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, 2020



	☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 1-8944

CLEVELAND-CLIFFS INC.

(Exact Name of Registrant as Specified in Its Charter)



Ohio			34-1464672
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)

200 Public Square,	Cleveland,	Ohio	44114-2315
(Address of Principal Executive Offices)			(Zip Code)

Registrant’s Telephone Number, Including Area Code: (216) 694-5700

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common shares, par value $0.125 per share	CLF	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

The number of shares outstanding of the registrant’s common shares, par value $0.125 per share, was 398,609,923 as of May 8, 2020.

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TABLE OF CONTENTS


			Page Number

DEFINITIONS				1

PART I - FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2020 and December 31, 2019		4
		Statements of Unaudited Condensed Consolidated Operations for the Three Months Ended March 31, 2020 and 2019		5
		Statements of Unaudited Condensed Consolidated Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019		6
		Statements of Unaudited Condensed Consolidated Cash Flows for the Three Months Ended March 31, 2020 and 2019		7
		Statements of Unaudited Condensed Consolidated Changes in Equity for the Three Months Ended March 31, 2020 and 2019		8
		Notes to Unaudited Condensed Consolidated Financial Statements		9
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		45
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		64
	Item 4.	Controls and Procedures		64

PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings		66
	Item 1A.	Risk Factors		67
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		84
	Item 4.	Mine Safety Disclosures		84
	Item 5.	Other Information		84
	Item 6.	Exhibits		84

Signatures				86

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DEFINITIONS

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



Abbreviation or acronym		Term
A&R 2015 Equity Plan		Cliffs Natural Resources Inc. Amended and Restated 2015 Equity and Incentive Compensation Plan
ABL Facility		Asset-Based Revolving Credit Agreement, by and among Bank of America, N.A., as Agent, the Lenders that are parties thereto, as the Lenders, and Cleveland-Cliffs Inc., as Parent and a Borrower, dated as of March 13, 2020, as amended
Adjusted EBITDA		EBITDA excluding certain items such as EBITDA of noncontrolling interests, impacts of discontinued operations, extinguishment of debt, severance, acquisition costs, amortization of inventory step-up and intersegment corporate allocations of selling, general and administrative costs
AK Coal		AK Coal Resources, Inc., an indirect, wholly owned subsidiary of AK Steel, and related coal mining operations
AK Steel		AK Steel Holding Corporation and its consolidated subsidiaries, including AK Steel Corporation, its direct, wholly owned subsidiary, collectively, unless stated otherwise or the context indicates otherwise
AK Tube		AK Tube LLC, an indirect, wholly owned subsidiary of AK Steel
AMT		Alternative Minimum Tax
AOCI		Accumulated Other Comprehensive Income
ArcelorMittal USA		ArcelorMittal USA LLC (including many of its United States affiliates, subsidiaries and representatives. References to ArcelorMittal USA comprise all such relationships unless a specific ArcelorMittal USA entity is referenced)
ASC		Accounting Standards Codification
Atlantic Basin pellet premium		Platts Atlantic Basin Blast Furnace 65% Fe pellet premium
Board		The Board of Directors of Cleveland-Cliffs Inc.
CARES Act		Coronavirus Aid, Relief, and Economic Security Act
CECL		Current Expected Credit Losses
CERCLA		Comprehensive Environmental Response, Compensation and Liability Act
Compensation Committee		Compensation and Organization Committee of the Board
COVID-19		A novel strain of coronavirus that the World Health Organization declared a global pandemic in March 2020
Dodd-Frank Act		Dodd-Frank Wall Street Reform and Consumer Protection Act
DR-grade		Direct Reduction-grade
DRI		Direct Reduced Iron
EAF		Electric Arc Furnace
EBITDA		Earnings before interest, taxes, depreciation and amortization
Empire		Empire Iron Mining Partnership
EPA		U.S. Environmental Protection Agency
ERISA		Employee Retirement Income Security Act of 1974, as amended
ERM		Enterprise Risk Management
Exchange Act		Securities Exchange Act of 1934, as amended
Fe		Iron
Former ABL Facility		Amended and Restated Syndicated Facility Agreement by and among Bank of America, N.A., as Administrative Agent, the Lenders that are parties thereto, as the Lenders, Cleveland-Cliffs Inc., as Parent and a Borrower, and the Subsidiaries of Parent party thereto, as Borrowers, dated as of March 30, 2015, as amended and restated as of February 28, 2018, and as further amended
GAAP		Accounting principles generally accepted in the United States
HBI		Hot briquetted iron
Hibbing		Hibbing Taconite Company, an unincorporated joint venture
Hot-rolled coil steel price		Estimated average annual daily market price for hot-rolled coil steel
IRBs		Industrial Revenue Bonds
LIBOR		London Interbank Offered Rate
LIFO		Last-in, first-out
Long ton		2,240 pounds
Merger		The merger of Merger Sub with and into AK Steel, with AK Steel surviving the merger as a wholly owned subsidiary of Cliffs, subject to the terms and conditions set forth in the Merger Agreement, effective as of March 13, 2020
Merger Agreement		Agreement and Plan of Merger, dated as of December 2, 2019, among Cliffs, AK Steel and Merger Sub
Merger Sub		Pepper Merger Sub Inc., a direct, wholly owned subsidiary of Cliffs prior to the Merger
Metric ton		2,205 pounds
MMBtu		Million British Thermal Units
MSHA		U.S. Mine Safety and Health Administration
Net ton		2,000 pounds
Northshore		Northshore Mining Company
OPEB		Other postretirement benefits
Platts 62% Price		Platts IODEX 62% Fe Fines cost and freight North China
PPI		Producer Price Indices
Precision Partners		PPHC Holdings, LLC, an indirect, wholly owned subsidiary of AK Steel
RCRA		Resource Conservation and Recovery Act
SEC		U.S. Securities and Exchange Commission

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Abbreviation or acronym		Term
Section 232		Section 232 of the Trade Expansion Act of 1962, as amended
Securities Act		Securities Act of 1933, as amended
SunCoke Middletown		Middletown Coke Company, LLC, a subsidiary of SunCoke Energy, Inc.
Tilden		Tilden Mining Company L.C.
Topic 805		ASC Topic 805, Business Combinations
Topic 815		ASC Topic 815, Derivatives and Hedging
TSR		Total shareholder return
United Taconite		United Taconite LLC
U.S.		United States of America
U.S. Steel		Ontario Hibbing Company, a subsidiary of United States Steel Corporation and a participant in Hibbing
USMCA		United States-Mexico-Canada Agreement
USW		United Steelworkers
VIE		Variable Interest Entity

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PART I



Item 1.	Financial Statements

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Statements of Unaudited Condensed Consolidated Financial Position

Cleveland-Cliffs Inc. and Subsidiaries



	(In Millions)
	March 31, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	186.9		$	352.6
Accounts receivable, net	560.8			94.0
Inventories	2,148.8			317.4
Income tax receivable, current	61.7			58.6
Other current assets	107.4			75.3
Total current assets	3,065.6			897.9
Non-current assets:
Property, plant and equipment, net	4,549.8			1,929.0
Goodwill	143.3			2.1
Intangible assets, net	210.0			48.1
Income tax receivable, non-current	4.1			62.7
Deferred income taxes	486.4			459.5
Right-of-use asset, operating lease	238.0			11.7
Other non-current assets	215.1			92.8
TOTAL ASSETS	$	8,912.3		$	3,503.8
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	825.3		$	193.2
Accrued liabilities	299.8			126.3
Other current liabilities	245.7			89.9
Total current liabilities	1,370.8			409.4
Non-current liabilities:
Long-term debt	4,357.1			2,113.8
Operating lease liability, non-current	201.2			10.5
Intangible liability, net	137.9			—
Pension and OPEB liabilities	1,171.6			311.5
Asset retirement obligations	179.2			163.2
Other non-current liabilities	263.5			137.5
TOTAL LIABILITIES	7,681.3			3,145.9
Commitments and contingencies (See Note 20)
Equity:
Common shares - par value $0.125 per share
Authorized - 600,000,000 shares (2019 - 600,000,000 shares);
Issued - 428,645,866 shares (2019 - 301,886,794 shares);
Outstanding - 398,587,083 shares (2019 - 270,084,005 shares)	53.6			37.7
Capital in excess of par value of shares	4,450.2			3,872.1
Retained deficit	(2,918.5		)	(2,842.4		)
Cost of 30,058,783 common shares in treasury (2019 - 31,802,789 shares)	(365.0		)	(390.7		)
Accumulated other comprehensive loss	(317.1		)	(318.8		)
Total Cliffs shareholders' equity	903.2			357.9
Noncontrolling interest	327.8			—
TOTAL EQUITY	1,231.0			357.9
TOTAL LIABILITIES AND EQUITY	$	8,912.3		$	3,503.8

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

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Statements of Unaudited Condensed Consolidated Operations

Cleveland-Cliffs Inc. and Subsidiaries



	(In Millions, Except Per Share Amounts)
	Three Months Ended March 31,
	2020			2019
Revenues	$	324.5		$	157.0
Realization of deferred revenue	34.6			—
Operating costs:
Cost of goods sold	(356.0		)	(126.1		)
Selling, general and administrative expenses	(26.1		)	(27.3		)
Acquisition-related costs	(42.5		)	—
Miscellaneous – net	(13.3		)	(4.4		)
Total operating costs	(437.9		)	(157.8		)
Operating loss	(78.8		)	(0.8		)
Other income (expense):
Interest expense, net	(31.0		)	(25.1		)
Other non-operating income	9.2			0.1
Total other expense	(21.8		)	(25.0		)
Loss from continuing operations before income taxes	(100.6		)	(25.8		)
Income tax benefit	51.4			3.7
Loss from continuing operations	(49.2		)	(22.1		)
Income from discontinued operations, net of tax	0.6			—
Net loss	(48.6		)	(22.1		)
Income attributable to noncontrolling interest	(3.5		)	—
Net loss attributable to Cliffs shareholders	$	(52.1	)	$	(22.1	)

Loss per common share attributable to Cliffs shareholders - basic
Continuing operations	$	(0.18	)	$	(0.08	)
Discontinued operations	—			—
	$	(0.18	)	$	(0.08	)
Loss per common share attributable to Cliffs shareholders - diluted
Continuing operations	$	(0.18	)	$	(0.08	)
Discontinued operations	—			—
	$	(0.18	)	$	(0.08	)
Average number of shares (in thousands)
Basic	297,515			289,525
Diluted	297,515			289,525

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

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Statements of Unaudited Condensed Consolidated Comprehensive Loss

Cleveland-Cliffs Inc. and Subsidiaries



	(In Millions)
	Three Months Ended March 31,
	2020			2019
Net loss	$	(48.6	)	$	(22.1	)
Other comprehensive income (loss):
Changes in pension and OPEB, net of tax	5.6			5.7
Changes in foreign currency translation	(0.9		)	—
Changes in derivative financial instruments, net of tax	(3.0		)	2.7
Total other comprehensive income	1.7			8.4
Comprehensive loss	(46.9		)	(13.7		)
Comprehensive income attributable to noncontrolling interests	(3.5		)	—
Comprehensive loss attributable to Cliffs shareholders	$	(50.4	)	$	(13.7	)

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

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Statements of Unaudited Condensed Consolidated Cash Flows

Cleveland-Cliffs Inc. and Subsidiaries



	(In Millions)
	Three Months Ended March 31,
	2020			2019
OPERATING ACTIVITIES
Net loss	$	(48.6	)	$	(22.1	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation, depletion and amortization	34.4			19.9
Deferred income taxes	(47.5		)	(4.1		)
Loss (gain) on derivatives	32.0			(5.7		)
Other	(31.6		)	13.9
Changes in operating assets and liabilities, net of business combination:
Receivables and other assets	254.1			204.0
Inventories	(244.1		)	(228.9		)
Payables, accrued expenses and other liabilities	(109.2		)	(88.2		)
Net cash used by operating activities	(160.5		)	(111.2		)
INVESTING ACTIVITIES
Purchase of property, plant and equipment	(138.1		)	(134.1		)
Acquisition of AK Steel, net of cash acquired	(869.3		)	—
Other investing activities	(0.1		)	8.5
Net cash used by investing activities	(1,007.5		)	(125.6		)
FINANCING ACTIVITIES
Repurchase of common shares	—			(124.3		)
Dividends paid	(16.9		)	(14.8		)
Proceeds from issuance of debt	716.2			—
Debt issuance costs	(44.4		)	—
Repurchase of debt	(429.9		)	(10.3		)
Borrowings under credit facilities	800.0			—
Other financing activities	(19.9		)	(8.4		)
Net cash provided (used) by financing activities	1,005.1			(157.8		)
Decrease in cash and cash equivalents, including cash classified within other current assets related to discontinued operations	(162.9		)	(394.6		)
Less: increase (decrease) in cash and cash equivalents from discontinued operations, classified within other current assets	2.8			(1.6		)
Net decrease in cash and cash equivalents	(165.7		)	(393.0		)
Cash and cash equivalents at beginning of period	352.6			823.2
Cash and cash equivalents at end of period	$	186.9		$	430.2

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

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Statements of Unaudited Condensed Consolidated Changes in Equity

Cleveland-Cliffs Inc. and Subsidiaries



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



	(In Millions)
	Number of Common Shares Outstanding		Par Value of Common Shares Issued		Capital in Excess of Par Value of Shares			Retained Deficit			Common Shares in Treasury			AOCI (Loss)			Total
December 31, 2018	292.6		$	37.7	$	3,916.7		$	(3,060.2	)	$	(186.1	)	$	(283.9	)	$	424.2
Comprehensive income (loss)	—		—		—			(22.1		)	—			8.4			(13.7		)
Stock and other incentive plans	1.7		—		(56.5		)	—			46.5			—			(10.0		)
Common 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

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

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Cleveland-Cliffs Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Business, Consolidation and Presentation

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

Acquisition of AK Steel

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

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

COVID-19

In response to the COVID-19 pandemic, we have made various operational changes to adjust to the demand for our products. Although steel and iron ore are considered “essential” by the states in which we operate, certain of our facilities, including Dearborn Works, all Precision Partners facilities and approximately 65% of AK Tube production, have been temporarily idled until market conditions improve. We have also temporarily shut down construction activities at the HBI production plant. On April 13, 2020, we announced the temporarily idling of two of our iron ore mining operations, Northshore in Minnesota and Tilden in Michigan, and we expect them to restart in July 2020 and August 2020, respectively. Mansfield Works is idled for an unknown, extended period of time, and AK Coal has been indefinitely idled and held for sale. We are also moving forward with the permanent idle of the Dearborn Works hot strip mill, anneal and temper operations. Finally, the Hibbing mine, of which we are a minority participant, has been idled by the joint venture.

Basis of Consolidation

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

Reportable Segments

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

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Significant Accounting Policies

A detailed description of our significant accounting policies can be found in the audited financial statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K filed with the SEC. Due to the completion of our acquisition of AK Steel, there have been several changes in our significant accounting policies from those disclosed therein. The significant accounting policies requiring updates have been included within the disclosures below.

Revenue Recognition

Steel and Manufacturing

We generate our revenue through product sales, in which shipping terms generally indicate when we have fulfilled our performance obligations and transferred control of products to our customer. Our revenue transactions consist of a single performance obligation to transfer promised goods. We have contracts with a significant portion of our customers. These contracts usually define the mechanism for determining the sales price, which is normally fixed upon transfer of control, but the contracts do not impose a specific quantity on either party. Quantities to be delivered to the customer are determined at a point near the date of delivery through purchase orders or other written instructions we receive from the customer. Spot market sales are made through purchase orders or other written instructions. For sales with shipping terms that transfer control at the destination point, we consider our performance obligation is complete and recognize revenue when the customer receives the goods. For sales with shipping terms that transfer control at the shipping point with us bearing responsibility for freight costs to the destination, we determine that we fulfilled a single performance obligation and recognize revenue when we ship the goods.

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring product. We reduce the amount of revenue recognized for estimated returns and other customer credits, such as discounts and volume rebates, based on the expected value to be realized. Payment terms are consistent with terms standard to the markets we serve. Sales taxes collected from customers are excluded from revenues.

Mining and Pelletizing

We sell 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 must run continuously with a constant feed of iron ore in order to be most efficient. As a result, we ship iron ore in large quantities for storage and use by customers at a later date. Customers do not simultaneously receive and consume the benefits of the iron ore. Based on our assessment of the factors that indicate the pattern of satisfaction, we transfer control of the iron ore at a point in time upon shipment or delivery of the product. The customer is able to direct the use of, and obtain substantially all of the benefits from, the product at the time the product is delivered.

Most of our customer supply agreements specify a provisional price, which is used for initial billing and cash collection. Revenue is calculated using the expected revenue rate at the point when control transfers. The final settlement includes market inputs for a specified period of time, which may vary by customer, but typically include one or more of the following: Platts 62% Price, Atlantic Basin pellet premium and Platts international indexed freight rates. 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 14 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES 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 hot-rolled coil steel price 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 Topic 815. Refer to NOTE 14 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information on supplemental revenue or refunds.

Included within Revenues related to Topic 815 is a derivative loss of $26.8 million and a derivative gain of $5.5 million for the three months ended March 31, 2020 and 2019, respectively.

Allowance for Doubtful Accounts

We establish provisions for expected lifetime losses on accounts receivable at the time a receivable is recorded based on historical experience, customer credit quality and forecasted economic conditions. We regularly review our accounts receivable balances and the allowance for credit loss and establish or adjust the allowance as necessary using

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the specific identification method in accordance with CECL. We evaluate the aggregation and risk characteristics of receivable pools and develop loss rates that reflect historical collections, current forecasts of future economic conditions over the time horizon we are exposed to credit risk, and payment terms or conditions that may materially affect future forecasts. We expect credit losses associated with major auto companies to be lower than other customer pools.

Deferred Revenue

The table below summarizes our deferred revenue balances:



	(In Millions)
	Deferred Revenue (Current)						Deferred Revenue (Long-Term)
	2020			2019			2020			2019
Opening balance as of January 1	$	22.1		$	21.0		$	25.7		$	38.5
Decrease	(21.8		)	(2.9		)	(25.7		)	—
Closing balance as of March 31	$	0.3		$	18.1		$	—		$	38.5

One of our iron ore pellet sales agreements required supplemental payments to be paid by a customer during the period from 2009 through 2013. Installment amounts received under this arrangement in excess of sales were classified as deferred revenue in the Statements of Consolidated Financial Position upon receipt of payment and the revenue was recognized over the life of the supply agreement, which had extended until 2022, in equal annual installments. As a result of the termination of the AK Steel iron ore pellet sales agreement, we realized $34.6 million of deferred revenue, which was recognized within Realization of deferred revenue in the Statements of Unaudited Condensed Consolidated Operations, during the three months ended March 31, 2020.

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

Inventories

Steel and Manufacturing

Inventories are stated at the lower of cost or net realizable value. The Steel and Manufacturing segment determines cost using average cost, excluding depreciation and amortization.

Mining and Pelletizing

Inventories are stated at the lower of cost or market. The Mining and Pelletizing segment determines cost using the LIFO method.

Property, Plant and Equipment

Our properties are stated at the lower of cost less accumulated depreciation or fair value. Depreciation of plant and equipment is computed principally by the straight-line method based on estimated useful lives. Depreciation continues to be recognized when operations are idled temporarily. Depreciation and depletion is recorded over the following estimated useful lives:



Asset Class	Basis	Life
Land, land improvements and mineral rights
Land and mineral rights	Units of production	Life of mine
Land improvements	Straight line	20 to 45 years
Buildings	Straight line	40 to 45 years
Mining and Pelletizing equipment	Straight line/Double declining balance	3 to 20 years
Steel and Manufacturing equipment	Straight line/Double declining balance	3 to 20 years

Refer to NOTE 5 - PROPERTY, PLANT AND EQUIPMENT for further information.

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Goodwill

Goodwill represents the excess purchase price paid over the fair value of the net assets during an acquisition. Goodwill is not amortized but is assessed for impairment on an annual basis on October 1st (or more frequently if necessary).

Other Intangible Assets and Liabilities

Intangible assets and liabilities are subject to periodic amortization on a straight-line basis over their estimated useful lives as follows:



Type	Basis	Useful Life
Intangible assets, net
Customer relationships	Straight line	18 years
Developed technology	Straight line	17 years
Trade names and trademarks	Straight line	10 years
Mining permits	Straight line	Life of mine
Intangible liability, net
Above-market supply contract	Straight line	13 years

We monitor conditions that may affect the carrying value of our long-lived tangible and intangible assets when events and circumstances indicate that the carrying value of the asset groups may not be recoverable. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable, independent cash flows are available ("asset group"). An impairment loss exists when the carrying value of the asset group is greater than its fair value. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the asset group. Fair value can be determined using a market approach, income approach or cost approach.

Refer to NOTE 6 - GOODWILL AND INTANGIBLE ASSETS AND LIABILITIES for further information.

Leases

We determine if an arrangement contains a lease at inception. We recognize right-of-use assets and lease liabilities associated with leases based on the present value of the future minimum lease payments over the lease term at the commencement date. Lease terms reflect options to extend or terminate the lease when it is reasonably certain that the option will be exercised. For short-term leases (leases with an initial lease term of 12 months or less), right-of-use assets and lease liabilities are not recognized in the consolidated balance sheet, and lease expense is recognized on a straight-line basis over the lease term. In addition, we have agreements with both lease and non-lease components for which we have elected the practical expedient, for each underlying class of asset, to not separate the components.

Refer to NOTE 8 - LEASES for further information.

Investments in Affiliates

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



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

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Recent Accounting Pronouncements

Issued and Adopted

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

NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION

Revenues

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



	(In Millions)
	Three Months Ended March 31,
	2020		2019
Steel and Manufacturing:
Automotive	$	120.2	$	—
Infrastructure and manufacturing	44.0		—
Distributors and converters	53.3		—
Total Steel and Manufacturing	217.5		—
Mining and Pelletizing:
Steel producers¹	141.6		157.0
Total revenues	$	359.1	$	157.0

¹ Includes Realization of deferred revenue of $34.6 million for the three months ended March 31, 2020.

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



	(In Millions)
	Three Months Ended March 31,
	2020		2019
Steel and Manufacturing:
Carbon steel	$	138.6	$	—
Stainless and electrical steel	59.4		—
Tubular products, components and other	19.5		—
Total Steel and Manufacturing	217.5		—
Mining and Pelletizing:
Iron ore¹	131.3		145.4
Freight	10.3		11.6
Total Mining and Pelletizing	141.6		157.0
Total revenues	$	359.1	$	157.0

¹ Includes Realization of deferred revenue of $34.6 million for the three months ended March 31, 2020.

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We sell domestically to customers located primarily in the Midwestern, Southern and Eastern United States and to foreign customers, primarily in Canada, Mexico and Western Europe. Net revenues to customers located outside the United States were $46.7 million and $43.0 million for the three months ended March 31, 2020 and 2019, respectively.

Allowance for Credit Losses

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



	(In Millions)
	March 31, 2020		March 31, 2019
Allowance for credit losses at beginning of period	$	—	$	—
Increase in allowance	1.2		—
Allowance for credit losses at end of period	$	1.2	$	—

Inventories

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



	(In Millions)
	March 31, 2020		December 31, 2019
Product inventories
Finished and semi-finished goods	$	1,358.9	$	114.1
Work-in-process	88.0		68.7
Raw materials	343.0		9.4
Total product inventories	1,789.9		192.2
Manufacturing supplies and critical spares	358.9		125.2
Inventories	$	2,148.8	$	317.4

Accrued Liabilities

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



	(In Millions)
	March 31, 2020		December 31, 2019
Accrued employment costs	$	158.3	$	61.7
Accrued interest	47.1		29.0
Accrued dividends	24.9		17.8
Other	69.5		17.8
Accrued liabilities	$	299.8	$	126.3

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Cash Flow Information

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



	(In Millions)
	Three Months Ended March 31,
	2020			2019
Capital additions	$	157.7		$	129.3
Less:
Non-cash accruals	(10.3		)	(11.5		)
Right-of-use assets - finance leases	29.9			15.1
Grants	—			(8.4		)
Cash paid for capital expenditures including deposits	$	138.1		$	134.1

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



	(In Millions)
	Three Months Ended March 31,
	2020			2019
Taxes paid on income	$	0.1		$	0.1
Income tax refunds	(60.4		)	—
Interest paid on debt obligations net of capitalized interest¹	29.7			39.2

¹Capitalized interest was $9.7 million and $4.0 million for the three months ended March 31, 2020 and 2019, respectively.

Non-Cash Investing and Financing Activities



	(In Millions)
	Three Months Ended March 31,
	2020		2019
Fair value of common shares issued for consideration for business combination	$	617.6	$	—
Fair value of equity awards assumed from AK Steel acquisition	4.3		—
Dividends declared	24.0		14.5

On February 18, 2020, our Board declared a quarterly cash dividend on our common shares of $0.06 per share. The cash dividend of $23.9 million was paid on April 15, 2020 to shareholders of record as of the close of business on April 3, 2020.

NOTE 3 - ACQUISITION OF AK STEEL

Transaction Overview

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

The acquisition combined Cliffs, North America’s largest producer of iron ore pellets, with AK Steel, a leading producer of innovative flat-rolled carbon, stainless and electrical steel products, to create a vertically integrated producer of value-added iron ore and steel products. The combination is expected to create significant opportunities to generate additional value from market trends across the entire steel value chain and enable more consistent, predictable performance through normal market cycles. Together, Cliffs and AK Steel have a presence across the entire manufacturing process, from mining to pelletizing to the development and production of finished high value steel products, including

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Next Generation Advanced High Strength Steels for automotive and other markets. The combination is expected to generate cost synergies, primarily from consolidating corporate functions, reducing duplicative overhead costs, and procurement and energy cost savings, as well as operational and supply chain efficiencies. The combined company is well positioned to provide high-value iron ore and steel solutions to customers primarily across North America.

Total net revenues for AK Steel for the most recent pre-acquisition year ended December 31, 2019 were $6,359.4 million. Following the acquisition, the operating results of AK Steel were included in our unaudited condensed consolidated financial statements and are reported as part of our Steel and Manufacturing segment. For the period subsequent to the acquisition (March 13, 2020 through March 31, 2020), AK Steel's Revenues were $217.5 million and Net loss attributable to Cliffs shareholders was $55.1 million, which includes $23.2 million and $17.6 million related to amortization of the fair value inventory step-up and severance costs, respectively.

Additionally, we incurred acquisition costs of $23.2 million for the three months ended March 31, 2020, which were recorded in Acquisition-related costs on the Statements of Unaudited Condensed Consolidated Operations.

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

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

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



	(In Millions, Except Per Share Amounts)
Fair value of Cliffs common shares issued for AK Steel outstanding common stock	$	617.6
Fair value of replacement equity awards	4.3
Fair value of AK Steel debt	913.6
Total transaction consideration	$	1,535.5

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



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

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



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

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Valuation Assumption and Preliminary Purchase Price Allocation

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

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



	(In Millions)
Cash and cash equivalents	$	37.7
Accounts receivable	666.0
Inventories	1,562.8
Other current assets	67.5
Property, plant and equipment	2,184.4
Intangible assets	163.0
Right-of-use asset, operating lease	225.9
Other non-current assets	85.9
Accounts payable	(636.3		)
Accrued liabilities	(222.5		)
Other current liabilities	(181.8		)
Long-term debt	(1,179.4		)
Deferred income taxes	(19.7		)
Operating lease liability, non-current	(188.1		)
Intangible liability	(140.0		)
Pension and OPEB liabilities	(873.0		)
Asset retirement obligations	(13.9		)
Other non-current liabilities	(144.2		)
Net identifiable assets acquired	$	1,394.3
Goodwill	141.2
Total net assets acquired	$	1,535.5

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

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



	(In Millions)			Weighted Average Life (In Years)
Intangible assets:
Customer relationships	$	91.0		18
Developed technology	61.0			17
Trade names and trademarks	11.0			10
Total identifiable intangible assets	$	163.0		17
Intangible liability:
Above-market supply contract	$	(140.0	)	13

The above-market supply contract relates to a long-term coke supply agreement with SunCoke Middletown, a consolidated variable interest entity. Refer to NOTE 18 - VARIABLE INTEREST ENTITIES for further information.

Pro Forma Results

The following table provides unaudited pro forma financial information, prepared in accordance with Topic 805, for the three months ended March 31, 2020 and 2019, as if AK Steel had been acquired as of January 1, 2019:



	(In Millions)
	Three Months Ended March 31,
	2020			2019
Revenues	$	1,526.4		$	1,787.3
Net loss attributable to Cliffs shareholders	$	(17.4	)	$	(79.7	)

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


1.	The elimination of intercompany revenues between Cliffs and AK Steel of $67.8 million and $67.4 million for the three months ended March 31, 2020 and 2019, respectively.


2.	The 2020 pro forma net income was adjusted to exclude $23.2 million of non-recurring inventory acquisition accounting adjustments incurred during the three months ended March 31, 2020. The 2019 pro forma net income was adjusted to include $84.8 million of non-recurring inventory acquisition accounting adjustments.


3.	The elimination of nonrecurring transaction costs incurred by Cliffs and AK Steel in connection with the Merger of $26.6 million for the three months ended March 31, 2020.


4.	Total other pro forma adjustments included income of $13.1 million and $4.2 million, for the three months ended March 31, 2020 and 2019, respectively, primarily due to reduced interest and amortization expense, offset partially by additional depreciation expense.


5.	The income tax impact of pro forma transaction adjustments that affect Net loss attributable to Cliffs shareholders at a statutory rate of 24.3% resulted in an income tax expense of $11.6 million and an income tax benefit of $18.3 million, for the three months ended March 31, 2020 and 2019, respectively.

The unaudited pro forma financial information does not reflect the potential realization of revenue synergies or cost savings, nor does it reflect other costs relating to the integration of the two companies. This unaudited pro forma financial information should not be considered indicative of the results that would have actually occurred if the acquisition had been consummated on January 1, 2019, nor are they indicative of future results.

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NOTE 4 - SEGMENT REPORTING

Our Company is a vertically integrated producer of value-added iron ore and steel products. Our operations are organized and managed in two operating segments according to our upstream and downstream operations. Our 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. Our Steel and Manufacturing segment is a leading producer of flat-rolled carbon, stainless and electrical steel products, primarily for the automotive, infrastructure and manufacturing, and distributors and converters markets. Our Steel and Manufacturing segment includes subsidiaries that provide customer solutions with carbon and stainless steel tubing products, advanced-engineered solutions, tool design and build, hot- and cold-stamped steel components, and complex assemblies. Although we planned for our HBI production plant in Toledo, Ohio, now included as part of our Steel and Manufacturing segment, to be ready for production before the end of the second quarter of 2020, construction is temporarily on hold due to the economic impact of the COVID-19 pandemic. All intersegment transactions were eliminated in consolidation.

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

Our results by segment are as follows:



	(In Millions, Except Sales Tons)
	Three Months Ended March 31,
	2020	2019
Sales volume (in thousands):