Cleveland-Cliffs Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

STOCK COMPENSATION PLANS

STOCK COMPENSATION PLANS

12 Months Ended

Dec. 31, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

NOTE 8 - STOCK COMPENSATION PLANS

At December 31, 2015, we have outstanding awards under two share-based compensation plans, which are described below. The compensation cost that has been charged against income for those plans was $13.9 million, $21.5 million and $19.1 million in 2015, 2014 and 2013, respectively, which primarily was recorded in Selling, general and administrative expenses in the Statements of Consolidated Operations. The total income tax benefit recognized in the Statements of Consolidated Operations for share-based compensation arrangements was $7.5 million and $6.7 million for 2014 and 2013, respectively. There was no income tax benefit recognized for the year ended December 31, 2015, due to the full valuation allowance.

Employees’ Plans

The 2015 Equity Plan was approved by our Board of Directors on March 26, 2015 and by our shareholders on May 19, 2015. The 2015 Equity Plan replaced the 2012 Amended Equity Plan. The maximum number of shares that may be issued under the 2015 Equity Plan is 12.9 million common shares. No additional grants were issued from the 2012 Amended Equity Plan after the date of approval of the 2015 Equity Plan; however, all awards previously granted under the 2012 Amended Equity Plan will continue in full force and effect in accordance with the terms of outstanding awards.

During the third quarter of 2015, the Compensation Committee approved grants under the 2015 Equity Plan of 1.5 million restricted share units to certain officers and employees with a grant date of September 10, 2015. The restricted share units granted under this award are subject to continued employment through the vesting date of December 15, 2017.

During the first quarter of 2015, the Compensation Committee approved grants under the 2012 Amended Equity Plan to certain officers and employees for the 2015 to 2017 performance period. Shares granted under the awards consisted of 0.9 million performance shares, 0.9 million restricted share units and 0.4 million stock options.

On February 10, 2014, upon recommendation by the Compensation Committee, our Board of Directors approved and adopted, subject to the approval of our shareholders at the 2014 Annual Meeting, the 2012 Amended Equity Plan. The principal reason for amending and restating the 2012 Equity Plan was to increase the number of common shares available for issuance by 5.0 million common shares. This amended plan was approved by our shareholders at the 2014 Annual Meeting held on July 29, 2014.

Subsequent to our 2014 Annual Meeting of Shareholders, where shareholders elected six new directors, our board changed substantially. Such an event constituted a change in control pursuant to our incentive equity plans and applicable award agreements. As a result, all of the outstanding and unvested equity incentives awarded to participants prior to October 2013 became vested. Accordingly, this resulted in recognizing $11.7 million of additional equity-based compensation expense in the accompanying financial statements, representing the remaining unrecognized compensation expense of the awards. For any equity grants awarded after September 2013, the vesting of all such grants will accelerate and pay out in cash only following a participant's qualifying termination of employment associated with the change in control and if the common shares are not substituted with a replacement award. This potential liability for additional double-trigger payments for share-based compensation in cash will expire on August 6, 2016.

Performance Shares

The outstanding performance share or unit grants vest over a period of three years and are intended to be paid out in common shares or cash in certain circumstances. Performance is measured on the basis of relative TSR for the period and measured against the constituents of the S&P Metals and Mining ETF Index on the last day of trading of the relevant performance period. The final payouts for the outstanding performance period grants will vary from zero to 200 percent of the original grant depending on whether and to what extent the Company achieves certain objectives and performance goals as established by the Compensation Committee.

Following is a summary of our performance share award agreements currently outstanding:



Performance Share Plan Year	Performance Shares Granted	Estimated Forfeitures	Expected to Vest	Grant Date	Performance Period
2015	410,105	111,877	298,228	February 9, 2015	1/1/2015 - 12/31/2017
2015	464,470	96,149	368,321	January 12, 2015	1/1/2015 - 12/31/2017
2014	400,000	27,774	372,226	November 17, 2014	8/7/2014 - 12/31/2017
2014	199,450	32,653	166,797	July 29, 2014	1/1/2014 - 12/31/2016
2014	106,120	16,351	89,769	May 12, 2014	1/1/2014 - 12/31/2016
2014	230,265	142,017	88,248	February 10, 2014	1/1/2014 - 12/31/2016

Performance-Based Restricted Stock Units

For the outstanding performance-based restricted stock units, the award may be earned and settled based upon certain VWAP performance for the Company’s common shares, (Threshold VWAP, Target VWAP, or Maximum VWAP) for any period of ninety (90) consecutive calendar days during a performance period commencing August 7, 2014 and ending December 31, 2017.

Restricted Share Units

The outstanding restricted share units are subject to continued employment, are retention based, will vest in equal thirds on each of December 31, 2015, December 31, 2016 and December 31, 2017, and are payable in common shares or cash in certain circumstances at a time determined by the Compensation Committee at its discretion.

Stock Options

The stock options that were granted during the first quarter of 2015 vest on December 31, 2017, subject to continued employment through the vesting date, are exercisable at a strike price of $7.70 after the vesting date and expire on January 12, 2025. The stock options that were granted on November 17, 2014 vest in equal thirds on each of December 31, 2015, December 31, 2016 and December 31, 2017 subject to continued employment through each vesting date, and are exercisable cumulatively at a strike price of $13.83 after each vesting date and expire on November 17, 2021.

Employee Stock Purchase Plan

On March 26, 2015, upon recommendation by the Compensation Committee, our Board of Directors approved and adopted, subject to the approval of Cliffs' shareholders at the 2015 Annual Meeting, the Cliffs Natural Resources Inc. 2015 Employee Stock Purchase Plan. This plan was approved by our shareholders at the 2015 Annual Meeting held May 19, 2015. 10 million common shares have been registered for issuance under this plan and zero common shares have been purchased. We sought shareholder approval of this plan for the purpose of qualifying the reserved common shares for special tax treatment under Section 423 of the Internal Revenue Code of 1986, as amended.

Nonemployee Directors

Equity Grants

During 2015 our nonemployee directors were entitled to receive restricted share awards under the Directors’ Plan. For 2015, nonemployee directors were granted a number of restricted shares, with a value equal to $85,000, based on the closing price of our common shares on May 19, 2015, the date of the Company’s 2015 annual meeting of shareholders, subject to any deferral election and pursuant to the terms of the Directors’ Plan and an award agreement, effective on May 19, 2015.

At our 2014 annual meeting, the shareholders approved the Directors' Plan which became effective December 1, 2014. The Directors’ Plan authorizes us to issue up to 300,000 common shares from time to time to nonemployee Directors. Under the Share Ownership Guidelines in effect for 2015 ("Guidelines"), a Director is required by the end of five years from date of election to hold common shares with a market value of at least $250,000. The Directors’ Plan offers the nonemployee Director the opportunity to defer all or a portion of the awards granted.

Directors receive dividends, if any, on their restricted share awards and may elect that all cash dividends with respect to restricted shares be deferred and reinvested in additional common shares. Those additional common shares are subject to the same restrictions as the underlying award. Cash dividends not subject to a deferral election will be paid to the director without restriction.

The 2008 Directors’ Plan in effect for most of 2014 provided for an Annual Equity Grant ("Equity Grant") to be awarded at our annual meeting each year to all nonemployee Directors elected or re-elected by the shareholders and a pro-rata amount was awarded to new directors upon their appointment. The value of the Equity Grant was payable in restricted shares with a three-year vesting period from the date of grant. The closing market price of our common shares on October 16, 2014 was divided into the number of common shares remaining available for issuance under the 2008 Directors' Plan to determine the number of restricted shares awarded as the Equity Grant. In 2014, nonemployee Directors each received Equity Grants valued at $85,000 which was bifurcated into two tranches since the 2008 Director's Plan did not have a sufficient number of shares available for issuance. The first tranche of the 2014 Equity Grant was granted under the 2008 Directors' Plan on October 16, 2014 and valued at $42,500. The second tranche was granted under the Directors' Plan on December 2, 2014 and valued at $42,500.

For the last three years, Equity Grant shares have been awarded to elected or re-elected nonemployee Directors as follows:



Year of Grant	Unrestricted Equity Grant Shares	Restricted Equity Grant Shares	Deferred Equity Grant Shares
2013	3,985	31,506	7,970
2014	—	73,635	—
2015	—	109,408	25,248

Starting in July, 2015, the Governance and Nominating Committee recommended, and the Board adopted, a Nonemployee Director Retainer Share Election Program pursuant to which nonemployee directors may elect to receive all or any portion of their annual retainer and any other fees earned in cash in Cliffs' common shares. Election is voluntary and irrevocable for the applicable election period and shares issued under this program must be held for six months from the issuance date. The number of shares received each quarter are calculated by dividing the value of the quarterly cash retainer amount by the closing market price of the date of payment.

Other Information

The following table summarizes the share-based compensation expense that we recorded for continuing operations in 2015, 2014 and 2013:



	(In Millions, except per share amounts)
	2015		2014			2013
Cost of goods sold and operating expenses	$	4.0	$	5.6		$	4.9
Selling, general and administrative expenses	9.9		15.9			14.2
Reduction of operating income (loss) from continuing operations before income taxes and equity loss from ventures	13.9		21.5			19.1
Income tax benefit ⁽¹⁾	—		(7.5		)	(6.7		)
Reduction of net income attributable to Cliffs shareholders	$	13.9	$	14.0		$	12.4
Reduction of earnings per share attributable to Cliffs shareholders:
Basic	$	0.09	$	0.09		$	0.08
Diluted	$	0.09	$	0.09		$	0.07


⁽¹⁾	No income tax benefit for the year ended December 31, 2015, due to the full valuation allowance.

Determination of Fair Value

Performance Shares

The fair value of each performance share grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. A correlation matrix of historic and projected stock prices was developed for both the Company and our predetermined peer group of mining and metals companies. The fair value assumes that performance goals will be achieved.

The expected term of the grant represents the time from the grant date to the end of the service period for each of the three plan-year agreements. We estimate the volatility of our common shares and that of the peer group of mining and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds, with a term commensurate with the remaining life of the performance period.

The following assumptions were utilized to estimate the fair value for the 2015 performance share grants:



Grant Date	Grant Date Market Price		Average Expected Term (Years)	Expected Volatility	Risk-Free Interest Rate	Dividend Yield	Fair Value		Fair Value (Percent of Grant Date Market Price)
January 12, 2015	$	7.70	2.97	58.3%	0.91%	—%	$	11.56	150.13%
February 9, 2015	$	6.57	2.89	58.3%	0.87%	—%	$	9.86	150.13%

Stock Options

The fair value of each stock option grant is estimated on the date of grant using a Black-Scholes valuation model. The expected term of the option grant is determined using the simplified method. We estimate the volatility of our common shares using historical stock prices with consistent frequency over the most recent historical period equal to the option’s expected term. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds, with a term commensurate with the expected term.

The following assumptions were utilized to estimate the fair value for the stock options granted in 2015:



Grant Date	Grant Date Market Price		Average Expected Term (Years)	Expected Volatility	Risk-Free Interest Rate	Dividend Yield	Fair Value
January 12, 2015	$	7.70	6.47	75.3%	1.60%	—%	$	5.23

Restricted Share Units

The fair value of the restricted share units is determined based on the closing price of our common shares on the grant date. The restricted share units granted under the 2015 Equity Plan vest over 27 months. The restricted share units granted under either the 2012 Equity Plan or the 2012 Amended Equity Plan generally vest over a period of three years.

Stock option, restricted share awards and performance share activity under our long-term equity plans and Directors’ Plans are as follows:



	2015		2014		2013
	Shares		Shares		Shares
Stock options:
Outstanding at beginning of year	250,000		—		—
Granted during the year	412,710		250,000		—
Vested	—		—		—
Forfeited/canceled	(55,221	)	—		—
Outstanding at end of year	607,489		250,000		—
Restricted awards:
Outstanding and restricted at beginning of year	523,176		586,084		393,787
Granted during the year	2,482,415		531,030		396,844
Vested	(477,157	)	(423,822	)	(118,973	)
Forfeited/canceled	(190,364	)	(170,116	)	(85,574	)
Outstanding and restricted at end of year	2,338,070		523,176		586,084
Performance shares:
Outstanding at beginning of year	1,072,376		1,040,453		772,484
Granted during the year ⁽¹⁾	874,575		1,233,685		806,271
Issued ⁽²⁾	(242,920	)	(796,624	)	(289,054	)
Forfeited/canceled	(207,542	)	(405,138	)	(249,248	)
Outstanding at end of year	1,496,489		1,072,376		1,040,453
Vested or expected to vest as of December 31, 2015	3,934,901
Directors’ retainer and voluntary shares:
Outstanding at beginning of year	—		7,329		2,880
Granted during the year	—		2,281		8,136
Forfeited/canceled	—		—		(1,521	)
Vested	—		(9,610	)	(2,166	)
Outstanding at end of year	—		—		7,329
Reserved for future grants or awards at end of year:
Employee plans	11,917,635
Directors’ plans	91,299
Total	12,008,934


⁽¹⁾	The shares granted in 2013 include 54,051 shares related to the 23% payout associated with the prior-year pool as actual payout exceeded target.

⁽²⁾

For the year ended December 31, 2015, the shares vesting due to the change in control were paid out in cash, at target, and valued as of the respective participants' termination dates. For the year ended December 31, 2014, the shares vesting on December 31, 2013 were valued as of February 10, 2014, and the shares vesting due to the change in a majority of our Board of Directors that triggered the acceleration of vesting and payout of outstanding equity grants under our equity plans on August 6, 2014 were paid out in cash, at target, and valued as of that date. For the year ended December 31, 2013, the shares vested on December 31, 2012 were valued as of February 21, 2013.

A summary of our outstanding share-based awards as of December 31, 2015 is shown below:



	Shares		Weighted Average Grant Date Fair Value
Outstanding, beginning of year	1,845,552		$	16.55
Granted	3,769,700		$	6.78
Vested	(720,077	)	$	16.15
Forfeited/expired	(453,127	)	$	10.50
Outstanding, end of year	4,442,048		$	8.93

A summary of our stock option grants vested or expected to vest as of December 31, 2015 is shown below:



	Shares	Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Term (Years)
Expected to vest	490,902	$	9.67	$	—	7.90
Exercisable	83,334	$	13.83	$	—	5.88

The total compensation cost related to outstanding awards not yet recognized is $23.5 million at December 31, 2015. The weighted average remaining period for the awards outstanding at December 31, 2015 is approximately 2.6 years.