Cleveland-Cliffs Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

NEW ACCOUNTING STANDARDS

NEW ACCOUNTING STANDARDS

9 Months Ended

Sep. 30, 2018

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

NEW ACCOUNTING STANDARDS

NOTE 2 - NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standards

ASC Topic 606, Revenue from Contracts with Customers (Topic 606). On January 1, 2018, we adopted Topic 606 and applied it to all contracts that were not completed using the modified retrospective method. We recognized the cumulative effect of initially applying Topic 606 as an adjustment of $34.0 million to the opening balance of Retained deficit. The comparative period information has not been restated and continues to be reported under the accounting standards in effect for those periods. We do not expect that the adoption of Topic 606 will have a material impact to our annual net income on an ongoing basis.

Under Topic 606, revenue is generally recognized upon delivery to our customers, which is earlier than under the previous guidance. As an example, for certain iron ore shipments where revenue was previously recognized upon title transfer when payment was received, we now recognize revenue when control transfers, which is generally upon delivery. While we continue to retain title until we receive payment, we determined upon review of our customer contracts that the preponderance of control indicators pass to our customers' favor when we deliver our products; thus, we generally concluded that control transfers at that point. As a result of the adoption of Topic 606 and vessel deliveries not occurring during the winter months because of the closure of the Soo Locks and the Welland Canal, our revenues and net income will be relatively lower than historical levels during the first quarter of each year and relatively higher than historical levels during the remaining three quarters in future years. However, the total amount of revenue recognized during the year should remain substantially the same as under previous accounting standards, assuming revenue rates and volumes are consistent between years.

The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of Topic 606 were as follows:



	($ in Millions)
	Balance at December 31, 2017			Adjustments due to Topic 606			Balance at January 1, 2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	978.3		$	—		$	978.3
Accounts receivable, net	106.7			76.6			183.3
Inventories	138.4			(51.4		)	87.0
Supplies and other inventories	88.8			—			88.8
Derivative assets	37.9			11.6			49.5
Income tax receivable	13.3			—			13.3
Current assets of discontinued operations	118.5			—			118.5
Loans to and accounts receivable from the Canadian Entities	51.6			—			51.6
Other current assets	11.1			—			11.1
TOTAL CURRENT ASSETS	1,544.6			36.8			1,581.4
PROPERTY, PLANT AND EQUIPMENT, NET	1,033.8			—			1,033.8
OTHER ASSETS
Deposits for property, plant and equipment	17.8			—			17.8
Income tax receivable	235.3			—			235.3
Non-current assets of discontinued operations	20.3			—			20.3
Other non-current assets	101.6			—			101.6
TOTAL OTHER ASSETS	375.0			—			375.0
TOTAL ASSETS	$	2,953.4		$	36.8		$	2,990.2

LIABILITIES
CURRENT LIABILITIES
Accounts payable	$	99.5		$	1.4		$	100.9
Accrued expenses	79.1			—			79.1
Accrued interest	31.4			—			31.4
Contingent claims	55.6			—			55.6
Partnership distribution payable	44.2			—			44.2
Current liabilities of discontinued operations	75.0			—			75.0
Other current liabilities	67.4			1.4			68.8
TOTAL CURRENT LIABILITIES	452.2			2.8			455.0
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES	257.7			—			257.7
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS	167.7			—			167.7
LONG-TERM DEBT	2,304.2			—			2,304.2
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS	52.2			—			52.2
OTHER LIABILITIES	163.5			—			163.5
TOTAL LIABILITIES	3,397.5			2.8			3,400.3
EQUITY
CLIFFS SHAREHOLDERS' DEFICIT	(444.3		)	34.0			(410.3		)
NONCONTROLLING INTEREST	0.2			—			0.2
TOTAL DEFICIT	(444.1		)	34.0			(410.1		)
TOTAL LIABILITIES AND DEFICIT	$	2,953.4		$	36.8		$	2,990.2

The impact of adoption on our Statements of Unaudited Condensed Consolidated Operations and Statements of Unaudited Condensed Consolidated Financial Position is as follows:



	($ in Millions)
	Three Months Ended September 30, 2018									Nine Months Ended September 30, 2018
	As Reported			Balances without Adoption of Topic 606			Effect of Change			As Reported			Balances without Adoption of Topic 606			Effect of Change
REVENUES FROM PRODUCT SALES AND SERVICES
Product	$	684.7		$	675.6		$	9.1		$	1,525.9		$	1,471.2		$	54.7
Freight and venture partners' cost reimbursements	57.1			56.5			0.6			110.2			107.7			2.5
	741.8			732.1			9.7			1,636.1			1,578.9			57.2
COST OF GOODS SOLD AND OPERATING EXPENSES	(480.2		)	(475.9		)	(4.3		)	(1,028.5		)	(1,006.6		)	(21.9		)
SALES MARGIN	261.6			256.2			5.4			607.6			572.3			35.3
OTHER OPERATING EXPENSE
Selling, general and administrative expenses	(30.1		)	(30.1		)	—			(81.4		)	(81.4		)	—
Miscellaneous – net	(6.0		)	(6.0		)	—			(16.2		)	(16.2		)	—
	(36.1		)	(36.1		)	—			(97.6		)	(97.6		)	—
OPERATING INCOME	225.5			220.1			5.4			510.0			474.7			35.3
OTHER INCOME (EXPENSE)
Interest expense, net	(29.5		)	(29.5		)	—			(93.1		)	(93.1		)	—
Gain on extinguishment of debt	—			—			—			0.2			0.2			—
Other non-operating income	4.3			4.3			—			13.1			13.1			—
	(25.2		)	(25.2		)	—			(79.8		)	(79.8		)	—
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	200.3			194.9			5.4			430.2			394.9			35.3
INCOME TAX EXPENSE	(0.5		)	(0.5		)	—			(14.4		)	(14.4		)	—
INCOME FROM CONTINUING OPERATIONS	199.8			194.4			5.4			415.8			380.5			35.3
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX	238.0			238.0			—			102.8			102.8			—
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS	$	437.8		$	432.4		$	5.4		$	518.6		$	483.3		$	35.3
INCOME PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS – BASIC
Continuing operations	$	0.67		$	0.65		$	0.02		$	1.40		$	1.28		$	0.12
Discontinued operations	0.80			0.80			—			0.35			0.35			—
	$	1.47		$	1.45		$	0.02		$	1.75		$	1.63		$	0.12
INCOME PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS – DILUTED
Continuing operations	$	0.64		$	0.62		$	0.02		$	1.37		$	1.25		$	0.12
Discontinued operations	0.77			0.77			—			0.34			0.34			—
	$	1.41		$	1.39		$	0.02		$	1.71		$	1.59		$	0.12
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
Basic	297,878			297,878						297,587			297,587
Diluted	310,203			310,203						303,518			303,518



	($ in Millions)
	September 30, 2018
	As Reported			Balances without Adoption of Topic 606			Effect of Change
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	897.1		$	897.1		$	—
Accounts receivable, net	141.4			34.8			106.6
Inventories	187.9			257.5			(69.6		)
Supplies and other inventories	88.2			88.2			—
Derivative assets	190.8			156.6			34.2
Income tax receivable	110.3			110.3			—
Current assets of discontinued operations	16.1			16.1			—
Other current assets	18.8			18.8			—
TOTAL CURRENT ASSETS	1,650.6			1,579.4			71.2
PROPERTY, PLANT AND EQUIPMENT, NET	1,144.8			1,144.8			—
OTHER ASSETS
Deposits for property, plant and equipment	94.6			94.6			—
Income tax receivable	113.6			113.6			—
Other non-current assets	121.4			121.4			—
TOTAL OTHER ASSETS	329.6			329.6			—
TOTAL ASSETS	$	3,125.0		$	3,053.8		$	71.2

LIABILITIES
CURRENT LIABILITIES
Accounts payable	$	140.8		$	140.1		$	0.7
Accrued expenses	95.1			95.1			—
Accrued interest	26.2			26.2			—
Partnership distribution payable	43.1			43.1			—
Current liabilities of discontinued operations	14.2			14.2			—
Other current liabilities	61.3			61.5			(0.2		)
TOTAL CURRENT LIABILITIES	380.7			380.2			0.5
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES	225.0			225.0			—
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS	174.4			174.4			—
LONG-TERM DEBT	2,300.0			2,300.0			—
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS	9.3			9.3			—
OTHER LIABILITIES	121.8			121.8			—
TOTAL LIABILITIES	3,211.2			3,210.7			0.5
EQUITY
CLIFFS SHAREHOLDERS' DEFICIT	(86.2		)	(156.9		)	70.7
TOTAL LIABILITIES AND DEFICIT	$	3,125.0		$	3,053.8		$	71.2

The adoption of Topic 606 did not have an impact on net cash flows in our Statements of Unaudited Condensed Consolidated Cash Flows.

ASU 2017-07, Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. On January 1, 2018, we adopted the amendments to ASC 715 regarding the presentation of net periodic pension and postretirement benefit costs. We retrospectively adopted the presentation of service cost separate from the other components of net periodic costs. The interest cost, expected return on assets, amortization of prior service costs, net remeasurement, and other costs have been reclassified from Cost of goods sold and operating expenses, Selling, general and administrative expenses and Miscellaneous – net to Other non-operating income. We elected to apply the practical expedient, which allows us to reclassify amounts disclosed previously in our pension and other postretirement benefits footnote as the basis for applying retrospective presentation for comparative periods. On a prospective basis from adoption, only service costs will be included in amounts capitalized in inventory or property, plant, and equipment.

The effect of the retrospective presentation change related to the net periodic cost of our defined benefit pension and other postretirement employee benefits plans on our Statements of Unaudited Condensed Consolidated Operations was as follows:



	($ in Millions)
	Three Months Ended September 30, 2017									Nine Months Ended September 30, 2017
	As Revised			Without Adoption of ASU 2017-07			Effect of Change			As Revised			Without Adoption of ASU 2017-07			Effect of Change
Cost of goods sold and operating expenses	$	(438.9	)	$	(439.5	)	$	0.6		$	(1,002.7	)	$	(1,004.4	)	$	1.7
Selling, general and administrative expenses	$	(23.8	)	$	(21.8	)	$	(2.0	)	$	(75.5	)	$	(69.6	)	$	(5.9	)
Miscellaneous – net	$	(5.3	)	$	(4.9	)	$	(0.4	)	$	1.3		$	2.4		$	(1.1	)
Operating income	$	128.7		$	130.5		$	(1.8	)	$	277.3		$	282.6		$	(5.3	)
Other non-operating income	$	2.6		$	0.8		$	1.8		$	7.6		$	2.3		$	5.3
Net Income	$	52.9		$	52.9		$	—		$	53.2		$	53.2		$	—

Recent Accounting Pronouncements

Issued and Not Effective

In August 2018, the FASB issued ASU No. 2018-14, Defined Benefit Plans (Topic 715-20) - Changes to the Disclosure Requirements for Defined Benefit Plans. Certain of the existing required disclosures were modified for clarification or removed and additional disclosures were added. The new standard is effective for the year ending December 31, 2020, will be applied on a retrospective basis and early adoption is permitted. Based on our analysis to date, the updated standard is not expected to have a material impact on our consolidated financial statements, but will affect our footnote disclosures. We expect to early adopt this new standard during the fourth quarter of 2018.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases except for short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the Statements of Unaudited Condensed Consolidated Operations. We plan to adopt the standard on its effective date of January 1, 2019. We will apply the standard on the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption as permitted by ASU 2018-11. Based on our analysis to date, the updated standard is not expected to have a material effect on our consolidated financial statements. For example, based on the future minimum payments under non-cancellable operating leases as of September 30, 2018, we would expect to record right–of–use assets and lease liabilities of approximately $19 million, discounted to fair value, in the Statements of Unaudited Condensed Consolidated Financial Position.

Issued and Adopted

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement. The new standard removes or modifies certain existing disclosure requirements and adds additional disclosure requirements. We have evaluated the impact of the adoption of this new accounting standard update and determined that it will not have a material effect on our consolidated financial statements. However, we do expect an overall reduction in both our quarterly and annual disclosures related to fair value measurement. We are adopting the standard effective for the period ended September 30, 2018.