
78.9

 
 
 
 
1 Refer to NOTE 17 - CASH FLOW INFORMATION for additional information.

10


A summary of assets by segment is as follows:
 
(In Millions)
 
March 31,
2019
 
December 31,
2018
Assets:
 
 
 
Mining and Pelletizing
$
1,774.5

 
$
1,694.1

Metallics
350.0

 
265.9

Total segment assets
2,124.5

 
1,960.0

Corporate and Other (including discontinued operations)
1,181.8

 
1,569.6

Total assets
$
3,306.3

 
$
3,529.6

NOTE 4 - REVENUE
We sell primarily a single product, iron ore pellets, in the North American market. Revenue is recognized generally when iron ore is delivered to our customers. Revenue is measured at the point that control transfers and represents the amount of consideration we expect to receive in exchange for transferring goods. We offer standard payment terms to our customers, generally requiring settlement within 30 days.
We enter into supply contracts of varying lengths to provide customers iron ore pellets to use in their blast furnaces. Blast furnaces run continuously with a constant feed of iron ore and, once shut down, cannot easily be restarted. As a result, we ship iron ore in large quantities for storage and use by customers at a later date. Customers do not simultaneously receive and consume the iron ore. Based on our assessment of the factors that indicate the pattern of satisfaction, we transfer control of the iron ore at a point in time upon shipment or delivery of the product. The customer is able to direct the use of, and obtain substantially all of the benefits from, the product at the time the product is delivered.
Most of our customer supply agreements specify a provisional price, which is used for initial billing and cash collection. Revenue recorded in accordance with Topic 606 is calculated using the expected revenue rate at the point when control transfers. The final settlement includes market inputs for a specified period of time, which may vary by customer, but typically include one or more of the following published rates: Platts 62% Price, Atlantic Basin pellet premiums, Platts international indexed freight rates and changes in specified Producer Price Indices, including industrial commodities, fuel and steel. Changes in the expected revenue rate from the date control transfers through final settlement of contract terms is recorded in accordance with Topic 815. Refer to NOTE 13 - DERIVATIVE INSTRUMENTS for further information on how our estimated and final revenue rates are determined.
A supply agreement with a customer provides for supplemental revenue or refunds based on the average annual daily market price for hot-rolled coil steel in the year the iron ore is consumed in the customer’s blast furnaces. As control transfers prior to consumption, the supplemental revenue is recorded in accordance with ASC Topic 815. Refer to NOTE 13 - DERIVATIVE INSTRUMENTS for further information on supplemental revenue or refunds.
Included within Revenues from product sales and services is derivative revenue related to Topic 815 of $5.5 million and $43.8 million, for three months ended March 31, 2019 and 2018, respectively.
Deferred Revenue
The table below summarizes our deferred revenue balances:
 
(In Millions)
 
Deferred Revenue (Current)
 
Deferred Revenue (Long-Term)
 
2019
 
2018
 
2019
 
2018
Opening balance as of January 1
$
21.0

 
$
23.8

 
$
38.5

 
$
51.4

Closing balance as of March 31
18.1

 
31.0

 
38.5

 
51.4

Increase (decrease)
$
(2.9
)
 
$
7.2

 
$

 
$


11


The terms of one of our pellet supply agreements required supplemental payments to be paid by the customer during the period 2009 through 2012. Installment amounts received under this arrangement in excess of sales were classified as Other current liabilities and Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position upon receipt of payment. Revenue is recognized over the life of the supply agreement, which extends until 2022, in equal annual installments. As of March 31, 2019 and December 31, 2018, installment amounts received in excess of sales totaled $51.4 million related to this agreement. As of March 31, 2019 and December 31, 2018, deferred revenue of $12.9 million was recorded in Other current liabilities and $38.5 million was recorded as long-term in Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position, related to this agreement.
Due to the payment terms and the timing of cash receipts near a period end, cash receipts can exceed shipments for certain customers. Revenue recognized on these transactions totaling $5.3 million and $8.2 million was deferred and included in Other current liabilities in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2019 and December 31, 2018, respectively.
NOTE 5 - INVENTORIES
The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position:
 
 
(In Millions)
 
 
March 31, 2019
 
December 31, 2018
Finished goods
 
$
287.7

 
$
77.8

Work-in-process
 
25.0

 
10.1

Total inventories
 
$
312.7

 
$
87.9

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the carrying value of each of the major classes of our depreciable assets:
 
(In Millions)
 
March 31,
2019
 
December 31,
2018
Land rights and mineral rights
$
549.6

 
$
549.6

Office and information technology
70.5

 
70.0

Buildings
87.4

 
87.2

Mining equipment
568.4

 
548.5

Processing equipment
660.9

 
645.8

Electric power facilities
58.7

 
58.7

Land improvements
23.8

 
23.8

Asset retirement obligation
14.8

 
14.8

Other
25.5

 
25.2

Construction-in-progress
392.0

 
284.8

 
2,451.6

 
2,308.4

Allowance for depreciation and depletion
(1,041.3
)
 
(1,022.4
)
 
$
1,410.3

 
$
1,286.0

We recorded capitalized interest of $4.0 million and $1.0 million into construction-in-progress during the three months ended March 31, 2019 and 2018, respectively.

12


NOTE 7 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt:
(In Millions)
March 31, 2019
Debt Instrument
 
Annual Effective
Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Unamortized Discounts
 
Total Debt
Secured Notes:
 
 
 
 
 
 
 
 
 
 
$400 Million 4.875% 2024 Senior Notes
 
5.00%
 
$
400.0

 
$
(5.5
)
 
$
(2.1
)
 
$
392.4

Unsecured Notes:
 
 
 
 
 
 
 
 
 
 
$700 Million 4.875% 2021 Senior Notes
 
4.89%
 
114.0

 
(0.2
)
 

 
113.8

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

 
(5.3
)
 
(73.0
)
 
238.0

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

 
(9.5
)
 
(14.1
)
 
1,049.7

$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
298.4

 
(2.2
)
 
(3.3
)
 
292.9

ABL Facility
 
N/A
 
450.0

 
N/A

 
N/A

 

Fair Value Adjustment to Interest Rate Hedge
 
 
 
 
 
 
 
 
 
0.2

Long-term debt
 
 
 
 
 
 
 
 
 
$
2,087.0

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

 
$
(5.7
)
 
$
(2.2
)
 
$
392.1

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

 
(0.2
)
 

 
123.8

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

 
(5.5
)
 
(75.6
)
 
235.2

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

 
(9.9
)
 
(14.6
)
 
1,048.8

$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
298.4

 
(2.3
)
 
(3.3
)
 
292.8

ABL Facility
 
N/A
 
450.0

 
N/A

 
N/A

 

Fair Value Adjustment to Interest Rate Hedge
 
 
 
 
 
 
 
 
 
0.2

Long-term debt
 
 
 
 
 
 
 
 
 
$
2,092.9

Debt Extinguishment
The following is a summary of the debt extinguished with cash and the respective loss on extinguishment:
 
(In Millions)
 
Three Months Ended
March 31, 2019
Debt Instrument
Debt Extinguished
 
Loss on Extinguishment
$700 Million 4.875% 2021 Senior Notes
$
10.0

 
$
0.3

 
$
10.0

 
$
0.3


13


Debt Maturities
The following represents a summary of our maturities of debt instruments based on the principal amounts outstanding at March 31, 2019:
 
 
(In Millions)
 
 
Maturities of Debt
2019
 
$

2020
 

2021
 
114.0

2022
 

2023
 

2024
 
400.0

2025 and thereafter
 
1,688.0

Total maturities of debt
 
$
2,202.0

ABL Facility
The following represents a summary of our borrowing capacity under the ABL Facility:
 
(In Millions)
 
March 31, 2019
 
December 31, 2018
Available borrowing base on ABL Facility1
$
305.4

 
$
323.7

Letter of credit obligations and other commitments2
(65.4
)
 
(55.0
)
Borrowing capacity available3
$
240.0

 
$
268.7

 
 
 
 
1 The ABL Facility has a maximum borrowing base of $450 million, determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment.
2 We issued standby letters of credit with certain financial institutions in order to support business obligations including, but not limited to, workers compensation, environmental obligations and certain Metallics' contracts.
3 As of March 31, 2019 and December 31, 2018, we had no loans drawn under the ABL Facility.
NOTE 8 - FAIR VALUE MEASUREMENTS
The following represents the assets and liabilities measured at fair value:
 
(In Millions)
 
March 31, 2019
 
Quoted Prices in Active
Markets for Identical Assets/Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$

 
$
357.6

 
$

 
$
357.6

Derivative assets

 
0.7

 
106.7

 
107.4

Total
$

 
$
358.3

 
$
106.7

 
$
465.0

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
0.7

 
$
9.8

 
$
10.5

Total
$

 
$
0.7

 
$
9.8

 
$
10.5


14


 
(In Millions)
 
December 31, 2018
 
Quoted Prices in Active
Markets for Identical Assets/Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
0.8

 
$
542.6

 
$

 
$
543.4

Derivative assets

 
0.1

 
91.4

 
91.5

Total
$
0.8

 
$
542.7

 
$
91.4

 
$
634.9

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
3.7

 
$

 
$
3.7

Total
$

 
$
3.7

 
$

 
$
3.7

Financial assets classified in Level 1 included money market funds. The valuation of these instruments is based upon unadjusted quoted prices for identical assets in active markets.
The valuation of financial assets and liabilities classified in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable. Level 2 assets include commercial paper, certificates of deposit and commodity hedge contracts. Level 2 liabilities include commodity hedge contracts.
The Level 3 assets and liabilities include derivative assets that consist of freestanding derivative instruments related to a certain supply agreement and derivative assets and liabilities related to certain provisional pricing arrangements with our customers.
The supply agreement included in our Level 3 assets contains provisions for supplemental revenue or refunds based on the average annual daily market price for hot-rolled coil steel in the year the iron ore product is consumed in the customer’s blast furnaces. We account for these provisions as derivative instruments at the time of sale and adjust the derivative instruments to fair value through Product revenues each reporting period until the product is consumed and the amounts are settled. We had assets of $106.4 million and $89.3 million at March 31, 2019 and December 31, 2018, respectively, related to this supply agreement.
The provisional pricing arrangements included in our Level 3 assets/liabilities specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate to be based on market inputs at a specified point in time in the future, per the terms of the supply agreements. The difference between the estimated final revenue rate at the date of sale and the estimated final revenue rate at the measurement date is characterized as a derivative and is required to be accounted for separately once the revenue has been recognized. The derivative instruments are adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates provided by management until the final revenue rates are determined. We had assets of $0.3 million and liabilities of $9.8 million related to provisional pricing arrangements at March 31, 2019 compared to assets of $2.1 million related to provisional pricing arrangements at December 31, 2018.

15


The following table illustrates information about quantitative inputs and assumptions for the assets and liabilities categorized in Level 3 of the fair value hierarchy:
Qualitative/Quantitative Information About Level 3 Fair Value Measurements
 
 
(In Millions)
Fair Value at March 31, 2019
 
Balance Sheet
Location
 
Valuation Technique
 
Unobservable Input
 
Range or Point Estimate
(Weighted Average)
 
Customer supply agreement
 
$
106.4

 
Derivative assets
 
Market Approach
 
Management's Estimate of Market Hot-Rolled Coil Steel per net ton
 
$735
Provisional pricing arrangements
 
$
9.8

 
Other current liabilities
 
Market Approach
 
PPI Estimates
 
180 - 240
(208)
Management's Estimate of Platts 62% Price per dry metric ton for respective contract period
$80
The significant unobservable input used in the fair value measurement of our customer supply agreement is a forward-looking estimate of the average annual daily market price for hot-rolled coil steel determined by management.
The significant unobservable inputs used in the fair value measurement of our provisional pricing arrangements include estimates for PPI data and management’s estimate of Platts 62% Price based upon current market data and index pricing, which include forward-looking estimates determined by management.
The following tables represent a reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
(In Millions)
 
Level 3 Assets
 
Three Months Ended
March 31,
 
2019
 
2018
Beginning balance
$
91.4

 
$
49.5

Total gains included in earnings
15.3

 
44.3

Settlements

 
(0.2
)
Ending balance - March 31
$
106.7

 
$
93.6

Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date
$
15.3

 
$
44.5

 
(In Millions)
 
Level 3 Liabilities
 
Three Months Ended
March 31,
 
2019
 
2018
Beginning balance
$

 
$
(1.7
)
Total losses included in earnings
(9.8
)
 
(0.5
)
Settlements

 
2.2

Ending balance - March 31
$
(9.8
)
 
$

Total losses for the period included in earnings attributable to the change in unrealized losses on liabilities still held at the reporting date
$
(9.8
)
 
$


16


The carrying values of certain financial instruments (e.g., Accounts receivable, net, Accounts payable and Other current liabilities) approximates fair value and, therefore, have been excluded from the table below. A summary of the carrying value and fair value of other financial instruments were as follows:
 
 
 
(In Millions)
 
 
 
March 31, 2019
 
December 31, 2018
 
Classification
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Long-term debt:
 
 
 
 
 
 
 
 
 
Secured Notes
 
 
 
 
 
 
 
 
 
$400 Million 4.875% 2024 Senior Notes
Level 1
 
$
392.4

 
$
398.0

 
$
392.1

 
$
370.2

Unsecured Notes
 
 
 
 
 
 
 
 
 
$700 Million 4.875% 2021 Senior Notes
Level 1
 
113.8

 
115.7

 
123.8

 
122.3

$316.25 Million 1.50% 2025 Convertible Senior Notes
Level 1
 
238.0

 
432.5

 
235.2

 
352.4

$1.075 Billion 5.75% 2025 Senior Notes
Level 1
 
1,049.7

 
1,035.5

 
1,048.8

 
962.0

$800 Million 6.25% 2040 Senior Notes
Level 1
 
292.9

 
255.0

 
292.8

 
232.8

ABL Facility
Level 2
 

 

 

 

Fair value adjustment to interest rate hedge
Level 2
 
0.2

 
0.2

 
0.2

 
0.2

Total long-term debt
 
 
$
2,087.0

 
$
2,236.9

 
$
2,092.9

 
$
2,039.9

The fair value of long-term debt was determined using quoted market prices.
NOTE 9 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
We offer defined benefit pension plans, defined contribution pension plans and OPEB plans, primarily consisting of retiree healthcare benefits, to most employees as part of a total compensation and benefits program. The defined benefit pension plans are noncontributory and benefits generally are based on a minimum formula or employees’ years of service and average earnings for a defined period prior to retirement.
The following are the components of defined benefit pension and OPEB costs:
Defined Benefit Pension Costs
 
(In Millions)
 
Three Months Ended
March 31,
 
2019
 
2018
Service cost
$
4.1

 
$
4.7

Interest cost
8.7

 
7.6

Expected return on plan assets
(13.6
)
 
(15.0
)
Amortization:
 
 
 
Prior service costs
0.3

 
0.5

Net actuarial loss
5.9

 
5.3

Net periodic benefit cost
$
5.4

 
$
3.1


17


Other Postretirement Benefits Credits
 
(In Millions)
 
Three Months Ended
March 31,
 
2019
 
2018
Service cost
$
0.4

 
$
0.5

Interest cost
2.3

 
2.1

Expected return on plan assets
(4.2
)
 
(4.6
)
Amortization:
 
 
 
Prior service credits
(0.5
)
 
(0.8
)
Net actuarial loss
1.3

 
1.2

Net periodic benefit credit
$
(0.7
)
 
$
(1.6
)
Based on funding requirements, we made pension contributions of $3.2 million for the three months ended March 31, 2019, compared to pension contributions of $2.3 million for the three months ended March 31, 2018. OPEB contributions are typically made on an annual basis in the first quarter of each year, but due to plan funding requirements being met, no OPEB contributions were required or made for the three months ended March 31, 2019 and 2018.
NOTE 10 - STOCK COMPENSATION PLANS
Employees’ Plans
On February 19, 2019, the Compensation Committee approved grants under the A&R 2015 Equity Plan to certain officers and employees for the 2019 to 2021 performance period. Shares granted under the awards consisted of 0.6 million restricted stock units and 0.6 million performance shares.
Restricted stock units granted during 2019 are subject to continued employment, are retention based and are payable in common shares. The outstanding restricted stock units that were granted in 2019 cliff vest on December 31, 2021.
Performance shares are subject to continued employment, and each performance share, if earned, entitles the holder to be paid out in common shares. Performance is measured on the basis of relative TSR for the period of January 1, 2019 to December 31, 2021 and measured against the constituents of the SPDR S&P Metals and Mining ETF Index at the beginning of the relevant performance period. The final payouts for the outstanding performance period grants will vary from zero to 200% of the original grant depending on whether and to what extent the Company achieves certain objectives and performance goals as established by the Compensation Committee.
Determination of Fair Value
The fair value of each performance share grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. A correlation matrix of historic and projected stock prices was developed for both the Company and our predetermined peer group of mining and metals companies. The fair value assumes that the objective will be achieved.
The expected term of the grant represents the time from the grant date to the end of the service period. We estimate the volatility of our common shares and that of the peer group of mining and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds with a term commensurate with the remaining life of the performance period.
The following assumptions were utilized to estimate the fair value for the 2019 performance share grant:
Grant Date
 
Grant Date Market Price
 
Average Expected Term (Years)
 
Expected Volatility
 
Risk-Free Interest Rate
 
Dividend Yield
 
Fair Value
 
Fair Value (Percent of Grant Date Market Price)
February 19, 2019
 
$
11.24

 
2.87
 
67.5%
 
2.55%
 
—%
 
$
18.31

 
162.90%

18


NOTE 11 - INCOME TAXES
Our 2019 estimated annual effective tax rate before discrete items is 12.9%. The estimated annual effective tax rate differs from the U.S. statutory rate of 21.0% primarily due to the deductions for percentage depletion in excess of cost depletion related to U.S. operations. The 2018 estimated annual effective tax rate before discrete items at March 31, 2018 was 0.1%. The rate in the comparable prior-year period was significantly lower due to the reversal of valuation allowance in the same period.
For the three months ended March 31, 2019 and 2018, we recorded discrete items that resulted in an income tax benefit of $0.4 million and expense of $15.7 million, respectively. The prior-year period expense of $15.7 million primarily relates to the $14.5 million reduction of the refundable AMT credit recorded in Income tax receivable, non-current in our Statements of Unaudited Condensed Consolidated Financial Position based on the sequestration guidance issued by the Internal Revenue Service during the first quarter of 2018. This position was subsequently reversed by the Internal Revenue Service during the fourth quarter of 2018. The prior-year period expense was a $15.7 million reduction of an asset and did not result in a cash tax outlay.
NOTE 12 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
The following is a summary of our environmental and mine closure obligations:
 
(In Millions)
 
March 31,
2019
 
December 31,
2018
Environmental
$
2.4

 
$
2.5

Mine closure1
174.9

 
172.4

Total environmental and mine closure obligations
177.3

 
174.9

Less current portion
2.9

 
2.9

Long-term environmental and mine closure obligations
$
174.4

 
$
172.0

 
 
 
 
1 Includes our active operating mines, our indefinitely idled Empire mine and a closed mine formerly operating as LTVSMC.
Mine Closure
The accrued closure obligation for our active mining operations provides for contractual and legal obligations associated with the eventual closure of the mining operations. The closure date for each of our active operating mine sites was determined based on the exhaustion date of the remaining iron ore reserves. 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. The amortization of the related asset and accretion of the liability is recognized over the estimated mine lives for our active operations.
The following represents a roll forward of our mine closure obligation liability for the three months ended March 31, 2019 and for the year ended December 31, 2018:
 
(In Millions)
 
March 31,
2019
 
December 31,
2018
Asset retirement obligation at beginning of period
$
172.4

 
$
168.4

Accretion expense
2.6

 
9.5

Remediation payments
(0.1
)
 
(1.0
)
Revision in estimated cash flows

 
(4.5
)
Asset retirement obligation at end of period
$
174.9

 
$
172.4


19


NOTE 13 - DERIVATIVE INSTRUMENTS
The following table presents the fair value of our derivative instruments and the classification of each in the Statements of Unaudited Condensed Consolidated Financial Position:
 
 
(In Millions)
 
 
Derivative Assets
 
Derivative Liabilities
 
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
Derivative Instrument
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Derivative assets
 
$
0.7

 
Derivative assets
 
$
0.1

 
Other current liabilities
 
$
0.7

 
Other current liabilities
 
$
3.7

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer supply agreement
 
Derivative assets
 
$
106.4

 
Derivative assets
 
$
89.3

 
 
 
$

 
 
 
$

Provisional pricing arrangements
 
Derivative assets
 
0.3

 
Derivative assets
 
2.1

 
Other current liabilities
 
9.8

 
 
 

Total derivatives not designated as hedging instruments under ASC 815
 
 
 
$
106.7

 
 
 
$
91.4

 
 
 
$
9.8

 
 
 
$

Total derivatives
 
 
 
$
107.4

 
 
 
$
91.5

 
 
 
$
10.5

 
 
 
$
3.7

Derivatives Designated as Hedging Instruments - Cash Flow Hedges
Commodity Contracts
The following table presents our outstanding hedge contracts:
 
(In Millions)
 
March 31, 2019
 
December 31, 2018
 
Notional Amount
 
Unit of Measure
 
Varying Maturity Dates
 
Notional Amount
 
Unit of Measure
 
Varying Maturity Dates
Natural gas
4.0
 
MMBtu
 
April 2019 - February 2020
 
1.8
 
MMBtu
 
January 2019 - August 2019
Diesel
7.5
 
Gallons
 
April 2019 - December 2019
 
11.0
 
Gallons
 
January 2019 - December 2019
Derivatives Not Designated as Hedging Instruments
Customer Supply Agreement
A supply agreement with one customer provides for supplemental revenue or refunds to the customer based on the average annual daily steel market price for hot-rolled coil steel at the time the iron ore product is consumed in the customer’s blast furnace. The supplemental pricing is characterized as a freestanding derivative and is required to be accounted for separately once control transfers to the customer. The derivative instrument, which is finalized based on a future price, is adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates provided by management until the pellets are consumed and the amounts are settled.
Provisional Pricing Arrangements
Certain of our supply agreements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate based on certain market inputs at a specified period in time in the future, per the terms of the supply agreements. Market inputs are tied to indexed price adjustment factors that are integral to the iron ore supply contracts and vary based on the agreement. The pricing mechanisms typically include

20


adjustments based upon changes in the Platts 62% Price, Atlantic Basin pellet premiums, Platts international indexed freight rates and changes in specified Producer Price Indices, including those for industrial commodities, fuel and steel. The pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. The price adjustment factors have been evaluated to determine if they qualify as embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host contract and are integral to the host contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments.
Revenue is recognized generally upon delivery to our customers. Revenue is measured at the point that control transfers and represents the amount of consideration we expect to receive in exchange for transferring goods. Changes in the expected revenue rate from the date that control transfers through final settlement of contract terms is recorded in accordance with ASC Topic 815 and is characterized as a derivative and accounted for separately.  Subsequently, the derivative instruments are adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates provided by management until the final revenue rate is determined.
The provisional amounts represent the difference between the amount we expect to receive when revenue was initially measured at the point control transfers and our subsequent estimate of the final revenue rate based on the price calculation established in the supply agreements.
The following summarizes the effect of our derivatives that are not designated as hedging instruments in the Statements of Unaudited Condensed Consolidated Operations:
 
(In Millions)
 
Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in Income on Derivatives
Three Months Ended
March 31,
 
 
 
 
2019
 
2018
 
Customer supply agreements
Product revenues
$
17.1

 
$
41.9

 
Provisional pricing arrangements
Product revenues
(11.6
)
 
1.9

 
Total
 
$
5.5

 
$
43.8

Refer to NOTE 8 - FAIR VALUE MEASUREMENTS for additional information.
NOTE 14 - DISCONTINUED OPERATIONS
The information below sets forth selected financial information related to operating results of our businesses classified as discontinued operations, which include our former Asia Pacific Iron Ore, North American Coal and Canadian operations. While the reclassification of revenues and expenses related to discontinued operations from prior periods have no impact upon previously reported net income, the Statements of Unaudited Condensed Consolidated Operations present the revenues and expenses that were reclassified from the specified line items to discontinued operations and the Statements of Unaudited Condensed Consolidated Financial Position present the assets and liabilities that were reclassified from the specified line items to assets and liabilities of discontinued operations. The charts below provide an asset group breakout for each financial statement line impacted by discontinued operations.
 
 
(In Millions)
 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Income (loss) from discontinued operations, net of tax
 
 
 
 
Asia Pacific Iron Ore
 
$
(0.5
)
 
$
(71.3
)
North American Coal
 
0.5

 
0.4

 
 
$

 
$
(70.9
)

21


 
 
(In Millions)
 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Net cash used by operating activities
 
 
 
 
Asia Pacific Iron Ore
 
$
(0.8
)
 
$
(21.2
)
 
 
$
(0.8
)
 
$
(21.2
)
 
 
 
 
 
Net cash provided (used) by investing activities
 
 
 
 
Asia Pacific Iron Ore
 
$
0.1

 
$
(0.1
)
 
 
$
0.1

 
$
(0.1
)
Asia Pacific Iron Ore Operations
Background
In January 2018, we announced that we would accelerate the time frame for the planned closure of our Asia Pacific Iron Ore mining operations in Australia. In April 2018, we committed to a course of action leading to the permanent closure of the Asia Pacific Iron Ore mining operations and, as planned, completed our final shipment in June 2018. Factors considered in this decision included increasingly discounted prices for lower-iron-content ore and the quality of the remaining iron ore reserves.
During 2018, we sold all of the assets of our Asia Pacific Iron Ore business through a series of sales to third parties. As a result of our planned exit, management determined that our Asia Pacific Iron Ore operating segment met the criteria to be classified as held for sale and a discontinued operation under ASC Topic 205, Presentation of Financial Statements. As such, all Asia Pacific Iron Ore operating segment results are classified within discontinued operations.
Loss from Discontinued Operations
 
 
(In Millions)
 
 
Three Months Ended
March 31,
Loss from Discontinued Operations
 
2019
 
2018
Revenues from product sales and services
 
$

 
$
59.0

Cost of goods sold and operating expenses
 

 
(124.1
)
Sales margin
 

 
(65.1
)
Other operating expense
 
(0.4
)
 
(2.5
)
Other expense
 
(0.1
)
 
(1.1
)
Impairment of long-lived assets
 

 
(2.6
)
Loss from discontinued operations, net of tax
 
$
(0.5
)
 
$
(71.3
)

22


NOTE 15 - CAPITAL STOCK
Share Repurchase Program
In November 2018, our Board of Directors authorized a program to repurchase outstanding common shares in the open market or in privately negotiated transactions, up to a maximum of $200 million. We are not obligated to make any purchase and the program may be suspended or discontinued at any time. During the three months ended March 31, 2019, we repurchased 11.5 million common shares at a cost of $124.3 million in the aggregate, including commissions and fees. As of March 31, 2019, there was $28.6 million remaining under the authorization. The share repurchase program is active until December 31, 2019.
Dividends
On February 19, 2019, the Board of Directors declared a quarterly cash dividend on our common shares of $0.05 per share. As a result, we have $14.7 million in Other current liabilities in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2019. Subsequent to quarter end on April 15, 2019, the cash dividend was paid to shareholders of record as of the close of business on April 5, 2019.
On October 18, 2018, the Board of Directors declared a quarterly cash dividend on our common shares of $0.05 per share. On January 15, 2019, the cash dividend was paid to shareholders of record as of the close of business on January 4, 2019.
NOTE 16 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables reflect the changes in Accumulated other comprehensive loss related to shareholders’ equity (deficit):
 
(In Millions)
 
Postretirement Benefit Liability, net of tax
 
Derivative Financial Instruments, net of tax
 
Accumulated Other Comprehensive Loss
December 31, 2018
$
(281.1
)
 
$
(2.8
)
 
$
(283.9
)
Other comprehensive income before reclassifications
0.2

 
2.5

 
2.7

Net loss reclassified from accumulated other comprehensive loss
5.5

 
0.2

 
5.7

March 31, 2019
$
(275.4
)
 
$
(0.1
)
 
$
(275.5
)
 
(In Millions)
 
Postretirement Benefit Liability, net of tax
 
Foreign Currency Translation
 
Derivative Financial Instruments, net of tax
 
Accumulated Other Comprehensive Loss
December 31, 2017
$
(263.9
)
 
$
225.4

 
$
(0.5
)
 
$
(39.0
)