UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
OR
o 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
CLIFFS NATURAL RESOURCES INC.
(Exact Name of Registrant as Specified in Its Charter)
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| | |
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 x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x
The number of shares outstanding of the registrant’s common shares, par value $0.125 per share, was 153,181,056 as of April 21, 2014.
TABLE OF CONTENTS |
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| | | Page Number |
| | | | | |
DEFINITIONS | | | |
| | | |
PART I - FINANCIAL INFORMATION | | | |
| Item 1. | Financial Statements | | | |
| | Statements of Unaudited Condensed Consolidated Operations Three Months Ended March 31, 2014 and 2013 | | | |
| | Statements of Unaudited Condensed Consolidated Comprehensive Income for the Three Months Ended March 31, 2014 and 2013 | | | |
| | Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2014 and December 31, 2013 | | | |
| | Statements of Unaudited Condensed Consolidated Cash Flows for the Three Months Ended March 31, 2014 and 2013 | | | |
| | Notes to Unaudited Condensed Consolidated Financial Statements | | | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | | | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | | | |
| Item 4. | Controls and Procedures | | | |
| | | |
PART II - OTHER INFORMATION | | | |
| Item 1A. | Risk Factors | | | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | | | |
| Item 4. | Mine Safety Disclosures | | | |
| Item 6. | Exhibits | | | |
| | | | | |
Signatures | | | |
| | | |
DEFINITIONS
The following abbreviations or acronyms are used in the text. References in this report to the “Company,” “we,” “us,” “our” and “Cliffs” are to Cliffs Natural Resources Inc. and subsidiaries, collectively. References to “A$” or “AUD” refer to Australian currency, “C$” to Canadian currency and “$” to United States currency.
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| | |
Abbreviation or acronym | | Term |
Amapá | | Anglo Ferrous Amapá Mineração Ltda. and Anglo Ferrous Logística Amapá Ltda. |
ArcelorMittal | | ArcelorMittal (as the parent company of ArcelorMittal Mines Canada, ArcelorMittal USA and ArcelorMittal Dofasco, as well as, many other subsidiaries) |
ASC | | Accounting Standards Codification |
Barrick | | Barrick Gold Corporation Inc. |
Bloom Lake | | The Bloom Lake Iron Ore Mine Limited Partnership |
Chromite Project | | Cliffs Chromite Ontario Inc. |
CLCC | | Cliffs Logan County Coal LLC |
DD&A | | Depreciation, depletion and amortization |
Dodd-Frank Act | | Dodd-Frank Wall Street Reform and Consumer Protection Act |
EBITDA | | Earnings before interest, taxes, depreciation and amortization |
Empire | | Empire Iron Mining Partnership |
EPA | | U.S. Environmental Protection Agency |
EPS | | Earnings per share |
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 |
Hibbing | | Hibbing Taconite Company |
ICE Plan | | Amended and Restated Cliffs 2007 Incentive Equity Plan, as amended |
Ispat | | Ispat Inland Steel Company |
Koolyanobbing | | Collective term for the operating deposits at Koolyanobbing, Mount Jackson and Windarling |
LIBOR | | London Interbank Offered Rate |
LTVSMC | | LTV Steel Mining Company |
MACT | | Maximum Achievable Control Technology |
MMBtu | | Million British Thermal Units |
Moody's | | Moody's Investors Service, Inc., a subsidiary of Moody's Corporation, and its successors |
MRRT | | Minerals Resource Rent Tax (Australia) |
MSHA | | U.S. Mine Safety and Health Administration |
n/m | | Not meaningful |
Northshore | | Northshore Mining Company |
Oak Grove | | Oak Grove Resources, LLC |
OCI | | Other comprehensive income (loss) |
OPEB | | Other postretirement benefits |
Pinnacle | | Pinnacle Mining Company, LLC |
S&P | | Standard & Poor's Rating Services, a division of Standard & Poor's Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc., and its successors |
SEC | | U.S. Securities and Exchange Commission |
Severstal | | Severstal Dearborn, LLC |
Substitute Rating Agency | | A "nationally recognized statistical rating organization" within the meaning of Section 3 (a)(62) of the Exchange Act, selected by us (as certified by a certificate of officers confirming the decision of our board of directors) as a replacement agency of Moody's or S&P, or both of them, as the case may be |
Tilden | | Tilden Mining Company |
TSR | | Total Shareholder Return |
United Taconite | | United Taconite LLC |
U.S. | | United States of America |
VNQDC Plan | | 2005 Voluntary NonQualified Deferred Compensation Plan |
VWAP | | Volume Weighted Average Price |
Wabush | | Wabush Mines Joint Venture |
WISCO | | Wugang Canada Resources Investment Limited, a subsidiary of Wuhan Iron and Steel (Group) Corporation |
2012 Equity Plan | | Cliffs Natural Resources Inc. 2012 Incentive Equity Plan |
PART I
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| |
Item 1. | Financial Statements |
Statements of Unaudited Condensed Consolidated Operations
Cliffs Natural Resources Inc. and Subsidiaries
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| | | | | | | |
| (In Millions, Except Per Share Amounts) |
| Three Months Ended March 31, |
| 2014 | | 2013 |
REVENUES FROM PRODUCT SALES AND SERVICES | | | |
Product | $ | 860.9 |
| | $ | 1,082.6 |
|
Freight and venture partners' cost reimbursements | 79.1 |
| | 57.9 |
|
| 940.0 |
| | 1,140.5 |
|
COST OF GOODS SOLD AND OPERATING EXPENSES | (876.8 | ) | | (902.6 | ) |
SALES MARGIN | 63.2 |
| | 237.9 |
|
OTHER OPERATING INCOME (EXPENSE) | | | |
Selling, general and administrative expenses | (51.1 | ) | | (48.4 | ) |
Exploration costs | (4.2 | ) | | (22.7 | ) |
Miscellaneous - net | (58.6 | ) | | 1.5 |
|
| (113.9 | ) | | (69.6 | ) |
OPERATING INCOME (EXPENSE) | (50.7 | ) | | 168.3 |
|
OTHER INCOME (EXPENSE) | | | |
Interest expense, net | (42.7 | ) | | (49.1 | ) |
Other non-operating income | 1.2 |
| | 1.1 |
|
| (41.5 | ) | | (48.0 | ) |
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY LOSS FROM VENTURES | (92.2 | ) | | 120.3 |
|
INCOME TAX BENEFIT | 21.8 |
| | 6.0 |
|
EQUITY LOSS FROM VENTURES, net of tax | (0.3 | ) | | (5.5 | ) |
NET INCOME (LOSS) | (70.7 | ) | | 120.8 |
|
LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST | 0.4 |
| | (13.8 | ) |
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | (70.3 | ) | | $ | 107.0 |
|
PREFERRED STOCK DIVIDENDS | (12.8 | ) | | (9.9 | ) |
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS COMMON SHAREHOLDERS | $ | (83.1 | ) | | $ | 97.1 |
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| | | |
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC | $ | (0.54 | ) | | $ | 0.66 |
|
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED | $ | (0.54 | ) | | $ | 0.66 |
|
AVERAGE NUMBER OF SHARES (IN THOUSANDS) | | | |
Basic | 153,040 |
| | 147,827 |
|
Diluted | 153,040 |
| | 148,081 |
|
CASH DIVIDENDS DECLARED PER DEPOSITARY SHARE | $ | 0.44 |
| | $ | 0.34 |
|
CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.15 |
| | $ | 0.15 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Statements of Unaudited Condensed Consolidated Comprehensive Income
Cliffs Natural Resources Inc. and Subsidiaries
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| | | | | | | |
| (In Millions) |
| Three Months Ended March 31, |
| 2014 | | 2013 |
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | (70.3 | ) | | $ | 107.0 |
|
OTHER COMPREHENSIVE INCOME | | | |
Pension and OPEB liability, net of tax | 3.4 |
| | 6.5 |
|
Unrealized net gain on marketable securities, net of tax | 3.9 |
| | 2.6 |
|
Unrealized net gain on foreign currency translation | 40.5 |
| | 3.3 |
|
Unrealized net gain (loss) on derivative financial instruments, net of tax | 10.5 |
| | (7.0 | ) |
OTHER COMPREHENSIVE INCOME | 58.3 |
| | 5.4 |
|
OTHER COMPREHENSIVE INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST | (0.5 | ) | | (1.2 | ) |
TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | (12.5 | ) | | $ | 111.2 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Statements of Unaudited Condensed Consolidated Financial Position
Cliffs Natural Resources Inc. and Subsidiaries
|
| | | | | | | |
| (In Millions) |
| March 31, 2014 | | December 31, 2013 |
ASSETS | | | |
CURRENT ASSETS | | | |
Cash and cash equivalents | $ | 364.0 |
| | $ | 335.5 |
|
Accounts receivable, net | 130.6 |
| | 270.0 |
|
Inventories | 609.8 |
| | 391.4 |
|
Supplies and other inventories | 204.9 |
| | 216.0 |
|
Other current assets | 363.0 |
| | 347.1 |
|
TOTAL CURRENT ASSETS | 1,672.3 |
| | 1,560.0 |
|
PROPERTY, PLANT AND EQUIPMENT, NET | 11,086.0 |
| | 11,153.4 |
|
OTHER ASSETS | | | |
Other non-current assets | 444.5 |
| | 408.5 |
|
TOTAL OTHER ASSETS | 444.5 |
| | 408.5 |
|
TOTAL ASSETS | $ | 13,202.8 |
| | $ | 13,121.9 |
|
(continued)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Statements of Unaudited Condensed Consolidated Financial Position
Cliffs Natural Resources Inc. and Subsidiaries - (Continued)
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| | | | | | | |
| (In Millions) |
| March 31, 2014 | | December 31, 2013 |
LIABILITIES | | | |
CURRENT LIABILITIES | | | |
Accounts payable | $ | 329.2 |
| | $ | 345.5 |
|
Accrued expenses | 363.5 |
| | 392.7 |
|
Short-term and current portion of long-term debt | 96.9 |
| | 20.9 |
|
Other current liabilities | 253.5 |
| | 326.4 |
|
TOTAL CURRENT LIABILITIES | 1,043.1 |
| | 1,085.5 |
|
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES | 285.0 |
| | 294.0 |
|
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS | 300.7 |
| | 309.7 |
|
DEFERRED INCOME TAXES | 1,195.7 |
| | 1,146.5 |
|
LONG-TERM DEBT | 3,194.8 |
| | 3,022.6 |
|
OTHER LIABILITIES | 347.9 |
| | 379.3 |
|
TOTAL LIABILITIES | 6,367.2 |
| | 6,237.6 |
|
COMMITMENTS AND CONTINGENCIES (SEE NOTE 18) |
| |
|
EQUITY | | | |
CLIFFS SHAREHOLDERS' EQUITY | | | |
Preferred Stock - no par value | | | |
Class A - 3,000,000 shares authorized | | | |
7% Series A Mandatory Convertible, Class A, no par value and $1,000 per share liquidation preference (See Note 14) | | | |
Issued and Outstanding - 731,233 shares (2013 - 731,250 shares) | 731.3 |
| | 731.3 |
|
Class B - 4,000,000 shares authorized | | | |
Common Shares - par value $0.125 per share | | | |
Authorized - 400,000,000 shares (2013 - 400,000,000 shares); | | | |
Issued - 159,546,224 shares (2013 - 159,546,224 shares); | | | |
Outstanding - 153,181,056 shares (2013 - 153,126,291 shares) | 19.8 |
| | 19.8 |
|
Capital in excess of par value of shares | 2,321.1 |
| | 2,329.5 |
|
Retained earnings | 3,300.9 |
| | 3,407.3 |
|
Cost of 6,365,168 common shares in treasury (2013 - 6,419,933 shares) | (298.5 | ) | | (305.5 | ) |
Accumulated other comprehensive loss | (55.1 | ) | | (112.9 | ) |
TOTAL CLIFFS SHAREHOLDERS' EQUITY | 6,019.5 |
| | 6,069.5 |
|
NONCONTROLLING INTEREST | 816.1 |
| | 814.8 |
|
TOTAL EQUITY | 6,835.6 |
| | 6,884.3 |
|
TOTAL LIABILITIES AND EQUITY | $ | 13,202.8 |
| | $ | 13,121.9 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Statements of Unaudited Condensed Consolidated Cash Flows
Cliffs Natural Resources Inc. and Subsidiaries
|
| | | | | | | |
| (In Millions) |
| Three Months Ended March 31, |
| 2014 | | 2013 |
OPERATING ACTIVITIES | | | |
Net income (loss) | $ | (70.7 | ) | | $ | 120.8 |
|
Adjustments to reconcile net income to net cash provided (used) by operating activities: | | | |
Depreciation, depletion and amortization | 141.1 |
| | 140.6 |
|
Deferred income taxes | 15.1 |
| | (46.3 | ) |
Other | 3.2 |
| | (10.0 | ) |
Changes in operating assets and liabilities: | | | |
Receivables and other assets | 161.5 |
| | 102.7 |
|
Product inventories | (214.5 | ) | | (194.0 | ) |
Payables and accrued expenses | (117.7 | ) | | (139.2 | ) |
Net cash used by operating activities | (82.0 | ) | | (25.4 | ) |
INVESTING ACTIVITIES | | | |
Purchase of property, plant and equipment | (103.3 | ) | | (230.4 | ) |
Other investing activities | 12.6 |
| | 2.0 |
|
Net cash used by investing activities | (90.7 | ) | | (228.4 | ) |
FINANCING ACTIVITIES | | | |
Net proceeds from issuance of Series A, Mandatory Convertible Preferred Stock, Class A | — |
| | 709.4 |
|
Net proceeds from issuance of common shares | — |
| | 285.6 |
|
Repayment of term loan | — |
| | (847.1 | ) |
Borrowings under credit facilities | 225.0 |
| | 297.0 |
|
Repayment under credit facilities | — |
| | (72.0 | ) |
Common stock dividends | (23.0 | ) | | (22.9 | ) |
Preferred stock dividends | (12.8 | ) | | — |
|
Other financing activities | 8.7 |
| | (4.1 | ) |
Net cash provided by financing activities | 197.9 |
| | 345.9 |
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 3.3 |
| | (0.1 | ) |
INCREASE IN CASH AND CASH EQUIVALENTS | 28.5 |
| | 92.0 |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 335.5 |
| | 195.2 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 364.0 |
| | $ | 287.2 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
See NOTE 19 - CASH FLOW INFORMATION.
Cliffs Natural Resources Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly, the financial position, results of operations, comprehensive income and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014 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, 2013.
Basis of Consolidation
The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly-owned and majority-owned subsidiaries, including the following operations:
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| | | | | | |
Name | | Location | | Ownership Interest | | Operation |
Northshore | | Minnesota | | 100.0% | | Iron Ore |
United Taconite | | Minnesota | | 100.0% | | Iron Ore |
Wabush | | Newfoundland and Labrador/ Quebec, Canada | | 100.0% | | Iron Ore |
Bloom Lake | | Quebec, Canada | | 82.8% | | Iron Ore |
Tilden | | Michigan | | 85.0% | | Iron Ore |
Empire | | Michigan | | 79.0% | | Iron Ore |
Koolyanobbing | | Western Australia | | 100.0% | | Iron Ore |
Pinnacle | | West Virginia | | 100.0% | | Coal |
Oak Grove | | Alabama | | 100.0% | | Coal |
CLCC | | West Virginia | | 100.0% | | Coal |
Intercompany transactions and balances are eliminated upon consolidation.
Also included in our consolidated results are Cliffs Chromite Ontario Inc. and Cliffs Chromite Far North Inc. Cliffs Chromite Ontario Inc. holds a 100 percent interest in each of the Black Label and Black Thor chromite deposits and, together with Cliffs Chromite Far North Inc., a 70 percent interest in the Big Daddy chromite deposit, all located in northern Ontario, Canada.
Equity Method Investments
Investments in unconsolidated ventures that we have the ability to exercise significant influence over, but not control, are accounted for under the equity method. The following table presents the detail of our investments in unconsolidated ventures and where those investments are classified in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2014 and December 31, 2013. Parentheses indicate a net liability.
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| | | | | | | | | | | | | | |
| | | | | | | | (In Millions) |
Investment | | Classification | | Accounting Method | | Interest Percentage | | March 31, 2014 | | December 31, 2013 |
Hibbing | | Other non-current assets1 | | Equity Method | | 23 | | $ | 1.7 |
| | $ | (3.9 | ) |
Other | | Other non-current assets | | Equity Method | | Various | | 34.3 |
| | 34.7 |
|
| | | | | | | | $ | 36.0 |
| | $ | 30.8 |
|
1 At December 31, 2013, the classification for Hibbing was Other liabilities.
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, 2013 included in our Annual Report on Form 10-K filed with the SEC. The significant accounting policies requiring updates have been included within the disclosures below.
Foreign Currency
Our financial statements are prepared with the U.S. dollar as the reporting currency. The functional currency of the Company’s Australian subsidiaries is the Australian dollar. The functional currency of all other international subsidiaries is the U.S. dollar. The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as Accumulated other comprehensive loss. Income taxes generally are not provided for foreign currency translation adjustments. To the extent that monetary assets and liabilities, inclusive of intercompany notes, are recorded in a currency other than the functional currency, these amounts are remeasured each reporting period, with the resulting gain or loss being recorded in the Statements of Unaudited Condensed Consolidated Operations. Transaction gains and losses resulting from remeasurement of short-term intercompany loans are included in Miscellaneous - net in our Statements of Unaudited Condensed Consolidated Operations. For the three months ended March 31, 2014, net losses of $6.5 million related to the impact of transaction gains and losses resulting from remeasurement, of which losses of $8.8 million and losses of $3.1 million, respectively, resulted from remeasurement of short-term intercompany loans and cash and cash equivalents. For the three months ended March 31, 2013, net gains of $3.7 million related to the impact of transaction gains and losses resulting from remeasurement, of which losses of $0.5 million and losses of $0.3 million, respectively, resulted from remeasurement of short-term intercompany loans and cash and cash equivalents.
NOTE 2 - SEGMENT REPORTING
Our Company’s primary operations are organized and managed according to product category and geographic location: U.S. Iron Ore, Eastern Canadian Iron Ore, Asia Pacific Iron Ore, North American Coal, Ferroalloys and our Global Exploration Group. The U.S. Iron Ore segment is comprised of our interests in five U.S. mines that provide iron ore to the integrated steel industry. The Eastern Canadian Iron Ore segment is comprised of two Eastern Canadian mines that primarily provide iron ore to the seaborne market for Asian steel producers. The Asia Pacific Iron Ore segment is located in Western Australia and provides iron ore to the seaborne market for Asian steel producers. The North American Coal segment is comprised of our four metallurgical coal mines and one thermal coal mine that provide metallurgical coal primarily to the integrated steel industry and thermal coal primarily to the energy industry. There were no intersegment revenues in the first quarters of 2014 or 2013.
The Ferroalloys operating segment is comprised of our interests in chromite deposits held in Northern Ontario, Canada and the Global Exploration Group is focused on early involvement in exploration activities to identify new projects for future development or projects that add significant value to existing operations. The Ferroalloys and Global Exploration Group operating segments do not meet reportable segment disclosure requirements and, therefore, are not reported separately.
We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold, and operating expenses identifiable to each segment. This measure of operating performance is an effective measurement as we focus on reducing production costs throughout the Company.
The following table presents a summary of our reportable segments for the three months ended March 31, 2014 and 2013, including a reconciliation of segment sales margin to Income (Loss) from Continuing Operations Before Income Taxes and Equity Loss from Ventures:
|
| | | | | | | | | | | | | |
| (In Millions) |
| Three Months Ended March 31, |
| 2014 | | 2013 |
Revenues from product sales and services: | | | | | | | |
U.S. Iron Ore | $ | 361.3 |
| | 38 | % | | $ | 410.1 |
| | 36 | % |
Eastern Canadian Iron Ore | 158.3 |
| | 17 | % | | 245.3 |
| | 22 | % |
Asia Pacific Iron Ore | 254.2 |
| | 27 | % | | 270.8 |
| | 24 | % |
North American Coal | 166.2 |
| | 18 | % | | 214.3 |
| | 18 | % |
Total revenues from product sales and services | $ | 940.0 |
| | 100 | % | | $ | 1,140.5 |
| | 100 | % |
| | | | | | | |
Sales margin: | | | | | | | |
U.S. Iron Ore | $ | 95.0 |
| | | | $ | 157.3 |
| | |
Eastern Canadian Iron Ore | (49.7 | ) | | | | 19.4 |
| | |
Asia Pacific Iron Ore | 66.3 |
| | | | 61.3 |
| | |
North American Coal | (48.4 | ) | | | | 1.8 |
| | |
Other | — |
| | | | (1.9 | ) | | |
Sales margin | 63.2 |
| | | | 237.9 |
| | |
Other operating expense | (113.9 | ) | | | | (69.6 | ) | | |
Other expense | (41.5 | ) | | | | (48.0 | ) | | |
Income (loss) from continuing operations before income taxes and equity loss from ventures | $ | (92.2 | ) | | | | $ | 120.3 |
| | |
| | | | | | | |
Depreciation, depletion and amortization: | | | | | | | |
U.S. Iron Ore | $ | 28.7 |
| | | | $ | 26.6 |
| | |
Eastern Canadian Iron Ore | 41.2 |
| | | | 41.1 |
| | |
Asia Pacific Iron Ore | 39.1 |
| | | | 36.4 |
| | |
North American Coal | 29.9 |
| | | | 32.5 |
| | |
Other | 2.2 |
| | | | 4.0 |
| | |
Total depreciation, depletion and amortization | $ | 141.1 |
| | | | $ | 140.6 |
| | |
| | | | | | | |
Capital additions1: | | | | | | | |
U.S. Iron Ore | $ | 14.9 |
| | | | $ | 11.7 |
| | |
Eastern Canadian Iron Ore | 51.0 |
| | | | 167.0 |
| | |
Asia Pacific Iron Ore | 3.2 |
| | | | 4.3 |
| | |
North American Coal | 9.2 |
| | | | 11.1 |
| | |
Other | 0.9 |
| | | | 1.6 |
| | |
Total capital additions | $ | 79.2 |
| | | | $ | 195.7 |
| | |
1 Includes capital lease additions and non-cash accruals. Refer to NOTE 19 - CASH FLOW INFORMATION.
A summary of assets by segment is as follows:
|
| | | | | | | |
| (In Millions) |
| March 31, 2014 | | December 31, 2013 |
Assets: | | | |
U.S. Iron Ore | $ | 1,742.9 |
| | $ | 1,671.6 |
|
Eastern Canadian Iron Ore | 7,854.2 |
| | 7,915.5 |
|
Asia Pacific Iron Ore | 1,074.9 |
| | 1,078.4 |
|
North American Coal | 1,784.4 |
| | 1,841.8 |
|
Other | 467.5 |
| | 455.6 |
|
Total segment assets | 12,923.9 |
| | 12,962.9 |
|
Corporate | 278.9 |
| | 159.0 |
|
Total assets | $ | 13,202.8 |
| | $ | 13,121.9 |
|
NOTE 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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 as of March 31, 2014 and December 31, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| Derivative Assets | | Derivative Liabilities |
| March 31, 2014 | | December 31, 2013 | | March 31, 2014 | | December 31, 2013 |
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: | | | | | | | | | | | | | | | |
Interest Rate Swaps | Other current assets | | $ | 0.6 |
| | | | $ | — |
| | Other current liabilities | | $ | 0.4 |
| | Other current liabilities | | $ | 2.1 |
|
Foreign Exchange Contracts | Other current assets | | 4.1 |
| | Other current assets | | 0.3 |
| | Other current liabilities | | 15.1 |
| | Other current liabilities | | 25.8 |
|
Total derivatives designated as hedging instruments under ASC 815 | | | $ | 4.7 |
| | | | $ | 0.3 |
| | | | $ | 15.5 |
| | | | $ | 27.9 |
|
Derivatives not designated as hedging instruments under ASC 815: | | | | | | | | | | | | | | | |
Foreign Exchange Contracts | | | $ | — |
| | | | $ | — |
| | Other current liabilities | | $ | 1.9 |
| | Other current liabilities | | $ | 1.1 |
|
Customer Supply Agreement | Other current assets | | 42.0 |
| | Other current assets | | 55.8 |
| | | | — |
| | | | — |
|
Provisional Pricing Arrangements | Other current assets | | 1.3 |
| | Other current assets | | 3.1 |
| | Other current liabilities | | 7.4 |
| | Other current liabilities | | 10.3 |
|
Total derivatives not designated as hedging instruments under ASC 815 | | | $ | 43.3 |
| | | | $ | 58.9 |
| | | | $ | 9.3 |
| | | | $ | 11.4 |
|
Total derivatives | | | $ | 48.0 |
| | | | $ | 59.2 |
| | | | $ | 24.8 |
| | | | $ | 39.3 |
|
Derivatives Designated as Hedging Instruments
Cash Flow Hedges
Australian and Canadian Dollar Foreign Exchange Contracts
We are subject to changes in foreign currency exchange rates as a result of our operations in Australia and Canada. With respect to Australia, foreign exchange risk arises from our exposure to fluctuations in foreign currency exchange rates because the functional currency of our Asia Pacific operations is the Australian dollar. Our Asia Pacific operations receive funds in U.S. currency for their iron ore sales. The functional currency of our Canadian operations is the U.S. dollar; however, the production costs for these operations primarily are incurred in the Canadian dollar.
We use foreign currency exchange contracts to hedge our foreign currency exposure for a portion of our U.S. dollar sales receipts in our Australian functional currency entities and our entities with Canadian dollar operating costs. For our Australian operations, U.S. dollars are converted to Australian dollars at the currency exchange rate in effect during the period the transaction occurred. For our Canadian operations, U.S. dollars are converted to Canadian dollars at the exchange rate in effect for the period the operating costs are incurred. The primary objective for the use of these instruments is to reduce exposure to changes in Australian and U.S. currency exchange rates and U.S. and Canadian currency exchange rates, respectively, and to protect against undue adverse movement in these exchange rates. These instruments qualify for hedge accounting treatment, and are tested for effectiveness at inception and at least once each reporting period. If and when any of our hedge contracts are determined not to be highly effective as hedges, the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, hedge accounting is discontinued.
As of March 31, 2014, we had outstanding Australian and Canadian foreign currency exchange contracts with notional amounts of $315.0 million and $275.7 million, respectively, in the form of forward contracts with varying maturity dates ranging from April 2014 to March 2015. This compares with outstanding Australian and Canadian foreign currency exchange contracts with a notional amount of $323.0 million and $285.9 million, respectively, as of December 31, 2013.
Changes in fair value of highly effective hedges are recorded as a component of Accumulated other comprehensive loss in the Statements of Unaudited Condensed Consolidated Financial Position. Any ineffectiveness is recognized immediately in income and, as of March 31, 2014 and 2013, there was no material ineffectiveness recorded for foreign exchange contracts that were classified as cash flow hedges. However, certain Canadian hedge contracts were deemed ineffective during the fourth quarter of 2013 and no longer qualified for hedge accounting treatment. The de-designated hedges are discussed within the Derivatives Not Designated as Hedging Instruments section of this footnote. Amounts recorded as a component of Accumulated other comprehensive loss are reclassified into earnings in the same period the forecasted transactions affect earnings. Of the amounts remaining in Accumulated other comprehensive loss related to Australian hedge contracts and Canadian hedge contracts, we estimate that losses of $0.7 million and losses of $7.3 million (net of tax), respectively, will be reclassified into earnings within the next 12 months.
The following summarizes the effect of our derivatives designated as cash flow hedging instruments, net of tax in Accumulated other comprehensive loss in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2014 and 2013:
|
| | | | | | | | | | | | | | | | | |
| (In Millions) |
Derivatives in Cash Flow Hedging Relationships | Amount of Gain (Loss) Recognized in OCI on Derivative | | Location of Gain (Loss) Reclassified from Accumulated OCI into Earnings | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Earnings |
(Effective Portion) | | (Effective Portion) | | (Effective Portion) |
| Three Months Ended March 31, | | | | Three Months Ended March 31, |
| 2014 | | 2013 | | | | 2014 | | 2013 |
Australian Dollar Foreign Exchange Contracts (hedge designation) | $ | 5.5 |
| | $ | 3.2 |
| | Product revenues | | $ | (9.1 | ) | | $ | 1.8 |
|
Canadian Dollar Foreign Exchange Contracts (hedge designation) | (7.8 | ) | | (8.2 | ) | | Cost of goods sold and operating expenses | | (3.4 | ) | | 0.2 |
|
Canadian Dollar Foreign Exchange Contracts (prior to de-designation) | — |
| | — |
| | Cost of goods sold and operating expenses | | (0.3 | ) | | — |
|
| $ | (2.3 | ) | | $ | (5.0 | ) | | | | $ | (12.8 | ) | | $ | 2.0 |
|
Fair Value Hedges
Interest Rate Hedges
Our fixed-to-variable interest rate swap derivative instruments, with a notional amount of $250.0 million, are designated and qualify as fair value hedges as of March 31, 2014. The objective of the hedges is to offset changes in the fair value of our debt instruments associated with fluctuations in the benchmark LIBOR interest rate as part of our risk management strategy.
For derivative instruments that are designated and qualify as fair-value hedges, the gain or loss on the hedge instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in net income. We include the gain or loss on the derivative instrument and the offsetting loss or gain on the hedged item in Other non-operating income. The net gain recognized in Other non-operating income for the three months ended March 31, 2014 was $0.2 million. There were no derivative instruments that were designated as fair-value hedges for the period ended March 31, 2013.
Derivatives Not Designated as Hedging Instruments
Foreign Exchange Contracts
During the fourth quarter of 2013, we discontinued hedge accounting for Canadian foreign currency exchange contracts for all outstanding contracts associated with Wabush and Ferroalloys operations as projected future cash flows were no longer considered probable, but we continue to hold these instruments as economic hedges to manage currency risk. Subsequent to de-designation, no further foreign currency exchange contracts were entered into for Wabush or Ferroalloys operations. As of March 31, 2014, the outstanding de-designated foreign currency exchange rate contracts had a notional amount of $38.6 million in the form of forward contracts with varying maturity dates ranging from April 2014 to June 2014. This compares with outstanding de-designated foreign currency exchange contracts with a notional amount of $74.8 million as of December 31, 2013.
As a result of discontinued hedge accounting, the instruments are prospectively adjusted to fair value each reporting period through Cost of goods sold and operating expenses on the Statements of Unaudited Condensed Consolidated Operations. For the three months ended March 31, 2014, the change in fair value of our de-designated foreign currency exchange contracts resulted in net losses of $0.9 million. The amounts that were previously recorded as a component of Accumulated other comprehensive loss prior to de-designation are reclassified to earnings and a corresponding realized gain or loss will be recognized when the forecasted cash flow occurs. For the three months ended March 31, 2014, we reclassified losses of $0.3 million from Accumulated other comprehensive loss related to contracts that matured during the period, and recorded the amounts as Cost of goods sold and operating expenses on the Statements of Unaudited Condensed Consolidated Operations. As of March 31, 2014, approximately $0.4 million of losses remain in Accumulated other comprehensive loss related to the effective cash flow hedge contracts prior to de-designation. We estimate the remaining $0.4 million of losses will be reclassified to Cost of goods sold and operating expenses in the next three months upon the maturity of the related contracts.
Customer Supply Agreements
Most of our U.S. Iron Ore long-term supply agreements are comprised of a base price with annual price adjustment factors. The base price is the primary component of the purchase price for each contract. The indexed price adjustment factors are integral to the iron ore supply contracts and vary based on the agreement, but typically include adjustments based upon changes in the Platts 62 percent Fe spot rate and/or international pellet prices and changes in specified Producers Price Indices, including those for all commodities, industrial commodities, energy 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. In most cases, these adjustment factors have not been finalized at the time our product is sold. In these cases, we historically have estimated the adjustment factors at each reporting period based upon the best third-party information available. The estimates are then adjusted to actual when the information has been finalized. The price adjustment factors have been evaluated to determine if they contain 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.
A certain supply agreement with one U.S. Iron Ore customer provides for supplemental revenue or refunds to the customer based on the customer’s average annual steel pricing at the time the 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 the product is shipped. The derivative instrument, which is finalized based on a future price, is
adjusted to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled.
We recognized $27.7 million as Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2014 related to the supplemental payments. This compares with Product revenues of $24.1 million for the comparable respective period in 2013. Derivative assets, representing the fair value of the pricing factors, were $42.0 million and $55.8 million in the March 31, 2014 and December 31, 2013 Statements of Unaudited Condensed Consolidated Financial Position, respectively.
Provisional Pricing Arrangements
Certain of our U.S. Iron Ore, Eastern Canadian Iron Ore and Asia Pacific Iron Ore customer supply agreements 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 provisionally agreed-upon price and the estimated final revenue rate is characterized as a freestanding derivative and is required to be accounted for separately once the provisional revenue has been recognized. The derivative instrument 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 final revenue rate is determined. At March 31, 2014 and December 31, 2013, we recorded $1.3 million and $3.1 million, respectively, as Other current assets and $7.4 million and $10.3 million, respectively, as Other current liabilities in the Statements of Unaudited Condensed Consolidated Financial Position related to our estimate of final revenue rate with our U.S. Iron Ore, Eastern Canadian Iron Ore and Asia Pacific Iron Ore customers. These amounts represent the difference between the provisional price agreed upon with our customers based on the supply agreement terms and our estimate of the final revenue rate based on the price calculations established in the supply agreements. As a result, we recognized a net $6.1 million decrease in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2014 related to these arrangements. This compares with a net $2.9 million decrease in Product revenues for the comparable period in 2013.
The following summarizes the effect of our derivatives that are not designated as hedging instruments in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2014 and 2013:
|
| | | | | | | | |
(In Millions) |
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivative | Amount of Gain/(Loss) Recognized in Income on Derivative |
| | Three Months Ended March 31, |
| | 2014 | | 2013 |
Foreign Exchange Contracts | Cost of goods sold and operating expenses | $ | (0.9 | ) | | $ | — |
|
Customer Supply Agreement | Product revenues | 27.7 |
| | 24.1 |
|
Provisional Pricing Arrangements | Product revenues | (6.1 | ) | | (2.9 | ) |
| | $ | 20.7 |
| | $ | 21.2 |
|
Refer to NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS for additional information.
NOTE 4 - INVENTORIES
The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2014 and December 31, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| March 31, 2014 | | December 31, 2013 |
Segment | Finished Goods | | Work-in Process | | Total Inventory | | Finished Goods | | Work-in Process | | Total Inventory |
U.S. Iron Ore | $ | 270.6 |
| | $ | 25.7 |
| | $ | 296.3 |
| | $ | 92.1 |
| | $ | 13.0 |
| | $ | 105.1 |
|
Eastern Canadian Iron Ore | 78.3 |
| | 50.4 |
| | 128.7 |
| | 65.3 |
| | 48.1 |
| | 113.4 |
|
Asia Pacific Iron Ore | 46.4 |
| | 61.3 |
| | 107.7 |
| | 39.7 |
| | 50.6 |
| | 90.3 |
|
North American Coal | 63.5 |
| | 13.6 |
| | 77.1 |
| | 59.4 |
| | 23.2 |
| | 82.6 |
|
Total | $ | 458.8 |
| | $ | 151.0 |
| | $ | 609.8 |
| | $ | 256.5 |
| | $ | 134.9 |
| | $ | 391.4 |
|
We recorded lower-of-cost-or-market inventory charges of $22.1 million and $13.4 million in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2014 for our North American Coal and Eastern Canadian Iron Ore operations, respectively. The charge at North American Coal was a result of market pricing declines during the period. The charge at Eastern Canadian Iron Ore was a result of declines in Platts pricing and higher inventory costs at both Bloom Lake and Wabush. Bloom Lake’s higher inventory costs were driven by the timing of maintenance activities and mine development, whereas Wabush’s higher costs were driven by unfavorable production performance up to the idling of the Scully mine operation.
For the three months ended March 31, 2013, we recorded lower-of-cost-or-market inventory charges of $2.0 million for our North American Coal operations. These charges were a result of market declines and costs associated with operational and geological issues. No other lower-of-cost-or-market inventory charges were recorded for the three months ended March 31, 2013.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the value of each of the major classes of our consolidated depreciable assets as of March 31, 2014 and December 31, 2013:
|
| | | | | | | |
| (In Millions) |
| March 31, 2014 | | December 31, 2013 |
Land rights and mineral rights | $ | 7,841.1 |
| | $ | 7,819.6 |
|
Office and information technology | 126.1 |
| | 125.7 |
|
Buildings | 269.8 |
| | 255.2 |
|
Mining equipment | 1,624.1 |
| | 1,600.3 |
|
Processing equipment | 2,199.2 |
| | 2,148.6 |
|
Railroad equipment | 315.6 |
| | 219.0 |
|
Electric power facilities | 116.2 |
| | 114.3 |
|
Port facilities | 103.2 |
| | 99.4 |
|
Interest capitalized during construction | 23.9 |
| | 23.8 |
|
Land improvements | 54.6 |
| | 69.3 |
|
Other | 94.7 |
| | 104.4 |
|
Construction in-progress | 896.1 |
| | 991.3 |
|
| 13,664.6 |
| | 13,570.9 |
|
Accumulated depreciation and depletion | (2,578.6 | ) | | (2,417.5 | ) |
| $ | 11,086.0 |
| | $ | 11,153.4 |
|
We recorded depreciation and depletion expense of $138.4 million in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2014. This compares with depreciation and depletion expense of $135.9 million for the three months ended March 31, 2013.
The accumulated amount of capitalized interest included within construction in-progress at March 31, 2014 is $30.8 million, of which $0.6 million was capitalized during 2014. At December 31, 2013, $31.4 million of capitalized interest was included within construction in-progress, of which $17.4 million was capitalized during 2013.
NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
Goodwill
The following table summarizes changes in the carrying amount of goodwill allocated by operating segment for the three months ended March 31, 2014 and the year ended December 31, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| March 31, 2014 | | December 31, 2013 |
| U.S. Iron Ore | | Eastern Canadian Iron Ore | | Asia Pacific Iron Ore | | North American Coal | | Other | | Total | | U.S. Iron Ore | | Eastern Canadian Iron Ore | | Asia Pacific Iron Ore | | North American Coal | | Other | | Total |
Beginning Balance | $ | 2.0 |
| | $ | — |
| | $ | 72.5 |
| | $ | — |
| | $ | — |
| | $ | 74.5 |
| | $ | 2.0 |
| | $ | — |
| | $ | 84.5 |
| | $ | — |
| | $ | 80.9 |
| | $ | 167.4 |
|
Arising in business combinations | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Impairment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (80.9 | ) | | (80.9 | ) |
Impact of foreign currency translation | — |
| | — |
| | 2.8 |
| | — |
| | — |
| | 2.8 |
| | — |
| | — |
| | (12.0 | ) | | — |
| | — |
| | (12.0 | ) |
Ending Balance | $ | 2.0 |
| | $ | — |
| | $ | 75.3 |
| | $ | — |
| | $ | — |
| | $ | 77.3 |
| | $ | 2.0 |
| | $ | — |
| | $ | 72.5 |
| | $ | — |
| | $ | — |
| | $ | 74.5 |
|
Accumulated goodwill impairment loss | $ | — |
| | $ | (1,000.0 | ) | | $ | — |
| | $ | (27.8 | ) | | $ | (80.9 | ) | | $ | (1,108.7 | ) | | $ | — |
| | $ | (1,000.0 | ) | | $ | — |
| | $ | (27.8 | ) | | $ | (80.9 | ) | | $ | (1,108.7 | ) |
Other Intangible Assets and Liabilities
Following is a summary of intangible assets and liabilities as of March 31, 2014 and December 31, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | March 31, 2014 | | December 31, 2013 |
| Classification | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Definite-lived intangible assets: | | | | | | | | | | | | | |
Permits | Intangible assets, net | | $ | 129.3 |
| | $ | (38.9 | ) | | $ | 90.4 |
| | $ | 127.4 |
| | $ | (35.9 | ) | | $ | 91.5 |
|
Utility contracts | Intangible assets, net | | 54.7 |
| | (53.5 | ) | | 1.2 |
| | 54.7 |
| | (53.1 | ) | | 1.6 |
|
Leases | Intangible assets, net | | 2.4 |
| | (0.2 | ) | | 2.2 |
| | 2.4 |
| | (0.1 | ) | | 2.3 |
|
Total intangible assets | | | $ | 186.4 |
| | $ | (92.6 | ) | | $ | 93.8 |
| | $ | 184.5 |
| | $ | (89.1 | ) | | $ | 95.4 |
|
Below-market sales contracts | Other current liabilities | | $ | (23.0 | ) | | $ | — |
| | $ | (23.0 | ) | | $ | (23.0 | ) | | $ | — |
| | $ | (23.0 | ) |
Below-market sales contracts | Other liabilities | | (205.9 | ) | | 159.7 |
| | (46.2 | ) | | (205.9 | ) | | 159.7 |
| | (46.2 | ) |
Total below-market sales contracts | | | $ | (228.9 | ) | | $ | 159.7 |
| | $ | (69.2 | ) | | $ | (228.9 | ) | | $ | 159.7 |
| | $ | (69.2 | ) |
Amortization expense relating to intangible assets was $2.7 million and $4.7 million, respectively, for the three months ended March 31, 2014 and 2013, and is recognized in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations. The estimated amortization expense relating to intangible assets for each of the five succeeding years is as follows:
|
| | | |
| (In Millions) |
| Amount |
Year Ending December 31, |
|
2014 (remaining nine months) | $ | 7.4 |
|
2015 | 7.6 |
|
2016 | 7.1 |
|
2017 | 6.4 |
|
2018 | 7.4 |
|
2019 | 7.4 |
|
Total | $ | 43.3 |
|
The below-market sales contracts are classified as a liability and recognized over the term of the underlying contracts. The outstanding below-market sales contract has a remaining life of approximately three years. There were no Product revenues related to below-market sales contracts for the three months ended March 31, 2014. For the three months ended March 31, 2013, we recognized $1.9 million in Product revenues related to the below-market sales contracts. The following amounts are estimated to be recognized in Product revenues for the remainder of this year and each of the three succeeding fiscal years:
|
| | | |
| (In Millions) |
| Amount |
Year Ending December 31, | |
2014 (remaining nine months) | $ | 23.0 |
|
2015 | 23.0 |
|
2016 | 23.0 |
|
2017 | 0.2 |
|
Total | $ | 69.2 |
|
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following represents the assets and liabilities of the Company measured at fair value at March 31, 2014 and December 31, 2013:
|
| | | | | | | | | | | | | | | |
| (In Millions) |
| March 31, 2014 |
Description | 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 | $ | 134.0 |
| | $ | — |
| | $ | — |
| | $ | 134.0 |
|
Derivative assets | — |
| | 0.6 |
| | 43.3 |
| | 43.9 |
|
Available-for-sale marketable securities | 33.2 |
| | — |
| | — |
| | 33.2 |
|
Foreign exchange contracts | — |
| | 4.1 |
| | — |
| | 4.1 |
|
Total | $ | 167.2 |
| | $ | 4.7 |
| | $ | 43.3 |
| | $ | 215.2 |
|
Liabilities: |
| |
| |
| |
|
Derivative liabilities | $ | — |
| | $ | 0.4 |
| | $ | 7.4 |
| | $ | 7.8 |
|
Foreign exchange contracts | — |
| | 17.0 |
| | — |
| | 17.0 |
|
Total | $ | — |
| | $ | 17.4 |
| | $ | 7.4 |
| | $ | 24.8 |
|
|
| | | | | | | | | | | | | | | |
| (In Millions) |
| December 31, 2013 |
Description | 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 | $ | 85.0 |
| | $ | — |
| | $ | — |
| | $ | 85.0 |
|
Derivative assets | — |
| | — |
| | 58.9 |
| | 58.9 |
|
Available-for-sale marketable securities | 21.4 |
| | — |
| | — |
| | 21.4 |
|
Foreign exchange contracts | — |
| | 0.3 |
| | — |
| | 0.3 |
|
Total | $ | 106.4 |
| | $ | 0.3 |
| | $ | 58.9 |
| | $ | 165.6 |
|
Liabilities: |
| |
| |
| |
|
Derivative liabilities | $ | — |
| | $ | 2.1 |
| | $ | 10.3 |
| | $ | 12.4 |
|
Foreign exchange contracts | — |
| | 26.9 |
| | — |
| | 26.9 |
|
Total | $ | — |
| | $ | 29.0 |
| | $ | 10.3 |
| | $ | 39.3 |
|
Financial assets classified in Level 1 at March 31, 2014 and December 31, 2013 include money market funds and available-for-sale marketable securities. 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 securities primarily include derivative financial instruments valued using financial models that use as their basis readily observable market parameters. At March 31, 2014 and December 31, 2013, such derivative financial instruments
included our existing foreign currency exchange contracts and interest rate swaps. The fair value of the foreign currency exchange contracts is based on forward market prices and represents the estimated amount we would receive or pay to terminate these agreements at the reporting date, taking into account creditworthiness, nonperformance risk and liquidity risks associated with current market conditions.
The derivative financial assets classified within Level 3 at March 31, 2014 and December 31, 2013 included a freestanding derivative instrument related to certain supply agreements with one of our U.S. Iron Ore customers. The agreements include provisions for supplemental revenue or refunds based on the customer’s annual steel pricing at the time the product is consumed in the customer’s blast furnaces. We account for this provision as a derivative instrument at the time of sale and adjust this provision to fair value as an adjustment to Product revenues each reporting period until the product is consumed and the amounts are settled. The fair value of the instrument is determined using a market approach based on an estimate of the annual realized price of hot-rolled steel at the steelmaker’s facilities, and takes into consideration current market conditions and nonperformance risk.
The Level 3 derivative assets and liabilities at March 31, 2014 and December 31, 2013, also consisted of derivatives related to certain provisional pricing arrangements with our U.S. Iron Ore, Eastern Canadian Iron Ore and Asia Pacific Iron Ore customers. These provisional pricing arrangements 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 provisionally agreed-upon price and the estimated final revenue rate is characterized as a derivative and is required to be accounted for separately once the revenue has been recognized. The derivative instrument 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 final revenue rate is determined.
The following table illustrates information about quantitative inputs and assumptions for the derivative assets and derivative liabilities categorized in Level 3 of the fair value hierarchy:
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| | | | | | | | | | | | |
Qualitative/Quantitative Information About Level 3 Fair Value Measurements |
($ in millions) | | Fair Value at March 31, 2014 | | Balance Sheet Location | | Valuation Technique | | Unobservable Input | | Range or Point Estimate (Weighted Average) |
|
Provisional Pricing Arrangements | | $ | 1.3 |
| | Derivative assets | | Market Approach | | Management's Estimate of 62% Fe | | $117 |
| | $ | 7.4 |
| | Derivative liabilities | | | | | | |
Customer Supply Agreement | | $ | 42.0 |
| | Derivative assets | | Market Approach | | Hot-Rolled Steel Estimate | | $625 - $660 ($645) |
The significant unobservable input used in the fair value measurement of the reporting entity’s provisional pricing arrangements is management’s estimate of 62 percent Fe price based upon current market data, including historical seasonality and forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively.
The significant unobservable input used in the fair value measurement of the reporting entity’s customer supply agreement is the future hot-rolled steel price that is estimated based on current market data, analysts' projections, projections provided by the customer and forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively.
We recognize any transfers between levels as of the beginning of the reporting period. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2014 or 2013. 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) for the three months ended March 31, 2014 and 2013.
|
| | | | | | | |
| (In Millions) |
| Derivative Assets (Level 3) |
| Three Months Ended March 31, |
| 2014 | | 2013 |
Beginning balance | $ | 58.9 |
| | $ | 62.4 |
|
Total gains | | | |
Included in earnings | 29.0 |
| | 28.0 |
|
Settlements | (44.6 | ) | | (37.1 | ) |
Transfers into Level 3 | — |
| | — |
|
Transfers out of Level 3 | — |
| | — |
|
Ending balance - March 31 | $ | 43.3 |
| | $ | 53.3 |
|
Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date | $ | 29.0 |
| | $ | 28.0 |
|
|
| | | | | | | |
| (In Millions) |
| Derivative Liabilities (Level 3) |
| Three Months Ended March 31, |
| 2014 | | 2013 |
Beginning balance | $ | (10.3 | ) | | $ | (11.3 | ) |
Total gains | | | |
Included in earnings | (7.4 | ) | | (6.8 | ) |
Settlements | 10.3 |
| | 11.3 |
|
Transfers into Level 3 | — |
| | — |
|
Transfers out of Level 3 | — |
| | — |
|
Ending balance - March 31 | $ | (7.4 | ) | | $ | (6.8 | ) |
Total losses for the period included in earnings attributable to the change in unrealized losses on liabilities still held at the reporting date | $ | (7.4 | ) | | $ | (6.8 | ) |
Gains and losses included in earnings are reported in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2014 and 2013.
The carrying amount for certain financial instruments (e.g., Accounts receivable, net, Accounts payable and Accrued expenses) approximate fair value and, therefore, have been excluded from the table below. A summary of the carrying amount and fair value of other financial instruments at March 31, 2014 and December 31, 2013 were as follows:
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| | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | March 31, 2014 | | December 31, 2013 |
| Classification | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Long-term debt: | | | | | | | | | |
Senior notes—$700 million | Level 2 | | $ | 699.5 |
| | $ | 743.0 |
| | $ | 699.4 |
| | $ | 718.2 |
|
Senior notes—$1.3 billion | Level 2 | | 1,289.8 |
| | 1,504.8 |
| | 1,289.6 |
| | 1,404.9 |
|
Senior notes—$400 million | Level 2 | | 398.5 |
| | 442.0 |
| | 398.4 |
| | 432.1 |
|
Senior notes—$500 million | Level 2 | | 496.7 |
| | 528.0 |
| | 496.5 |
| | 523.8 |
|
Revolving loan | Level 2 | | 175.0 |
| | 175.0 |
| | — |
| | — |
|
Equipment loan facilities | Level 2 | | 135.3 |
| | 135.3 |
| | 140.8 |
| | 140.8 |
|
Fair value adjustment to interest rate hedge | Level 2 | | — |
| | — |
| | (2.1 | ) | | (2.1 | ) |
Total long-term debt | | | $ | 3,194.8 |
| | $ | 3,528.1 |
| | $ | 3,022.6 |
| | $ | 3,217.7 |
|
The fair value of debt is based on the fair market yield curves for the remainder of the term expected to be outstanding. The fair value of long-term debt was determined using quoted market prices or discounted cash flows based upon current borrowing rates. The revolving loan is variable rate interest and approximates fair value. See NOTE 8 - DEBT AND CREDIT FACILITIES for further information.
Items Measured at Fair Value on a Non-Recurring Basis
The following table presents information about the impairment charges on both financial and nonfinancial assets that were measured on a fair value basis at December 31, 2013. The table also indicates the fair value hierarchy of the valuation techniques used to determine such fair value. We had no financial assets and liabilities measured at fair value on a non-recurring basis at March 31, 2014.
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| | | | | | | | | | | | | | | | | | | | |
| | (In Millions) |
| | December 31, 2013 |
Description | | Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Total Losses |
Assets: | | | | | | | | | | |
Goodwill impairment - Ferroalloys reporting unit | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 80.9 |
|
Other long-lived assets - Property, plant and equipment | | — |
| | — |
| | 46.3 |
| | 46.3 |
| | 155.4 |
|
Other long-lived assets - Intangibles and long-term deposits | | — |
| | — |
| | 1.6 |
| | 1.6 |
| | 14.5 |
|
Investment in ventures impairment - Amapá | | — |
| | — |
| | — |
| | — |
| | 67.6 |
|
| | $ | — |
| | $ | — |
| | $ | 47.9 |
| | $ | 47.9 |
| | $ | 318.4 |
|
Financial Assets
In light of the March 28, 2013 collapse of the Santana port shiploader and subsequent evaluation of the effect that this event had on the carrying value of our investment in Amapá as of June 30, 2013, we recorded an impairment charge of $67.6 million in the second quarter of 2013. The sale of Amapá was completed in the fourth quarter of 2013.
Non-Financial Assets
During the fourth quarter of 2013, a goodwill impairment charge of $80.9 million was recorded for our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Ferroalloys operating segment. The impairment charge was primarily a result of the decision to indefinitely suspend the Chromite Project and to not allocate additional capital for the project given the uncertain timeline and risks associated with the development of necessary infrastructure to bring the project online. Based on our review of the fair value hierarchy, the inputs used in these fair value measurements were considered Level 3 inputs.
We also recorded impairment charges to property, plant and equipment during 2013 related to our Wabush operation within our Eastern Canadian Iron Ore operating segment, our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Other reportable segments and certain mineral lands at our Asia Pacific Iron Ore operating segment to reduce the related assets to their estimated fair value as we determined that the cash flows associated with these operations were not sufficient to support the recoverability of the carrying value of these assets. Fair value was determined based on management's estimate of liquidation value, which is considered a Level 3 input, and resulted in a charge of $155.4 million.
NOTE 8 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt as of March 31, 2014 and December 31, 2013:
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| | | | | | | | | | | | | | | |
($ in Millions) | |
March 31, 2014 | |
Debt Instrument | | Type | | Annual Effective Interest Rate | | Final Maturity | | Total Face Amount | | Total Debt | |
$700 Million 4.875% 2021 Senior Notes | | Fixed | | 4.89% | | 2021 | | $ | 700.0 |
| | $ | 699.5 |
| (1) |
$1.3 Billion Senior Notes: | | | | | | | | | | | |
$500 Million 4.80% 2020 Senior Notes | | Fixed | | 4.83% | | 2020 | | 500.0 |
| | 499.3 |
| (2) |
$800 Million 6.25% 2040 Senior Notes | | Fixed | | 6.34% | | 2040 | | 800.0 |
| | 790.5 |
| (3) |
$400 Million 5.90% 2020 Senior Notes | | Fixed | | 5.98% | | 2020 | | 400.0 |
| | 398.5 |
| (4) |
$500 Million 3.95% 2018 Senior Notes | | Fixed | | 4.14% | | 2018 | | 500.0 |
| | 496.7 |
| (5) |
$1.75 Billion Credit Facility: | | | | | | | | | | | |
Revolving Loan | | Variable | | 1.68% | | 2017 | | 1,750.0 |
| | 175.0 |
| (6) |
Equipment Loans | | Fixed | | Various | | 2020 | | 164.8 |
| | 156.5 |
| |
Short-Term Borrowing Arrangements | | | | | | 2014 | | 75.7 |
| | 75.7 |
|
|
Fair Value Adjustment to Interest Rate Hedge | | | | | | | | | | — |
| |
Total debt | | | | | | | | $ | 4,890.5 |
| | $ | 3,291.7 |
| |
Less: Short-term and current portion of long-term debt | | | | | | | | | | 96.9 |
| |
Long-term debt | | | | | | | | | | $ | 3,194.8 |
| |
|
| | | | | | | | | | | | | | | |
($ in Millions) | |
December 31, 2013 | |
Debt Instrument | | Type | | Annual Effective Interest Rate | | Final Maturity | | Total Face Amount | | Total Debt | |
$700 Million 4.875% 2021 Senior Notes | | Fixed | | 4.88% | | 2021 | | 700.0 |
| | 699.4 |
| (1) |
$1.3 Billion Senior Notes: | | | | | | | | | | | |
$500 Million 4.80% 2020 Senior Notes | | Fixed | | 4.83% | | 2020 | | 500.0 |
| | 499.2 |
| (2) |
$800 Million 6.25% 2040 Senior Notes | | Fixed | | 6.34% | | 2040 | | 800.0 |
| | 790.4 |
| (3) |
$400 Million 5.90% 2020 Senior Notes | | Fixed | | 5.98% | | 2020 | | 400.0 |
| | 398.4 |
| (4) |
$500 Million 3.95% 2018 Senior Notes | | Fixed | | 4.14% | | 2018 | | 500.0 |
| | 496.5 |
| (5) |
$1.75 Billion Credit Facility: | | | | | | | | | | | |
Revolving Loan | | Variable | | 1.64% | | 2017 | | 1,750.0 |
| | — |
| (6) |
Equipment Loans | | Fixed | | Various | | 2020 | | 164.8 |
| | 161.7 |
| |
Fair Value Adjustment to Interest Rate Hedge | | | | | | | | | | (2.1 | ) | |
Total debt | | | | | | | | $ | 4,814.8 |
| | $ | 3,043.5 |
| |
Less current portion | | | | | | | | | | 20.9 |
| |
Long-term debt | | | | | | | | | | $ | 3,022.6 |
| |
| |
(1) | As of March 31, 2014 and December 31, 2013, the $700 million 4.875 percent senior notes were recorded at a par value of $700 million less unamortized discounts of $0.5 million and $0.6 million, respectively, based on an imputed interest rate of 4.89 percent. |
| |
(2) | As of March 31, 2014 and December 31, 2013, the $500 million 4.80 percent senior notes were recorded at a par value of $500 million less unamortized discounts of $0.7 million and $0.8 million, respectively, based on an imputed interest rate of 4.83 percent. |
| |
(3) | As of March 31, 2014 and December 31, 2013, the $800 million 6.25 percent senior notes were recorded at a par value of $800 million less unamortized discounts of $9.5 million and $9.6 million, respectively, based on an imputed interest rate of 6.34 percent. |
| |
(4) | As of March 31, 2014 and December 31, 2013, the $400 million 5.90 percent senior notes were recorded at a par value of $400 million less unamortized discounts of $1.5 million and $1.6 million, respectively, based on an imputed interest rate of 5.98 percent. |
| |
(5) | As of March 31, 2014 and December 31, 2013, the $500 million 3.95 percent senior notes were recorded at a par value of $500 million less unamortized discounts of $3.3 million and $3.5 million, respectively, based on an imputed interest rate of 4.14 percent. |
| |
(6) | As of March 31, 2014, $175.0 million of revolving loans were drawn under the credit facility. As of December 31, 2013, no revolving loans were drawn under the credit facility. As of March 31, 2014 and December 31, 2013, the principal amount of letter of credit obligations totaled $5.2 million and $8.4 million, respectively, thereby reducing available borrowing capacity to $1.6 billion and $1.7 billion for each period, respectively. |
Credit Facility
At March 31, 2014, the amendments made on February 8, 2013 to the Amended and Restated Multicurrency Credit Agreement among Cliffs Natural Resources Inc. and various lenders dated August 11, 2011 (as further amended by Amendment No. 1 as of October 16, 2012), or revolving credit agreement, were no longer applicable and the covenants reverted back to those in place prior to the February 8, 2013 amendment. At March 31, 2014, the covenants require compliance with certain financial ratios based on:
| |
• | Debt to earnings ratio (Total Funded Debt to EBITDA, as those terms are defined in the revolving credit agreement), as of the last day of each fiscal quarter cannot exceed 3.5 to 1.0. |
| |
• | Minimum interest coverage ratio (Consolidated EBITDA to Interest Expense, as those terms are defined in the revolving credit agreement), for the preceding four quarters must not be less than 2.5 to 1.0 on the last day of any fiscal quarter. |
As of March 31, 2014, we were in compliance with these financial covenants. Additionally, as of December 31, 2013, we were in compliance with all applicable financial covenants related to the revolving credit agreement.