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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | | | | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2022
OR
| | | | | | | | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to .
Commission File Number: 1-8944
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, a 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 524,737,194 as of April 25, 2022.
TABLE OF CONTENTS
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| | | | | |
| | | Page Number |
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DEFINITIONS | | | |
| | | |
PART I - FINANCIAL INFORMATION | | | |
| Item 1. | Financial Statements | | | |
| | Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2022 and December 31, 2021 | | | |
| | Statements of Unaudited Condensed Consolidated Operations for the Three Months Ended March 31, 2022 and 2021 | | | |
| | Statements of Unaudited Condensed Consolidated Comprehensive Income for the Three Months Ended March 31, 2022 and 2021 | | | |
| | Statements of Unaudited Condensed Consolidated Cash Flows for the Three Months Ended March 31, 2022 and 2021 | | | |
| | Statements of Unaudited Condensed Consolidated Changes in Equity for the Three Months Ended March 31, 2022 and 2021 | | | |
| | Notes to Unaudited Condensed Consolidated Financial Statements | | | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | | | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | | | |
| Item 4. | Controls and Procedures | | | |
| | | |
PART II - OTHER INFORMATION | | | |
| Item 1. | Legal Proceedings | | | |
| Item 1A. | Risk Factors | | | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | | | |
| Item 4. | Mine Safety Disclosures | | | |
| Item 5. | Other Information | | | |
| Item 6. | Exhibits | | | |
| | | | | |
Signatures | | | |
| | | |
DEFINITIONS
The following abbreviations or acronyms are used in the text. References in this report to the “Company,” “we,” “us,” “our” and “Cliffs” are to Cleveland-Cliffs Inc. and subsidiaries, collectively, unless stated otherwise or the context indicates otherwise.
| | | | | | | | |
Abbreviation or acronym | | Term |
| | |
4.625% 2029 Senior Notes | | 4.625% Senior Guaranteed Notes due 2029 issued by Cleveland-Cliffs Inc. on February 17, 2021 in an aggregate principal amount of $500 million |
4.875% 2031 Senior Notes | | 4.875% Senior Guaranteed Notes due 2031 issued by Cleveland-Cliffs Inc. on February 17, 2021 in an aggregate principal amount of $500 million |
| | |
ABL Facility | | Asset-Based Revolving Credit Agreement, dated as of March 13, 2020, among Cleveland-Cliffs Inc., the lenders party thereto from time to time and Bank of America, N.A., as administrative agent, as amended as of March 27, 2020, and December 9, 2020, and as may be further amended from time to time |
Adjusted EBITDA | | EBITDA, excluding certain items such as EBITDA of noncontrolling interests, asset impairment, extinguishment of debt, severance, acquisition-related costs, amortization of inventory step-up and impacts of discontinued operations |
AK Steel | | AK Steel Holding Corporation (n/k/a Cleveland-Cliffs Steel Holding Corporation) and its consolidated subsidiaries, including AK Steel Corporation (n/k/a Cleveland-Cliffs Steel Corporation), its direct, wholly owned subsidiary, collectively, unless stated otherwise or the context indicates otherwise |
AK Steel Merger | | The merger of Merger Sub with and into AK Steel, with AK Steel surviving the merger as a wholly owned subsidiary of Cleveland-Cliffs Inc., subject to the terms and conditions set forth in the AK Steel Merger Agreement, consummated on March 13, 2020 |
AK Steel Merger Agreement | | Agreement and Plan of Merger, dated as of December 2, 2019, among Cleveland-Cliffs Inc., AK Steel and Merger Sub |
AM USA Transaction | | The acquisition of ArcelorMittal USA, consummated on December 9, 2020 |
AM USA Transaction Agreement | | Transaction Agreement, dated as of September 28, 2020, by and between Cleveland-Cliffs Inc. and ArcelorMittal |
AOCI | | Accumulated Other Comprehensive Income (Loss) |
ArcelorMittal | | ArcelorMittal S.A., a company organized under the laws of Luxembourg and the former ultimate parent company of ArcelorMittal USA |
ArcelorMittal USA | | Substantially all of the operations of the former ArcelorMittal USA LLC, its subsidiaries and certain affiliates, and Kote and Tek, collectively |
ASC | | Accounting Standards Codification |
ASU | | Accounting Standards Update |
Board | | The Board of Directors of Cleveland-Cliffs Inc. |
BOF | | Basic oxygen furnace |
CARES Act | | Coronavirus Aid, Relief, and Economic Security Act |
CERCLA | | Comprehensive Environmental Response, Compensation and Liability Act of 1980 |
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 |
EAF | | Electric arc furnace |
EBITDA | | Earnings before interest, taxes, depreciation and amortization |
| | |
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 | | Federal Mine Safety and Health Act of 1977, as amended |
FPT | | Ferrous Processing and Trading Company, including certain related entities |
FPT Acquisition | | The purchase of FPT, subject to the terms and conditions set forth in the FPT Acquisition Agreement |
FPT Acquisition Agreement | | Securities Purchase Agreement, dated as of October 8, 2021, by and between Cleveland-Cliffs Inc. and Anthony Soave Revocable Trust u/a/d January 14, 1987, as amended and restated |
GAAP | | Accounting principles generally accepted in the United States |
GHG | | Greenhouse gas |
GOES | | Grain oriented electrical steel |
HBI | | Hot briquetted iron |
| | |
HRC | | Hot-rolled coil steel |
IRB | | Industrial Revenue Bond |
JSW Steel | | JSW Steel (USA) Inc. and JSW Steel USA Ohio, Inc., collectively |
Kote and Tek | | I/N Kote L.P. (n/k/a Cleveland-Cliffs Kote L.P.) and I/N Tek L.P. (n/k/a Cleveland-Cliffs Tek L.P.), former joint ventures between subsidiaries of the former ArcelorMittal USA LLC and Nippon Steel Corporation |
Long ton | | 2,240 pounds |
Merger Sub | | Pepper Merger Sub Inc., a direct, wholly owned subsidiary of Cliffs prior to the AK Steel Merger |
Metric ton | | 2,205 pounds |
MSHA | | U.S. Mine Safety and Health Administration |
Net ton | | 2,000 pounds |
| | | | | | | | |
Abbreviation or acronym | | Term |
NOES | | Non-oriented electrical steel |
| | |
NPDES | | National Pollutant Discharge Elimination System, authorized by the Clean Water Act |
OPEB | | Other postretirement benefits |
Platts 62% price | | Platts IODEX 62% Fe Fines CFR North China |
RCRA | | Resource Conservation and Recovery Act |
RI/FS | | Remedial Investigation/Feasibility Study |
| | |
SEC | | U.S. Securities and Exchange Commission |
Section 232 | | Section 232 of the Trade Expansion Act of 1962, as amended |
Securities Act | | Securities Act of 1933, as amended |
SunCoke Middletown | | Middletown Coke Company, LLC, a subsidiary of SunCoke Energy, Inc. |
Topic 805 | | ASC Topic 805, Business Combinations |
Topic 815 | | ASC Topic 815, Derivatives and Hedging |
| | |
U.S. | | United States of America |
U.S. Steel | | United States Steel Corporation and its subsidiaries, collectively, unless stated otherwise or the context indicates otherwise |
| | |
USMCA | | United States-Mexico-Canada Agreement |
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| | |
VIE | | Variable interest entity |
PART I
| | | | | |
Item 1. | Financial Statements |
Statements of Unaudited Condensed Consolidated Financial Position
Cleveland-Cliffs Inc. and Subsidiaries
| | | | | | | | | | | |
| (In Millions) |
| March 31, 2022 | | December 31, 2021 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 35 | | | $ | 48 | |
Accounts receivable, net | 2,667 | | | 2,154 | |
Inventories | 5,562 | | | 5,188 | |
Other current assets | 295 | | | 263 | |
Total current assets | 8,559 | | | 7,653 | |
Non-current assets: | | | |
Property, plant and equipment, net | 9,012 | | | 9,186 | |
Goodwill | 1,127 | | | 1,116 | |
| | | |
Other non-current assets | 1,070 | | | 1,020 | |
TOTAL ASSETS | $ | 19,768 | | | $ | 18,975 | |
LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 2,271 | | | $ | 2,073 | |
Accrued employment costs | 541 | | | 585 | |
| | | |
Other current liabilities | 939 | | | 903 | |
Total current liabilities | 3,751 | | | 3,561 | |
Non-current liabilities: | | | |
Long-term debt | 5,028 | | | 5,238 | |
Pension liability, non-current | 552 | | | 578 | |
OPEB liability, non-current | 2,346 | | | 2,383 | |
Other non-current liabilities | 1,483 | | | 1,441 | |
TOTAL LIABILITIES | 13,160 | | | 13,201 | |
Commitments and contingencies (See Note 18) | | | |
Equity: | | | |
Common shares - par value $0.125 per share | | | |
Authorized - 1,200,000,000 shares (2021 - 1,200,000,000 shares); | | | |
Issued - 531,051,530 shares (2021 - 506,832,537 shares); | | | |
Outstanding - 524,714,208 shares (2021 - 500,158,955 shares) | 66 | | | 63 | |
Capital in excess of par value of shares | 4,848 | | | 4,892 | |
Retained earnings (deficit) | 800 | | | (1) | |
Cost of 6,337,322 common shares in treasury (2021 - 6,673,582 shares) | (90) | | | (82) | |
Accumulated other comprehensive income | 715 | | | 618 | |
Total Cliffs shareholders' equity | 6,339 | | | 5,490 | |
Noncontrolling interest | 269 | | | 284 | |
TOTAL EQUITY | 6,608 | | | 5,774 | |
TOTAL LIABILITIES AND EQUITY | $ | 19,768 | | | $ | 18,975 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Statements of Unaudited Condensed Consolidated Operations
Cleveland-Cliffs Inc. and Subsidiaries
| | | | | | | | | | | | | | | |
| | | | | (In Millions, Except Per Share Amounts) |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Revenues | | | | | $ | 5,955 | | | $ | 4,049 | |
Operating costs: | | | | | | | |
Cost of goods sold | | | | | (4,706) | | | (3,761) | |
Selling, general and administrative expenses | | | | | (122) | | | (108) | |
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Miscellaneous – net | | | | | (33) | | | (3) | |
Total operating costs | | | | | (4,861) | | | (3,872) | |
Operating income | | | | | 1,094 | | | 177 | |
Other income (expense): | | | | | | | |
Interest expense, net | | | | | (77) | | | (92) | |
Loss on extinguishment of debt | | | | | (14) | | | (66) | |
Net periodic benefit credits other than service cost component | | | | | 49 | | | 47 | |
Other non-operating expense | | | | | (2) | | | — | |
Total other expense | | | | | (44) | | | (111) | |
Income from continuing operations before income taxes | | | | | 1,050 | | | 66 | |
Income tax expense | | | | | (237) | | | (9) | |
Income from continuing operations | | | | | 813 | | | 57 | |
Income from discontinued operations, net of tax | | | | | 1 | | | — | |
Net income | | | | | 814 | | | 57 | |
Income attributable to noncontrolling interest | | | | | (13) | | | (16) | |
Net income attributable to Cliffs shareholders | | | | | $ | 801 | | | $ | 41 | |
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Earnings per common share attributable to Cliffs shareholders - basic | | | | | | | |
Continuing operations | | | | | $ | 1.54 | | | $ | 0.08 | |
Discontinued operations | | | | | — | | | — | |
| | | | | $ | 1.54 | | | $ | 0.08 | |
Earnings per common share attributable to Cliffs shareholders - diluted | | | | | | | |
Continuing operations | | | | | $ | 1.50 | | | $ | 0.07 | |
Discontinued operations | | | | | — | | | — | |
| | | | | $ | 1.50 | | | $ | 0.07 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Statements of Unaudited Condensed Consolidated Comprehensive Income
Cleveland-Cliffs Inc. and Subsidiaries
| | | | | | | | | | | | | | | |
| | | | | (In Millions) |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Net income | | | | | $ | 814 | | | $ | 57 | |
Other comprehensive income (loss): | | | | | | | |
Changes in pension and OPEB, net of tax | | | | | 1 | | | 7 | |
Changes in foreign currency translation | | | | | — | | | (1) | |
Changes in derivative financial instruments, net of tax | | | | | 96 | | | 7 | |
Total other comprehensive income | | | | | 97 | | | 13 | |
Comprehensive income | | | | | 911 | | | 70 | |
Comprehensive income attributable to noncontrolling interests | | | | | (13) | | | (16) | |
Comprehensive income attributable to Cliffs shareholders | | | | | $ | 898 | | | $ | 54 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Statements of Unaudited Condensed Consolidated Cash Flows
Cleveland-Cliffs Inc. and Subsidiaries
| | | | | | | | | | | |
| (In Millions) |
| Three Months Ended March 31, |
| 2022 | | 2021 |
OPERATING ACTIVITIES | | | |
Net income | $ | 814 | | | $ | 57 | |
Adjustments to reconcile net income to net cash provided (used) by operating activities: | | | |
Depreciation, depletion and amortization | 301 | | | 217 | |
Impairment of long-lived assets | 29 | | | — | |
| | | |
| | | |
Pension and OPEB credits | (27) | | | (21) | |
Loss on extinguishment of debt | 14 | | | 66 | |
Amortization of inventory step-up | — | | | 81 | |
Other | 82 | | | 26 | |
Changes in operating assets and liabilities, net of business combination: | | | |
Receivables and other assets | (441) | | | (480) | |
Inventories | (372) | | | (172) | |
Pension and OPEB payments and contributions | (60) | | | (175) | |
Payables, accrued expenses and other liabilities | 193 | | | 22 | |
Net cash provided (used) by operating activities | 533 | | | (379) | |
INVESTING ACTIVITIES | | | |
Purchase of property, plant and equipment | (236) | | | (136) | |
| | | |
Other investing activities | 1 | | | 1 | |
Net cash used by investing activities | (235) | | | (135) | |
FINANCING ACTIVITIES | | | |
| | | |
Proceeds from issuance of common shares | — | | | 322 | |
Repurchase of common shares | (19) | | | — | |
Proceeds from issuance of debt | — | | | 1,000 | |
| | | |
Repayments of debt | (360) | | | (902) | |
Borrowings under credit facilities | 1,715 | | | 1,158 | |
Repayments under credit facilities | (1,609) | | | (1,010) | |
| | | |
| | | |
Other financing activities | (38) | | | (56) | |
Net cash provided (used) by financing activities | (311) | | | 512 | |
Net decrease in cash and cash equivalents | (13) | | | (2) | |
Cash and cash equivalents at beginning of period | 48 | | | 112 | |
Cash and cash equivalents at end of period | $ | 35 | | | $ | 110 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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 Earnings (Deficit) | | Common Shares in Treasury | | AOCI | | Non-controlling Interests | | Total |
December 31, 2021 | 500 | | | $ | 63 | | | $ | 4,892 | | | $ | (1) | | | $ | (82) | | | $ | 618 | | | $ | 284 | | | $ | 5,774 | |
Comprehensive income | — | | | — | | | — | | | 801 | | | — | | | 97 | | | 13 | | | 911 | |
| | | | | | | | | | | | | | | |
Redemption of convertible debt | 24 | | | 3 | | | (28) | | | — | | | — | | | — | | | — | | | (25) | |
Stock and other incentive plans | 2 | | | — | | | (16) | | | — | | | 11 | | | — | | | — | | | (5) | |
Common stock repurchases | (1) | | | — | | | — | | | — | | | (19) | | | — | | | — | | | (19) | |
Net distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (28) | | | (28) | |
March 31, 2022 | 525 | | | $ | 66 | | | $ | 4,848 | | | $ | 800 | | | $ | (90) | | | $ | 715 | | | $ | 269 | | | $ | 6,608 | |
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| (In Millions) |
| Number of Common Shares Outstanding | | Par Value of Common Shares Issued | | Capital in Excess of Par Value of Shares | | Retained Earnings (Deficit) | | Common Shares in Treasury | | AOCI (Loss) | | Non-controlling Interests | | Total |
December 31, 2020 | 478 | | | $ | 63 | | | $ | 5,431 | | | $ | (2,989) | | | $ | (354) | | | $ | (133) | | | $ | 323 | | | $ | 2,341 | |
Comprehensive income | — | | | — | | | — | | | 41 | | | — | | | 13 | | | 16 | | | 70 | |
Issuance of common stock | 20 | | | — | | | 78 | | | — | | | 244 | | | — | | | — | | | 322 | |
Stock and other incentive plans | 1 | | | — | | | (22) | | | — | | | 17 | | | — | | | — | | | (5) | |
Acquisition of ArcelorMittal USA - Measurement period adjustments | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
Net distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (8) | | | (8) | |
March 31, 2021 | 499 | | | $ | 63 | | | $ | 5,487 | | | $ | (2,948) | | | $ | (93) | | | $ | (120) | | | $ | 330 | | | $ | 2,719 | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
Cleveland-Cliffs Inc. and Subsidiaries
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business, Consolidation and Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations, comprehensive income, 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, 2022 are not necessarily indicative of results to be expected for the year ending December 31, 2022 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, 2021.
Business Operations
We are vertically integrated from mined raw materials, direct reduced iron and ferrous scrap to primary steelmaking and downstream finishing, stamping, tooling and tubing. We are organized into four operating segments based on differentiated products, Steelmaking, Tubular, Tooling and Stamping, and European Operations. We primarily operate through one reportable segment – the Steelmaking segment.
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 VIEs for which we are the primary beneficiary. All intercompany transactions and balances are eliminated upon consolidation.
Investments in Affiliates
We have investments in several businesses accounted for using the equity method of accounting. As of March 31, 2022 and December 31, 2021, our investment in affiliates of $129 million and $128 million, respectively, was classified in Other non-current assets.
Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC. There have been no material changes in our significant accounting policies and estimates from those disclosed therein.
Recent Accounting Pronouncements
Issued and Adopted
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This update requires certain convertible instruments to be accounted for as a single liability measured at its amortized cost. Additionally, the update requires the use of the "if-converted" method, removing the treasury stock method, when calculating diluted shares. We utilized the modified retrospective method of adoption; using this approach, the guidance was applied to transactions outstanding as of the beginning of the fiscal year in which the amendment was adopted. On January 18, 2022, we redeemed all of our outstanding 1.500% 2025 Convertible Senior Notes; therefore, there was a de minimis impact as a result of our adoption of this update.
NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
Allowance for Credit Losses
The following is a roll-forward of our allowance for credit losses associated with Accounts receivable, net:
| | | | | | | | | | | |
| (In Millions) |
| 2022 | | 2021 |
Allowance for credit losses as of January 1 | $ | (4) | | | $ | (5) | |
Increase in allowance | — | | | (1) | |
Allowance for credit losses as of March 31 | $ | (4) | | | $ | (6) | |
Inventories
The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position:
| | | | | | | | | | | |
| (In Millions) |
| March 31, 2022 | | December 31, 2021 |
Product inventories | | | |
Finished and semi-finished goods | $ | 2,943 | | | $ | 2,814 | |
Raw materials | 2,312 | | | 2,070 | |
Total product inventories | 5,255 | | | 4,884 | |
Manufacturing supplies and critical spares | 307 | | | 304 | |
Inventories | $ | 5,562 | | | $ | 5,188 | |
Cash Flow Information
A reconciliation of capital additions to cash paid for capital expenditures is as follows:
| | | | | | | | | | | |
| (In Millions) |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Capital additions | $ | 181 | | | $ | 162 | |
Less: | | | |
Non-cash accruals | (55) | | | 23 | |
Right-of-use assets - finance leases | — | | | 3 | |
| | | |
Cash paid for capital expenditures including deposits | $ | 236 | | | $ | 136 | |
Cash payments (receipts) for income taxes and interest are as follows:
| | | | | | | | | | | |
| (In Millions) |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Taxes paid on income | $ | 1 | | | $ | 3 | |
Income tax refunds | (1) | | | (14) | |
Interest paid on debt obligations net of capitalized interest1 | 65 | | | 75 | |
| | | |
1 Capitalized interest was $2 million and $1 million for the three months ended March 31, 2022 and 2021, respectively. |
NOTE 3 - ACQUISITIONS
FPT Acquisition
Overview
On November 18, 2021, pursuant to the FPT Acquisition Agreement, we completed the FPT Acquisition, in which we were the acquirer. The FPT Acquisition gives us a competitive advantage in sourcing prime scrap, a key raw material for our steelmaking facilities. We incurred acquisition-related costs, excluding severance costs, of $1 million for the three months ended March 31, 2022, which was recorded in Selling, general and administrative expenses on the Statements of Unaudited Condensed Consolidated Operations.
The fair value of the total purchase consideration was determined as follows:
| | | | | |
| (In Millions) |
Cash consideration: | |
Cash consideration pursuant to the FPT Acquisition Agreement | $ | 778 | |
Estimated cash consideration payable related to Internal Revenue Code Section 338(h)(10) | 35 | |
Total cash consideration | 813 | |
Fair value of settlement of a pre-existing relationship | (20) | |
Total purchase consideration | $ | 793 | |
The Company's estimation of cash consideration payable related to Internal Revenue Code Section 338(h)(10) with respect to entities acquired in connection with the FPT Acquisition could potentially change as elections are expected to be finalized in the third quarter of 2022.
Valuation Assumption and Purchase Price Allocation
We estimated fair values at November 18, 2021 for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed in connection with the FPT Acquisition. During the measurement period, we will continue to obtain information to assist in finalizing the fair value of assets acquired and liabilities assumed, which may differ materially from these preliminary estimates. If we determine any measurement period adjustments are material, we will apply those adjustments, including any related impacts to net income, in the reporting period in which the adjustments are determined. We are in the process of conducting a valuation of the assets acquired and liabilities assumed related to the FPT Acquisition, most notably, personal and real property, deferred taxes, environmental obligations and intangible assets, 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 FPT Acquisition was:
| | | | | | | | | | | | | | | | | |
| (In Millions) |
| Initial Allocation of Consideration | | Measurement Period Adjustments | | Updated Allocation |
Cash and cash equivalents | $ | 9 | | | $ | — | | | 9 | |
Accounts receivable, net | 233 | | | 2 | | | 235 | |
Inventories | 137 | | | 2 | | | 139 | |
Other current assets | 4 | | | (1) | | | 3 | |
Property, plant and equipment | 179 | | | 26 | | | 205 | |
Other non-current assets | 74 | | | (1) | | | 73 | |
Accounts payable | (122) | | | — | | | (122) | |
Accrued employment costs | (8) | | | — | | | (8) | |
Other current liabilities | (9) | | | — | | | (9) | |
Other non-current liabilities | (21) | | | (1) | | | (22) | |
Net identifiable assets acquired | 476 | | | 27 | | | 503 | |
Goodwill | 279 | | | 11 | | | 290 | |
Total net assets acquired | $ | 755 | | | $ | 38 | | | $ | 793 | |
The goodwill resulting from the FPT Acquisition primarily represents the incremental benefit of providing substantial access to prime scrap for our vertically integrated steelmaking business, as well as any synergistic benefits to be realized from the FPT Acquisition within our Steelmaking segment.
The preliminary purchase price allocated to identifiable intangible assets acquired was:
| | | | | | | | | | | |
| (In Millions) | | Weighted Average Life (In Years) |
Customer relationships | $ | 13 | | | 15 |
Supplier relationships | 21 | | | 18 |
Trade names and trademarks | 7 | | | 15 |
Total identifiable intangible assets | $ | 41 | | | 17 |
Intangible assets are classified as Other non-current assets on the Statements of Unaudited Condensed Consolidated Financial Position.
NOTE 4 - REVENUES
We generate our revenue through product sales, in which shipping terms 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. Our contracts with customers define the mechanism for determining the sales price, which is generally fixed upon transfer of control, but the contracts generally 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. We consider our performance obligation to be complete and recognize revenue when control transfers in accordance with shipping terms.
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.
The following table represents our Revenues by market:
| | | | | | | | | | | |
| (In Millions) |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Steelmaking: | | | |
Automotive | $ | 1,607 | | | $ | 1,287 | |
Infrastructure and manufacturing | 1,542 | | | 954 | |
Distributors and converters | 1,829 | | | 1,248 | |
Steel producers | 816 | | | 430 | |
Total Steelmaking | 5,794 | | | 3,919 | |
Other Businesses: | | | |
Automotive | 122 | | | 105 | |
Infrastructure and manufacturing | 15 | | | 10 | |
Distributors and converters | 24 | | | 15 | |
Total Other Businesses | 161 | | | 130 | |
Total revenues | $ | 5,955 | | | $ | 4,049 | |
The following tables represent our Revenues by product line:
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| (Dollars in Millions, Sales Volumes in Thousands of Net Tons) |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Revenue | | Volume | | Revenue | | Volume |
Steelmaking: | | | | | | | |
Hot-rolled steel | $ | 1,194 | | | 903 | | | $ | 895 | | | 1,182 | |
Cold-rolled steel | 984 | | | 651 | | | 632 | | | 748 | |
Coated steel | 1,775 | | | 1,242 | | | 1,308 | | | 1,369 | |
Stainless and electrical steel | 551 | | | 189 | | | 363 | | | 167 | |
Plate | 421 | | | 221 | | | 244 | | | 275 | |
Other steel products | 334 | | | 431 | | | 289 | | | 403 | |
Other | 535 | | | N/A | | 188 | | | N/A |
Total Steelmaking | 5,794 | | | | | 3,919 | | | |
Other Businesses: | | | | | | | |
Other | 161 | | | N/A | | 130 | | | N/A |
Total revenues | $ | 5,955 | | | | | $ | 4,049 | | | |
NOTE 5 - SEGMENT REPORTING
We are vertically integrated from mined raw materials and direct reduced iron and ferrous scrap to primary steelmaking and downstream finishing, stamping, tooling and tubing. We are organized into four operating segments based on our differentiated products – Steelmaking, Tubular, Tooling and Stamping, and European Operations. We have one reportable segment – Steelmaking. The operating segment results of our Tubular, Tooling and Stamping, and European Operations that do not constitute reportable segments are combined and disclosed in the Other Businesses category. Our Steelmaking segment operates as the largest flat-rolled steel producer supported by being the largest iron ore pellet producer as well as a leading prime scrap processor in North America, primarily serving the automotive, distributors and converters and infrastructure and manufacturing markets. Our Other Businesses primarily include the operating segments 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. All intersegment transactions were eliminated in consolidation.
We evaluate performance on an operating 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 industry. 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) |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Revenues: | | | | | | | |
Steelmaking | | | | | $ | 5,794 | | | $ | 3,919 | |
Other Businesses | | | | | 161 | | | 130 | |
Total revenues | | | | | $ | 5,955 | | | $ | 4,049 | |
| | | | | | | |
Adjusted EBITDA: | | | | | | | |
Steelmaking | | | | | $ | 1,423 | | | $ | 502 | |
Other Businesses | | | | | 29 | | | 11 | |
Eliminations1 | | | | | (1) | | | — | |
Total Adjusted EBITDA | | | | | $ | 1,451 | | | $ | 513 | |
| | | | | | | |
1 In 2022, we began allocating Corporate SG&A to our operating segments. Prior periods have been adjusted to reflect this change. The Eliminations line now only includes sales between segments. |
The following table provides a reconciliation of our consolidated Net income to total Adjusted EBITDA:
| | | | | | | | | | | | | | | |
| | | | | (In Millions) |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Net income | | | | | $ | 814 | | | $ | 57 | |
Less: | | | | | | | |
Interest expense, net | | | | | (77) | | | (92) | |
Income tax expense | | | | | (237) | | | (9) | |
Depreciation, depletion and amortization | | | | | (301) | | | (217) | |
| | | | | 1,429 | | | 375 | |
Less: | | | | | | | |
EBITDA of noncontrolling interests1 | | | | | 22 | | | 22 | |
Asset impairment | | | | | (29) | | | — | |
Loss on extinguishment of debt | | | | | (14) | | | (66) | |
Severance costs | | | | | (1) | | | (11) | |
Acquisition-related costs excluding severance costs | | | | | (1) | | | (2) | |
| | | | | | | |
Amortization of inventory step-up | | | | | — | | | (81) | |
Impact of discontinued operations | | | | | 1 | | | — | |
Total Adjusted EBITDA | | | | | $ | 1,451 | | | $ | 513 | |
| | | | | | | |
1 EBITDA of noncontrolling interests includes the following: |
Net income attributable to noncontrolling interests | | | | | $ | 13 | | | $ | 16 | |
Depreciation, depletion and amortization | | | | | 9 | | | 6 | |
EBITDA of noncontrolling interests | | | | | $ | 22 | | | $ | 22 | |
The following summarizes our assets by segment:
| | | | | | | | | | | |
| (In Millions) |
| March 31, 2022 | | December 31, 2021 |
Assets: | | | |
Steelmaking | $ | 19,042 | | | $ | 18,326 | |
Other Businesses | 335 | | | 306 | |
Total segment assets | 19,377 | | | 18,632 | |
Corporate/Eliminations | 391 | | | 343 | |
Total assets | $ | 19,768 | | | $ | 18,975 | |
The following table summarizes our capital additions by segment:
| | | | | | | | | | | | | | | |
| | | | | (In Millions) |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Capital additions1: | | | | | | | |
Steelmaking | | | | | $ | 175 | | | $ | 133 | |
Other Businesses | | | | | 6 | | | 11 | |
Corporate | | | | | — | | | 18 | |
Total capital additions | | | | | $ | 181 | | | $ | 162 | |
| | | | | | | |
1 Refer to NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION for additional information. |
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the carrying value of each of the major classes of our depreciable assets:
| | | | | | | | | | | |
| (In Millions) |
| March 31, 2022 | | December 31, 2021 |
Land, land improvements and mineral rights | $ | 1,397 | | | $ | 1,291 | |
Buildings | 907 | | | 889 | |
Equipment | 8,691 | | | 8,709 | |
Other | 233 | | | 229 | |
Construction in progress | 414 | | | 408 | |
Total property, plant and equipment1 | 11,642 | | | 11,526 | |
Allowance for depreciation and depletion | (2,630) | | | (2,340) | |
Property, plant and equipment, net | $ | 9,012 | | | $ | 9,186 | |
| | | |
1 Includes right-of-use assets related to finance leases of $371 million and $411 million as of March 31, 2022 and December 31, 2021, respectively. |
We recorded depreciation and depletion expense of $298 million and $215 million for the three months ended March 31, 2022 and 2021, respectively. Depreciation and depletion expense for the three months ended March 31, 2022 includes $68 million of accelerated depreciation related to the indefinite idle of the Indiana Harbor #4 blast furnace.
NOTE 7 - GOODWILL AND INTANGIBLE ASSETS AND LIABILITIES
Goodwill
The following is a summary of Goodwill by segment:
| | | | | | | | | | | |
| (In Millions) |
| March 31, 2022 | | December 31, 2021 |
Steelmaking | $ | 953 | | | $ | 942 | |
Other Businesses | 174 | | | 174 | |
Total goodwill | $ | 1,127 | | | $ | 1,116 | |
The increase of $11 million in the balance of Goodwill in our Steelmaking segment as of March 31, 2022, compared to December 31, 2021, is due to the change in estimated identified goodwill as a result of measurement period adjustments to the preliminary purchase price allocation for the acquisition of FPT. Refer to NOTE 3 - ACQUISITIONS for further details.
Intangible Assets and Liabilities
The following is a summary of our intangible assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| March 31, 2022 | | December 31, 2021 |
| Gross Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
Intangible assets1: | | | | | | | | | | | |
Customer relationships | $ | 90 | | | $ | (9) | | | $ | 81 | | | $ | 95 | | | $ | (8) | | | $ | 87 | |
Developed technology | 60 | | | (8) | | | 52 | | | 60 | | | (6) | | | 54 | |
Trade names and trademarks | 18 | | | (3) | | | 15 | | | 18 | | | (2) | | | 16 | |
Mining permits | 72 | | | (26) | | | 46 | | | 72 | | | (26) | | | 46 | |
Supplier relationships | 21 | | | — | | | 21 | | | 18 | | | — | | | 18 | |
Total intangible assets | $ | 261 | | | $ | (46) | | | $ | 215 | | | $ | 263 | | | $ | (42) | | | $ | 221 | |
Intangible liabilities2: | | | | | | | | | | | |
Above-market supply contracts | $ | (71) | | | $ | 15 | | | $ | (56) | | | $ | (71) | | | $ | 14 | | | $ | (57) | |
| | | | | | | | | | | |
1 Intangible assets are classified as Other non-current assets. Amortization related to mining permits is recognized in Cost of goods sold. Amortization of all other intangible assets is recognized in Selling, general and administrative expenses. |
2 Intangible liabilities are classified as Other non-current liabilities. Amortization of all intangible liabilities is recognized in Cost of goods sold. |
Amortization expense related to intangible assets was $4 million and $3 million for the three months ended March 31, 2022 and 2021, respectively. Estimated future amortization expense is $9 million for the remainder of 2022 and $13 million annually for the years 2023 through 2027.
Income from amortization related to the intangible liabilities for both the three months ended March 31, 2022 and 2021 was $1 million. Estimated future income from amortization is $4 million for the remainder of 2022 and $5 million annually for the years 2023 through 2027.
NOTE 8 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Millions) |
Debt Instrument | | Issuer1 | | Annual Effective Interest Rate | | March 31, 2022 | | December 31, 2021 |
Senior Secured Notes: | | | | | | | | |
9.875% 2025 Senior Secured Notes | | Cliffs | | 10.57% | | $ | 607 | | | $ | 607 | |
6.750% 2026 Senior Secured Notes | | Cliffs | | 6.99% | | 845 | | | 845 | |
Senior Unsecured Notes: | | | | | | | | |
1.500% 2025 Convertible Senior Notes | | Cliffs | | 6.26% | | — | | | 294 | |
7.000% 2027 Senior Notes | | Cliffs | | 9.24% | | 73 | | | 73 | |
7.000% 2027 AK Senior Notes | | AK Steel | | 9.24% | | 56 | | | 56 | |
5.875% 2027 Senior Notes | | Cliffs | | 6.49% | | 556 | | | 556 | |
4.625% 2029 Senior Notes | | Cliffs | | 4.63% | | 500 | | | 500 | |
4.875% 2031 Senior Notes | | Cliffs | | 4.88% | | 500 | | | 500 | |
6.250% 2040 Senior Notes | | Cliffs | | 6.34% | | 263 | | | 263 | |
IRBs due 2024 to 2028 | | AK Steel | | Various | | — | | | 66 | |
ABL Facility | | Cliffs2 | | Variable3 | | 1,715 | | | 1,609 | |
Total principal amount | | | | | | 5,115 | | | 5,369 | |
Unamortized discounts and issuance costs | | | | | | (87) | | | (131) | |
Total long-term debt | | | | | | $ | 5,028 | | | $ | 5,238 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
1 Unless otherwise noted, references in this column and throughout this NOTE 8 - DEBT AND CREDIT FACILITIES to "Cliffs" are to Cleveland-Cliffs Inc., and references to "AK Steel" are to AK Steel Corporation (n/k/a Cleveland-Cliffs Steel Corporation). |
2 Refers to Cleveland-Cliffs Inc. as borrower under our ABL Facility. |
3 Our ABL Facility annual effective interest rate was 2.00% and 1.87%, respectively, as of March 31, 2022 and December 31, 2021. |
Debt Extinguishments - 2022
On January 18, 2022, we redeemed all of our outstanding 1.500% 2025 Convertible Senior Notes through a combination settlement, with the aggregate principal amount of $294 million paid in cash, and 24 million common shares, with a fair value of $499 million, delivered to noteholders in settlement of the premium due per the terms of the indenture, plus cash in respect of the accrued and unpaid interest on the