CLF-2013.3.31 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 1-8944
CLIFFS NATURAL RESOURCES INC.
(Exact Name of Registrant as Specified in Its Charter)
|
| | |
Ohio | | 34-1464672 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
| |
200 Public Square, Cleveland, Ohio | | 44114-2315 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (216) 694-5700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x
The number of shares outstanding of the registrant’s common shares, par value $0.125 per share, was 153,095,713 as of April 22, 2013.
TABLE OF CONTENTS |
| | | | | |
| | | | | |
| | | Page Number |
| | | | | |
DEFINITIONS | | | |
| | | |
PART I - FINANCIAL INFORMATION | | | |
| Item 1. | Financial Statements | | | |
| | Statements of Unaudited Condensed Consolidated Operations Three Months Ended March 31, 2013 and 2012 | | | |
| | Statements of Unaudited Condensed Consolidated Comprehensive Income for the Three Months Ended March 31, 2013 and 2012 | | | |
| | Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2013 and December 31, 2012 | | | |
| | Statements of Unaudited Condensed Consolidated Cash Flows for the Three Months Ended March 31, 2013 and 2012 | | | |
| | Notes to Unaudited Condensed Consolidated Financial Statements | | | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | | | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | | | |
| Item 4. | Controls and Procedures | | | |
| | | |
PART II - OTHER INFORMATION | | | |
| Item 1A. | Risk Factors | | | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | | | |
| Item 4. | Mine Safety Disclosures | | | |
| Item 6. | Exhibits | | | |
| | | | | |
Signatures | | | |
| | | |
DEFINITIONS
The following abbreviations or acronyms are used in the text. References in this report to the “Company,” “we,” “us,” “our” and “Cliffs” are to Cliffs Natural Resources Inc. and subsidiaries, collectively. References to “A$” or “AUD” refer to Australian currency, “C$” to Canadian currency and “$” to United States currency.
|
| | |
Abbreviation or acronym | | Term |
Amapá | | Anglo Ferrous Amapá Mineração Ltda. and Anglo Ferrous Logística Amapá Ltda. |
ArcelorMittal | | ArcelorMittal (as the parent company of ArcelorMittal Mines Canada, ArcelorMittal USA and ArcelorMittal Dofasco, as well as, many other subsidiaries) |
ArcelorMittal USA | | ArcelorMittal USA LLC (including many of its North American affiliates, subsidiaries and representatives. References to ArcelorMittal USA comprise all such relationships unless a specific ArcelorMittal USA entity is referenced) |
ASC | | Accounting Standards Codification |
Bloom Lake | | The Bloom Lake Iron Ore Mine Limited Partnership |
CLCC | | Cliffs Logan County Coal LLC |
Chromite Project | | Cliffs Chromite Ontario Inc. |
Cockatoo Island | | Cockatoo Island Joint Venture |
Consolidated Thompson | | Consolidated Thompson Iron Mining Limited (now known as Cliffs Quebec Iron Mining Limited) |
DD&A |
| Depreciation, depletion and amortization |
Dodd-Frank Act | | Dodd-Frank Wall Street Reform and Consumer Protection Act |
EBITDA | | Earnings before interest, taxes, depreciation and amortization |
Empire | | Empire Iron Mining Partnership |
EPS | | Earnings per share |
Exchange Act | | Securities Exchange Act of 1934, as amended |
FASB | | Financial Accounting Standards Board |
Fe | | Iron |
FMSH Act | | U.S. Federal Mine Safety and Health Act 1977, as amended |
GAAP | | Accounting principles generally accepted in the United States |
Hibbing | | Hibbing Taconite Company |
ICE Plan | | Amended and Restated Cliffs 2007 Incentive Equity Plan, as amended |
Ispat | | Ispat Inland Steel Company |
Koolyanobbing | | Collective term for the operating deposits at Koolyanobbing, Mount Jackson and Windarling |
LIBOR | | London Interbank Offered Rate |
LTVSMC | | LTV Steel Mining Company |
MMBtu | | Million British Thermal Units |
Moody's | | Moody's Investors Service, Inc., a subsidiary of Moody's Corporation, and its successors |
MRRT | | Minerals Resource Rent Tax (Australia) |
MSHA | | U.S. Mine Safety and Health Administration |
n/m | | Not meaningful |
Northshore | | Northshore Mining Company |
Oak Grove | | Oak Grove Resources, LLC |
OCI | | Other comprehensive income (loss) |
OPEB | | Other postretirement benefits |
Pinnacle | | Pinnacle Mining Company, LLC |
Pluton Resources | | Pluton Resources Limited |
S&P | | Standard & Poor's Rating Services, a division of Standard & Poor's Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc., and its successors |
Substitute Rating Agency | | A "nationally recognized statistical rating organization" within the meaning of Section 3 (a)(62) of the Exchange Act, selected by us (as certified by a certificate of officers confirming the decision of our board of directors) as a replacement agency of Moody's or S&P, or both of them, as the case may be |
SEC | | U.S. Securities and Exchange Commission |
Sonoma | | Sonoma Coal Project |
Tilden | | Tilden Mining Company |
TSR | | Total Shareholder Return |
United Taconite | | United Taconite LLC |
U.S. | | United States of America |
U.S. Steel | | United States Steel Corporation |
| | |
|
| | |
Abbreviation or acronym | | Term |
VNQDC Plan | | 2005 Voluntary NonQualified Deferred Compensation Plan |
VWAP | | Volume Weighted Average Price |
Wabush | | Wabush Mines Joint Venture |
WISCO | | Wugang Canada Resources Investment Limited, a subsidiary of Wuhan Iron and Steel (Group) Corporation |
2012 Equity Plan | | Cliffs Natural Resources Inc. 2012 Incentive Equity Plan |
PART I
|
| |
Item 1. | Financial Statements |
Statements of Unaudited Condensed Consolidated Operations
Cliffs Natural Resources Inc. and Subsidiaries
|
| | | | | | | |
| (In Millions, Except Per Share Amounts) |
| Three Months Ended March 31, |
| 2013 | | 2012 |
REVENUES FROM PRODUCT SALES AND SERVICES | | | |
Product | $ | 1,082.6 |
| | $ | 1,148.6 |
|
Freight and venture partners' cost reimbursements | 57.9 |
| | 63.8 |
|
| 1,140.5 |
| | 1,212.4 |
|
COST OF GOODS SOLD AND OPERATING EXPENSES | (902.6 | ) | | (920.6 | ) |
SALES MARGIN | 237.9 |
| | 291.8 |
|
OTHER OPERATING INCOME (EXPENSE) | | | |
Selling, general and administrative expenses | (48.4 | ) | | (59.5 | ) |
Exploration costs | (22.7 | ) | | (18.8 | ) |
Miscellaneous - net | 1.5 |
| | 9.4 |
|
| (69.6 | ) | | (68.9 | ) |
OPERATING INCOME | 168.3 |
| | 222.9 |
|
OTHER INCOME (EXPENSE) | | | |
Interest expense, net | (49.1 | ) | | (45.1 | ) |
Other non-operating income | 1.1 |
| | 1.8 |
|
| (48.0 | ) | | (43.3 | ) |
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY LOSS FROM VENTURES | 120.3 |
| | 179.6 |
|
INCOME TAX BENEFIT | 6.0 |
| | 213.2 |
|
EQUITY LOSS FROM VENTURES | (5.5 | ) | | (6.9 | ) |
INCOME FROM CONTINUING OPERATIONS | 120.8 |
| | 385.9 |
|
INCOME FROM DISCONTINUED OPERATIONS, net of tax | — |
| | 5.5 |
|
NET INCOME | 120.8 |
| | 391.4 |
|
INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST | (13.8 | ) | | (15.6 | ) |
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | 107.0 |
| | $ | 375.8 |
|
PREFERRED STOCK DIVIDENDS | (9.9 | ) | | — |
|
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | 97.1 |
| | $ | 375.8 |
|
| | | |
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC | | | |
Continuing operations | $ | 0.66 |
| | $ | 2.60 |
|
Discontinued operations | — |
| | 0.04 |
|
| $ | 0.66 |
| | $ | 2.64 |
|
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED | | | |
Continuing operations | $ | 0.66 |
| | $ | 2.59 |
|
Discontinued operations | — |
| | 0.04 |
|
| $ | 0.66 |
| | $ | 2.63 |
|
AVERAGE NUMBER OF SHARES (IN THOUSANDS) | | | |
Basic | 147,827 |
| | 142,226 |
|
Diluted | 148,081 |
| | 142,709 |
|
CASH DIVIDENDS DECLARED PER DEPOSITARY SHARE | $ | 0.34 |
| | $ | — |
|
CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.15 |
| | $ | 0.28 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Statements of Unaudited Condensed Consolidated Comprehensive Income
Cliffs Natural Resources Inc. and Subsidiaries
|
| | | | | | | |
| (In Millions) |
| Three Months Ended March 31, |
| 2013 | | 2012 |
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | 107.0 |
| | $ | 375.8 |
|
OTHER COMPREHENSIVE INCOME | | | |
Pension and OPEB liability, net of tax | 6.5 |
| | 6.2 |
|
Unrealized net gain on marketable securities, net of tax | 2.6 |
| | 2.3 |
|
Unrealized net gain on foreign currency translation | 3.3 |
| | 10.9 |
|
Unrealized net gain (loss) on derivative financial instruments, net of tax | (7.0 | ) | | 3.8 |
|
OTHER COMPREHENSIVE INCOME | 5.4 |
| | 23.2 |
|
OTHER COMPREHENSIVE INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST | (1.2 | ) | | (1.5 | ) |
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | 111.2 |
| | $ | 397.5 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Statements of Unaudited Condensed Consolidated Financial Position
Cliffs Natural Resources Inc. and Subsidiaries
|
| | | | | | | |
| (In Millions) |
| March 31, 2013 | | December 31, 2012 |
ASSETS | | | |
CURRENT ASSETS | | | |
Cash and cash equivalents | $ | 287.2 |
| | $ | 195.2 |
|
Accounts receivable, net | 272.3 |
| | 329.0 |
|
Inventories | 630.1 |
| | 436.5 |
|
Supplies and other inventories | 270.0 |
| | 289.1 |
|
Derivative assets | 66.4 |
| | 78.6 |
|
Other current assets | 297.9 |
| | 321.6 |
|
TOTAL CURRENT ASSETS | 1,823.9 |
| | 1,650.0 |
|
PROPERTY, PLANT AND EQUIPMENT, NET | 11,236.3 |
| | 11,207.3 |
|
OTHER ASSETS | | | |
Investments in ventures | 131.8 |
| | 135.8 |
|
Goodwill | 167.6 |
| | 167.4 |
|
Intangible assets, net | 124.5 |
| | 129.0 |
|
Deferred income taxes | 137.3 |
| | 91.8 |
|
Other non-current assets | 200.5 |
| | 193.6 |
|
TOTAL OTHER ASSETS | 761.7 |
| | 717.6 |
|
TOTAL ASSETS | $ | 13,821.9 |
| | $ | 13,574.9 |
|
(continued)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Statements of Unaudited Condensed Consolidated Financial Position
Cliffs Natural Resources Inc. and Subsidiaries - (Continued)
|
| | | | | | | |
| (In Millions) |
| March 31, 2013 | | December 31, 2012 |
LIABILITIES | | | |
CURRENT LIABILITIES | | | |
Accounts payable | $ | 299.9 |
| | $ | 555.5 |
|
Accrued expenses | 470.5 |
| | 442.6 |
|
Income taxes payable | 81.5 |
| | 28.3 |
|
Current portion of debt | — |
| | 94.1 |
|
Deferred revenue | 22.9 |
| | 35.9 |
|
Other current liabilities | 226.6 |
| | 225.1 |
|
TOTAL CURRENT LIABILITIES | 1,101.4 |
| | 1,381.5 |
|
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES | 600.0 |
| | 618.3 |
|
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS | 240.4 |
| | 252.8 |
|
DEFERRED INCOME TAXES | 1,114.4 |
| | 1,108.1 |
|
LONG-TERM DEBT | 3,433.0 |
| | 3,960.7 |
|
OTHER LIABILITIES | 473.7 |
| | 492.6 |
|
TOTAL LIABILITIES | 6,962.9 |
| | 7,814.0 |
|
COMMITMENTS AND CONTINGENCIES (SEE NOTE 19) |
| |
|
EQUITY | | | |
CLIFFS SHAREHOLDERS' EQUITY | | | |
Preferred Stock - no par value | | | |
Class A - 3,000,000 shares authorized | | | |
7% Series A Mandatory Convertible, Class A, no par value and $1,000 per share liquidation preference (See Note 15) | | | |
Issued and Outstanding - 731,250 shares (2012 - none) | 731.3 |
| | — |
|
Class B - 4,000,000 shares authorized | | | |
Common Shares - par value $0.125 per share | | | |
Authorized - 400,000,000 shares (2012 - 400,000,000 shares); | | | |
Issued - 159,545,469 shares (2012 - 149,195,469 shares); | | | |
Outstanding - 153,095,702 shares (2012 - 142,495,902 shares) | 19.8 |
| | 18.5 |
|
Capital in excess of par value of shares | 2,020.9 |
| | 1,774.7 |
|
Retained earnings | 3,291.7 |
| | 3,217.7 |
|
Cost of 6,449,767 common shares in treasury (2012 - 6,699,567 shares) | (307.7 | ) | | (322.6 | ) |
Accumulated other comprehensive loss | (51.4 | ) | | (55.6 | ) |
TOTAL CLIFFS SHAREHOLDERS' EQUITY | 5,704.6 |
| | 4,632.7 |
|
NONCONTROLLING INTEREST | 1,154.4 |
| | 1,128.2 |
|
TOTAL EQUITY | 6,859.0 |
| | 5,760.9 |
|
TOTAL LIABILITIES AND EQUITY | $ | 13,821.9 |
| | $ | 13,574.9 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Statements of Unaudited Condensed Consolidated Cash Flows
Cliffs Natural Resources Inc. and Subsidiaries
|
| | | | | | | |
| (In Millions) |
| Three Months Ended March 31, |
| 2013 | | 2012 |
OPERATING ACTIVITIES | | | |
Net income | $ | 120.8 |
| | $ | 391.4 |
|
Adjustments to reconcile net income to net cash provided (used) by operating activities: | | | |
Depreciation, depletion and amortization | 140.6 |
| | 117.3 |
|
Derivatives and currency hedges | 5.2 |
| | (9.9 | ) |
Equity loss in ventures (net of tax) | 5.5 |
| | 6.9 |
|
Pensions and other postretirement benefits | (11.0 | ) | | (24.8 | ) |
Deferred income taxes | (46.3 | ) | | (248.5 | ) |
Changes in deferred revenue and below-market sales contracts | (14.9 | ) | | (23.3 | ) |
Other | 5.2 |
| | (5.7 | ) |
Changes in operating assets and liabilities: | | | |
Receivables and other assets | 102.7 |
| | (9.5 | ) |
Product inventories | (194.0 | ) | | (219.0 | ) |
Payables and accrued expenses | (139.2 | ) | | (103.9 | ) |
Net cash used by operating activities | (25.4 | ) | | (129.0 | ) |
INVESTING ACTIVITIES | | | |
Purchase of property, plant and equipment | (230.4 | ) | | (241.1 | ) |
Investments in ventures | — |
| | (11.2 | ) |
Other investing activities | 2.0 |
| | 0.3 |
|
Net cash used by investing activities | (228.4 | ) | | (252.0 | ) |
FINANCING ACTIVITIES | | | |
Net proceeds from issuance of Series A, Mandatory Convertible Preferred Stock, Class A | 709.4 |
| | — |
|
Net proceeds from issuance of common shares | 285.6 |
| | — |
|
Repayment of term loan | (847.1 | ) | | (12.5 | ) |
Borrowings under revolving credit facility | 297.0 |
| | — |
|
Repayment under revolving credit facility | (72.0 | ) | | — |
|
Contributions by joint ventures, net | 11.3 |
| | 30.0 |
|
Common stock dividends | (22.9 | ) | | (39.7 | ) |
Other financing activities | (15.4 | ) | | 1.0 |
|
Net cash provided (used) by financing activities | 345.9 |
| | (21.2 | ) |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | (0.1 | ) | | 2.9 |
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 92.0 |
| | (399.3 | ) |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 195.2 |
| | 521.6 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 287.2 |
| | $ | 122.3 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
See NOTE 20 - CASH FLOW INFORMATION.
Cliffs Natural Resources Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly, the financial position, results of operations, comprehensive income and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of results to be expected for the year ended December 31, 2013 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, 2012.
Basis of Consolidation
The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly owned and majority-owned subsidiaries, including the following operations:
|
| | | | | | |
Name | | Location | | Ownership Interest | | Operation |
Northshore | | Minnesota | | 100.0% | | Iron Ore |
United Taconite | | Minnesota | | 100.0% | | Iron Ore |
Wabush | | Newfoundland and Labrador/Quebec, Canada | | 100.0% | | Iron Ore |
Bloom Lake | | Quebec, Canada | | 75.0% | | Iron Ore |
Tilden | | Michigan | | 85.0% | | Iron Ore |
Empire | | Michigan | | 79.0% | | Iron Ore |
Koolyanobbing | | Western Australia | | 100.0% | | Iron Ore |
Pinnacle | | West Virginia | | 100.0% | | Coal |
Oak Grove | | Alabama | | 100.0% | | Coal |
CLCC | | West Virginia | | 100.0% | | Coal |
Intercompany transactions and balances are eliminated upon consolidation.
Also included in our consolidated results are Cliffs Chromite Ontario Inc. and Cliffs Chromite Far North Inc. Cliffs Chromite Ontario, Inc. holds a 100 percent interest in each of the Black Label and Black Thor chromite deposits and, together with Cliffs Chromite Far North Inc., a 70 percent interest in the Big Daddy chromite deposit, all located in northern Ontario, Canada.
Equity Method Investments
Investments in unconsolidated ventures that we have the ability to exercise significant influence over, but not control, are accounted for under the equity method. The following table presents the detail of our investments in unconsolidated ventures and where those investments are classified in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2013 and December 31, 2012. Parentheses indicate a net liability.
|
| | | | | | | | | | | | | | |
| | | | | | | | (In Millions) |
Investment | | Classification | | Accounting Method | | Interest Percentage | | March 31, 2013 | | December 31, 2012 |
Amapá | | Investments in ventures | | Equity Method | | 30 | | $ | 96.9 |
| | $ | 101.9 |
|
Cockatoo | | Other liabilities | | Equity Method | | 50 | | (25.4 | ) | | (25.3 | ) |
Hibbing | | Investments in ventures (1) | | Equity Method | | 23 | | 1.4 |
| | (2.1 | ) |
Other | | Investments in ventures | | Equity Method | | Various | | 33.5 |
| | 33.9 |
|
| | | | | | | | $ | 106.4 |
| | $ | 108.4 |
|
(1) At December 31, 2012 the classification for Hibbing was Other liabilities.
Amapá
On December 27, 2012, our board of directors authorized the sale of our 30 percent interest in Amapá. Together with Anglo American plc., we will be selling our respective interest in a 100 percent sale transaction to a single entity. On March 28, 2013, an unknown event caused the Santana port shiploader to collapse into the Amazon river, preventing further ship loading by the mine operator, Anglo American. The investigation into the root cause of the collapse is ongoing as Anglo American develops a business continuation plan. The previously announced sale transaction remains in place, but without a projected close date until the port situation is clarified.
Cockatoo Island
In August 2011, we entered into a term sheet with our joint venture partner, HWE Cockatoo Pty Ltd., to sell our beneficial interest in the mining tenements and certain infrastructure of Cockatoo Island to Pluton Resources. On July 31, 2012, the parties entered into a definitive asset sale agreement, which was amended on August 31, 2012. On September 7, 2012, the closing date, Pluton Resources paid as consideration under the asset sale agreement, a nominal sum of AUD $4.00 and assumed ownership of the assets and responsibility for the environmental rehabilitation obligations and other assumed liabilities not inherently attached to the tenements acquired. With respect to those rehabilitation obligations and assumed liabilities that are inherently attached to the tenements, those obligations and liabilities will automatically transfer to, and be assumed by, Pluton Resources upon registration of each of the tenements in Pluton Resources' name. Registration of the tenements in Pluton Resources' name cannot occur until the requisite bonds and stamped transfer forms are lodged by Pluton Resources with the Department of Mining and Petroleum. This process is expected to be completed during the second quarter of 2013. As of March 31, 2013, our portion of the current estimated cost of the rehabilitation is approximately $24 million and will be extinguished upon registration of the tenements in Pluton Resources' name. Cliffs and HWE Cockatoo Pty Ltd. completed the current stage of mining, Stage 3, at Cockatoo Island on September 30, 2012.
Discontinued Operations
On July 10, 2012, we entered into a definitive share and asset sale agreement to sell our 45 percent economic interest in the Sonoma joint venture coal mine located in Queensland, Australia. Upon completion of the transaction on November 12, 2012, we collected approximately AUD $141.0 million in net cash proceeds. The assets sold included our interests in the Sonoma mine along with our ownership of the affiliated washplant and are reflected as Assets held for sale and Liabilities held for sale in the Statements of Unaudited Condensed Consolidated Financial Position and reflected the results of operations as discontinued operations in the Statements of Unaudited Condensed Consolidated Operations for periods presented prior to completion of the sale. The Sonoma operations previously were included in Other within our reportable segments.
Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the audited financial statements for the fiscal year ended December 31, 2012, included in our Annual Report on Form 10-K filed with the SEC. The significant accounting policies requiring updates have been included within the disclosures below.
Other Intangible Assets and Liabilities
Other intangible assets are subject to periodic amortization on a straight-line basis over their estimated useful lives or on a units of production basis as follows:
|
| | | | |
Intangible Assets | | Basis | | Useful Life (years) |
Permits - Asia Pacific Iron Ore | | Units of production | | Life of mine |
Permits - All Other | | Straight line | | 15 - 40 |
Utility contracts | | Straight line | | 5 |
Leases - North American Coal | | Units of production | | Life of mine |
Leases - All Other | | Straight line | | 4.5 - 17.5 |
Earnings Per Share
We present both basic and diluted earnings per share amounts. Basic earnings per share amounts are calculated by dividing Net Income Attributable to Cliffs Shareholders less any paid or declared but unpaid dividends on our depositary shares by the weighted average number of common shares outstanding during the period presented. Diluted earnings per share amounts are calculated by dividing Net Income Attributable to Cliffs Shareholders by the weighted average number of common shares, common share equivalents under stock plans using the treasury stock method and the number of common shares that would be issued under an assumed conversion of our outstanding depositary shares, each representing a 1/40th interest in a share of our Series A Mandatory Convertible Preferred Stock, Class A, under the if-converted method. Our outstanding depositary shares are convertible into common shares based on the volume weighted average of closing prices of our common stock over the 20 consecutive trading day period ending on the third day immediately preceding the end of the reporting period. Common share equivalents are excluded from EPS computations in the periods in which they have an anti-dilutive effect. See NOTE 18 - EARNINGS PER SHARE for further information.
Recent Accounting Pronouncements
In February 2013, the FASB amended the guidance on the presentation of comprehensive income in order to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendment does not change the current requirements for reporting net income or other comprehensive income in financial statements. Rather, it requires the entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The new guidance is effective prospectively for reporting periods beginning after December 15, 2012. We adopted the provisions of guidance required for the period beginning January 1, 2013. Refer to NOTE 16 - SHAREHOLDERS' EQUITY for further information.
NOTE 2 - SEGMENT REPORTING
Our Company’s primary operations are organized and managed according to product category and geographic location: U.S. Iron Ore, Eastern Canadian Iron Ore, Asia Pacific Iron Ore, North American Coal, Latin American Iron Ore, Ferroalloys and our Global Exploration Group. The U.S. Iron Ore segment is comprised of our interests in five U.S. mines that provide iron ore to the integrated steel industry. The Eastern Canadian Iron Ore segment is comprised of two Eastern Canadian mines that primarily provide iron ore to the seaborne market for Asian steel producers. The Asia Pacific Iron Ore segment is located in Western Australia and provides iron ore to the seaborne market for Asian steel producers. The North American Coal segment is comprised of our six metallurgical coal mines and one thermal coal mine that provide metallurgical coal primarily to the integrated steel industry and thermal coal primarily to the energy industry. There are no intersegment revenues.
The Latin American Iron Ore operating segment is comprised of our 30 percent Amapá interest in Brazil. On March 28, 2013, an unknown event caused the Santana port shiploader to collapse into the Amazon river, preventing further ship loading by the mine operator, Anglo American. The investigation into the root cause of the collapse is ongoing as Anglo American develops a business continuation plan. The previously announced sale transaction remains in place, but without a projected close date until the port situation is clarified. The Ferroalloys operating segment is comprised of our interests in chromite deposits held in Northern Ontario, Canada and the Global Exploration Group is focused on early involvement in exploration activities to identify new projects for future development or projects that add significant value to existing operations. The Latin American Iron Ore, Ferroalloys and Global Exploration Group operating segments do not meet reportable segment disclosure requirements and, therefore, are not reported separately.
We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold and operating expenses identifiable to each segment. This measure of operating performance is an effective measurement as we focus on reducing production costs throughout the Company.
The following table presents a summary of our reportable segments for the three months ended March 31, 2013 and 2012, including a reconciliation of segment sales margin to Income from Continuing Operations Before Income Taxes and Equity Loss from Ventures:
|
| | | | | | | | | | | | | |
| (In Millions) |
| Three Months Ended March 31, |
| 2013 | | 2012 |
Revenues from product sales and services: | | | | | | | |
U.S. Iron Ore | $ | 410.1 |
| | 36 | % | | $ | 441.7 |
| | 36 | % |
Eastern Canadian Iron Ore | 245.3 |
| | 22 | % | | 220.7 |
| | 18 | % |
Asia Pacific Iron Ore | 270.8 |
| | 24 | % | | 359.8 |
| | 30 | % |
North American Coal | 214.3 |
| | 18 | % | | 189.9 |
| | 16 | % |
Other | — |
| | — | % | | 0.3 |
| | — | % |
Total revenues from product sales and services | $ | 1,140.5 |
| | 100 | % | | $ | 1,212.4 |
| | 100 | % |
| | | | | | | |
Sales margin: | | | | | | | |
U.S. Iron Ore | $ | 157.3 |
| | | | $ | 166.9 |
| | |
Eastern Canadian Iron Ore | 19.4 |
| | | | (14.3 | ) | | |
Asia Pacific Iron Ore | 61.3 |
| | | | 125.0 |
| | |
North American Coal | 1.8 |
| | | | 14.5 |
| | |
Other | (1.9 | ) | | | | (0.3 | ) | | |
Sales margin | 237.9 |
| | | | 291.8 |
| | |
Other operating expense | (69.6 | ) | | | | (68.9 | ) | | |
Other income (expense) | (48.0 | ) | | | | (43.3 | ) | | |
Income from continuing operations before income taxes and equity loss from ventures | $ | 120.3 |
| | | | $ | 179.6 |
| | |
| | | | | | | |
Depreciation, depletion and amortization: | | | | | | | |
U.S. Iron Ore | $ | 26.6 |
| | | | $ | 23.2 |
| | |
Eastern Canadian Iron Ore | 41.1 |
| | | | 37.9 |
| | |
Asia Pacific Iron Ore | 36.4 |
| | | | 30.0 |
| | |
North American Coal | 32.5 |
| | | | 20.1 |
| | |
Other | 4.0 |
| | | | 6.1 |
| | |
Total depreciation, depletion and amortization | $ | 140.6 |
| | | | $ | 117.3 |
| | |
| | | | | | | |
Capital additions (1): | | | | | | | |
U.S. Iron Ore | $ | 11.7 |
| | | | $ | 34.8 |
| | |
Eastern Canadian Iron Ore | 167.0 |
| | | | 130.6 |
| | |
Asia Pacific Iron Ore | 4.3 |
| | | | 109.3 |
| | |
North American Coal | 11.1 |
| | | | 39.1 |
| | |
Other | 1.6 |
| | | | 39.6 |
| | |
Total capital additions | $ | 195.7 |
| | | | $ | 353.4 |
| | |
(1) Includes capital lease additions and non-cash accruals. Refer to NOTE 20 - CASH FLOW INFORMATION.
A summary of assets by segment is as follows:
|
| | | | | | | |
| (In Millions) |
| March 31, 2013 | | December 31, 2012 |
Assets: | | | |
U.S. Iron Ore | $ | 1,848.4 |
| | $ | 1,735.1 |
|
Eastern Canadian Iron Ore | 7,719.7 |
| | 7,605.1 |
|
Asia Pacific Iron Ore | 1,474.4 |
| | 1,506.3 |
|
North American Coal | 1,829.7 |
| | 1,877.8 |
|
Other | 599.3 |
| | 570.9 |
|
Total segment assets | 13,471.5 |
| | 13,295.2 |
|
Corporate | 350.4 |
| | 279.7 |
|
Total assets | $ | 13,821.9 |
| | $ | 13,574.9 |
|
NOTE 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The following table presents the fair value of our derivative instruments and the classification of each in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| Derivative Assets | | Derivative Liabilities |
| March 31, 2013 | | December 31, 2012 | | March 31, 2013 | | December 31, 2012 |
Derivative Instrument | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Derivatives designated as hedging instruments under ASC 815: | | | | | | | | | | | | | | | |
Foreign Exchange Contracts | Derivative assets | | $ | 13.1 |
| | Derivative assets | | $ | 16.2 |
| | Other current liabilities | | $ | 8.5 |
| | Other current liabilities | | $ | 1.9 |
|
Total derivatives designated as hedging instruments under ASC 815 | | | $ | 13.1 |
| | | | $ | 16.2 |
| | | | $ | 8.5 |
| | | | $ | 1.9 |
|
Derivatives not designated as hedging instruments under ASC 815: | | | | | | | | | | | | | | | |
Customer Supply Agreements | Derivative assets | | $ | 49.4 |
| | Derivative assets | | $ | 58.9 |
| | | | $ | — |
| | | | $ | — |
|
Provisional Pricing Arrangements | Derivative assets | | 3.9 |
| | Derivative assets | | 3.5 |
| | Other current liabilities | | 6.8 |
| | Other current liabilities | | 11.3 |
|
Total derivatives not designated as hedging instruments under ASC 815 | | | $ | 53.3 |
| | | | $ | 62.4 |
| | | | $ | 6.8 |
| | | | $ | 11.3 |
|
Total derivatives | | | $ | 66.4 |
| | | | $ | 78.6 |
| | | | $ | 15.3 |
| | | | $ | 13.2 |
|
Derivatives Designated as Hedging Instruments
Cash Flow Hedges
Australian and Canadian Dollar Foreign Exchange Contracts
We are subject to changes in foreign currency exchange rates as a result of our operations in Australia and Canada. With respect to Australia, foreign exchange risk arises from our exposure to fluctuations in foreign currency exchange rates because the functional currency of our Asia Pacific operations is the Australian dollar. Our Asia Pacific operations receive funds in U.S. currency for their iron ore sales. The functional currency of our Canadian operations is the U.S. dollar; however, the production costs for these operations primarily are incurred in the Canadian dollar.
We use foreign currency exchange contracts to hedge our foreign currency exposure for a portion of our U.S. dollar sales receipts in our Australian functional currency entities and our Canadian dollar operating costs. For our Australian operations, U.S. dollars are converted to Australian dollars at the currency exchange rate in effect during the period the transaction occurred. For our Canadian operations, U.S. dollars are converted to Canadian dollars at the exchange rate in effect for the period the operating costs are incurred. The primary objective for the use of these instruments is to reduce exposure to changes in Australian and U.S. currency exchange rates and U.S. and Canadian currency exchange rates, respectively, and to protect against undue adverse movement in these exchange rates. These instruments qualify for hedge accounting treatment, and are tested for effectiveness at inception and at least once each reporting period. If and when any of our hedge contracts are determined not to be highly effective as hedges, the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, hedge accounting is discontinued.
As of March 31, 2013, we had outstanding Australian and Canadian foreign currency exchange contracts with notional amounts of $378.0 million and $557.3 million, respectively, in the form of forward contracts with varying maturity dates ranging from April 2013 to March 2014. This compares with outstanding Australian and Canadian foreign currency exchange contracts with a notional amount of $400.0 million and $630.4 million, respectively, as of December 31, 2012.
Changes in fair value of highly effective hedges are recorded as a component of Accumulated other comprehensive loss in the Statements of Unaudited Condensed Consolidated Financial Position. Any ineffectiveness is recognized immediately in income and as of March 31, 2013 and 2012, there was no material ineffectiveness recorded for these foreign exchange contracts. Amounts recorded as a component of Accumulated other comprehensive loss are reclassified into earnings in the same period the forecasted transaction affects earnings. Of the amounts remaining in Accumulated other comprehensive loss related to Australian hedge contracts and Canadian hedge contracts, we estimate that gains of $8.1 million and losses of $5.0 million (net of tax), respectively, will be reclassified into earnings within the next 12 months.
The following summarizes the effect of our derivatives designated as hedging instruments, net of tax in Accumulated other comprehensive loss in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2013 and 2012:
|
| | | | | | | | | | | | | | | | | |
| (In Millions) |
Derivatives in Cash Flow | Amount of Gain (Loss) Recognized in OCI on Derivative | | Location of Gain Reclassified from Accumulated OCI into Earnings | | Amount of Gain Reclassified from Accumulated OCI into Earnings |
Hedging Relationships | (Effective Portion) | | (Effective Portion) | | (Effective Portion) |
| Three Months Ended March 31, | | | | Three Months Ended March 31, |
| 2013 | | 2012 | | | | 2013 | | 2012 |
Australian Dollar Foreign Exchange Contracts (hedge designation) | $ | 3.2 |
| | $ | 3.0 |
| | Product revenues | | $ | 1.8 |
| | $ | 3.1 |
|
Canadian Dollar Foreign Exchange Contracts (hedge designation) | (8.2 | ) | | 0.7 |
| | Cost of goods sold and operating expenses | | 0.2 |
| | 0.5 |
|
Total | $ | (5.0 | ) | | $ | 3.7 |
| | | | $ | 2.0 |
| | $ | 3.6 |
|
Derivatives Not Designated as Hedging Instruments
Customer Supply Agreements
Most of our U.S. Iron Ore long-term supply agreements are comprised of a base price with annual price adjustment factors, some of which are subject to annual price collars in order to limit the percentage increase or decrease in prices for our iron ore pellets during any given year. The base price is the primary component of the purchase price for each contract. The inflation-indexed price adjustment factors are integral to the iron ore supply contracts and vary based on the agreement, but typically include adjustments based
upon changes in the Platts 62 percent Fe market rate and/or international pellet prices and changes in specified Producers Price Indices, including those for all commodities, industrial commodities, energy and steel. The pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. In most cases, these adjustment factors have not been finalized at the time our product is sold. In these cases, we historically have estimated the adjustment factors at each reporting period based upon the best third-party information available. The estimates are then adjusted to actual when the information has been finalized. The price adjustment factors have been evaluated to determine if they contain embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host contract and are integral to the host contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments.
Certain supply agreements with one U.S. Iron Ore customer provide for supplemental revenue or refunds to the customer based on the customer’s average annual steel pricing at the time the product is consumed in the customer’s blast furnace. The supplemental pricing is characterized as a freestanding derivative and is required to be accounted for separately once the product is shipped. The derivative instrument, which is finalized based on a future price, is adjusted to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled. We recognized $24.1 million and $39.2 million, respectively, as Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2013 and 2012, respectively, related to the supplemental payments. Derivative assets, representing the fair value of the pricing factors, were $49.4 million and $58.9 million, respectively, in the March 31, 2013 and December 31, 2012 Statements of Unaudited Condensed Consolidated Financial Position.
Provisional Pricing Arrangements
Certain of our U.S. Iron Ore, Eastern Canadian Iron Ore and Asia Pacific Iron Ore customer supply agreements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final sales price to be based on market inputs at a specified point in time in the future, per the terms of the supply agreements. The difference between the provisionally agreed-upon price and the estimated final sales price is characterized as a derivative and is required to be accounted for separately once the revenue has been recognized. The derivative instrument is adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates provided by management until the final sales price is determined. We have recorded $3.9 million and $3.5 million, respectively, as Derivative assets and $6.8 million and $11.3 million, respectively, as derivative liabilities included in Other current liabilities in the Statements of Unaudited Condensed Consolidated Financial Position at March 31, 2013 and December 31, 2012, respectively, related to our estimate of final sales price with our U.S. Iron Ore and Asia Pacific Iron Ore customers at March 31, 2013 and related to our U.S. Iron Ore and Eastern Canadian Iron Ore customers at December 31, 2012. These amounts represent the difference between the provisional price agreed upon with our customers based on the supply agreement terms and our estimate of the final sales price based on the price calculations established in the supply agreements. As a result, we recognized a net $2.9 million as a decrease and a net $3.0 million as an increase in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2013 and 2012, respectively, related to these arrangements.
The following summarizes the effect of our derivatives that are not designated as hedging instruments in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2013 and 2012:
|
| | | | | | | | |
(In Millions) |
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivative | Amount of Gain/(Loss) Recognized in Income on Derivative |
| | Three Months Ended March 31, |
| | 2013 | | 2012 |
Foreign Exchange Contracts | Other income (expense) | $ | — |
| | $ | 0.3 |
|
Customer Supply Agreements | Product revenues | 24.1 |
| | 39.2 |
|
Provisional Pricing Arrangements | Product revenues | (2.9 | ) | | 3.0 |
|
Total | | $ | 21.2 |
| | $ | 42.5 |
|
Refer to NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS for additional information.
NOTE 4 - INVENTORIES
The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| March 31, 2013 | | December 31, 2012 |
Segment | Finished Goods | | Work-in Process | | Total Inventory | | Finished Goods | | Work-in Process | | Total Inventory |
U.S. Iron Ore | $ | 293.9 |
| | $ | 27.2 |
| | $ | 321.1 |
| | $ | 147.2 |
| | $ | 22.9 |
| | $ | 170.1 |
|
Eastern Canadian Iron Ore | 101.0 |
| | 38.4 |
| | 139.4 |
| | 62.6 |
| | 44.2 |
| | 106.8 |
|
Asia Pacific Iron Ore | 73.5 |
| | 16.4 |
| | 89.9 |
| | 36.7 |
| | 37.2 |
| | 73.9 |
|
North American Coal | 49.5 |
| | 30.2 |
| | 79.7 |
| | 36.7 |
| | 49.0 |
| | 85.7 |
|
Total | $ | 517.9 |
| | $ | 112.2 |
| | $ | 630.1 |
| | $ | 283.2 |
| | $ | 153.3 |
| | $ | 436.5 |
|
We recorded lower-of-cost-or-market inventory charges of $2.0 million and $1.3 million in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2013 and 2012, respectively, for our North American Coal operations. These charges were a result of market declines and operational and geological issues.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the value of each of the major classes of our consolidated depreciable assets as of March 31, 2013 and December 31, 2012:
|
| | | | | | | |
| (In Millions) |
| March 31, 2013 | | December 31, 2012 |
Land rights and mineral rights | $ | 7,922.8 |
| | $ | 7,920.8 |
|
Office and information technology | 114.8 |
| | 92.4 |
|
Buildings | 190.7 |
| | 162.0 |
|
Mining equipment | 1,342.9 |
| | 1,290.7 |
|
Processing equipment | 2,081.9 |
| | 1,937.4 |
|
Railroad equipment | 242.1 |
| | 240.8 |
|
Electric power facilities | 61.4 |
| | 58.7 |
|
Port facilities | 114.7 |
| | 114.3 |
|
Interest capitalized during construction | 20.8 |
| | 20.8 |
|
Land improvements | 48.7 |
| | 43.9 |
|
Other | 53.1 |
| | 39.0 |
|
Construction in progress | 1,013.2 |
| | 1,123.9 |
|
| 13,207.1 |
| | 13,044.7 |
|
Allowance for depreciation and depletion | (1,970.8 | ) | | (1,837.4 | ) |
| $ | 11,236.3 |
| | $ | 11,207.3 |
|
We recorded depreciation and depletion expense of $135.9 million and $111.4 million in the Statements of Unaudited Condensed Consolidated Operations for the periods ended March 31, 2013 and 2012, respectively.
The accumulated amount of capitalized interest included within construction in progress at March 31, 2013 is $24.2 million of which $7.1 million was capitalized during 2013. At December 31, 2012, $17.1 million of capitalized interest was included within construction in progress of which $15.4 million was capitalized during 2012.
NOTE 6 - DISCONTINUED OPERATIONS
The table below sets forth selected financial information related to operating results of our business classified as discontinued operations. While the reclassification of revenues and expenses related to discontinued operations for prior periods have no impact upon previously reported net income, the Statements of Unaudited Condensed Consolidated Operations present the revenues and expenses that were reclassified from the specified line items to discontinued operations. During the fourth quarter of 2012, we sold our 45 percent economic interest in Sonoma. The Sonoma operations previously were included in Other within our reportable segments.
The following table presents detail of our operations related to our Sonoma operations in the Statements of Unaudited Condensed Consolidated Operations:
|
| | | | | | | |
| (In Millions) |
| Three Months Ended March 31, |
| 2013 | | 2012 |
REVENUES FROM PRODUCT SALES AND SERVICES | | | |
Product | $ | — |
| | $ | 52.4 |
|
| | | |
INCOME FROM DISCONTINUED OPERATIONS, net of tax | $ | — |
| | $ | 5.5 |
|
We recorded income from discontinued operations of $5.5 million, net of $2.4 million in tax expense in Income from Discontinued Operations, net of tax in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2012 related to our sale of the Sonoma operations, which was completed as of November 12, 2012.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
Goodwill
The following table summarizes changes in the carrying amount of goodwill allocated by operating segment for the three months ended March 31, 2013 and the year ended December 31, 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| March 31, 2013 | | December 31, 2012 |
| U.S. Iron Ore | | Eastern Canadian Iron Ore | | Asia Pacific Iron Ore | | North American Coal | | Other | | Total | | U.S. Iron Ore | | Eastern Canadian Iron Ore | | Asia Pacific Iron Ore | | North American Coal | | Other | | Total |
Beginning Balance | $ | 2.0 |
| | $ | — |
| | $ | 84.5 |
| | $ | — |
| | $ | 80.9 |
| | $ | 167.4 |
| | $ | 2.0 |
| | $ | 986.2 |
| | $ | 83.0 |
| | $ | — |
| | $ | 80.9 |
| | $ | 1,152.1 |
|
Arising in business combinations | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13.8 |
| | — |
| | — |
| | — |
| | 13.8 |
|
Impairment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,000.0 | ) | | — |
| | — |
| | — |
| | (1,000.0 | ) |
Impact of foreign currency translation | — |
| | — |
| | 0.2 |
| | — |
| | — |
| | 0.2 |
| | — |
| | — |
| | 1.5 |
| | — |
| | — |
| | 1.5 |
|
Ending Balance | $ | 2.0 |
| | $ | — |
| | $ | 84.7 |
| | $ | — |
| | $ | 80.9 |
| | $ | 167.6 |
| | $ | 2.0 |
| | $ | — |
| | $ | 84.5 |
| | $ | — |
| | $ | 80.9 |
| | $ | 167.4 |
|
Accumulated Goodwill Impairment Loss | $ | — |
| | $ | (1,000.0 | ) | | $ | — |
| | $ | (27.8 | ) | | $ | — |
| | $ | (1,027.8 | ) | | $ | — |
| | $ | (1,000.0 | ) | | $ | — |
| | $ | (27.8 | ) | | $ | — |
| | $ | (1,027.8 | ) |
Other Intangible Assets and Liabilities
Following is a summary of intangible assets and liabilities as of March 31, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | March 31, 2013 | | December 31, 2012 |
| Classification | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Definite-lived intangible assets: | | | | | | | | | | | | | |
Permits | Intangible assets, net | | $ | 136.2 |
| | $ | (33.5 | ) | | $ | 102.7 |
| | $ | 136.1 |
| | $ | (31.7 | ) | | $ | 104.4 |
|
Utility contracts | Intangible assets, net | | 54.7 |
| | (35.2 | ) | | 19.5 |
| | 54.7 |
| | (32.4 | ) | | 22.3 |
|
Leases | Intangible assets, net | | 5.7 |
| | (3.4 | ) | | 2.3 |
| | 5.7 |
| | (3.4 | ) | | 2.3 |
|
Total intangible assets | | | $ | 196.6 |
| | $ | (72.1 | ) | | $ | 124.5 |
| | $ | 196.5 |
| | $ | (67.5 | ) | | $ | 129.0 |
|
Below-market sales contracts | Other current liabilities | | $ | (46.0 | ) | | $ | 1.9 |
| | $ | (44.1 | ) | | $ | (46.0 | ) | | $ | — |
| | $ | (46.0 | ) |
Below-market sales contracts | Other liabilities | | (250.7 | ) | | 181.6 |
| | (69.1 | ) | | (250.7 | ) | | 181.6 |
| | (69.1 | ) |
Total below-market sales contracts | | | $ | (296.7 | ) | | $ | 183.5 |
| | $ | (113.2 | ) | | $ | (296.7 | ) | | $ | 181.6 |
| | $ | (115.1 | ) |
Amortization expense relating to intangible assets was $4.7 million and $4.8 million, respectively, for the three months ended March 31, 2013 and 2012, and is recognized in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations. The estimated amortization expense relating to intangible assets for each of the five succeeding years is as follows:
|
| | | |
| (In Millions) |
| Amount |
Year Ending December 31 |
|
2013 (remaining nine months) | $ | 14.5 |
|
2014 | 18.8 |
|
2015 | 7.8 |
|
2016 | 7.7 |
|
2017 | 7.9 |
|
2018 | 7.7 |
|
Total | $ | 64.4 |
|
The below-market sales contracts are classified as a liability and recognized over the term of the underlying contracts, which have remaining lives ranging from one to four years. For each of the three months ended March 31, 2013 and 2012, we recognized $1.9 million in Product revenues related to the below-market sales contracts. The following amounts are estimated to be recognized in Product revenues for the remainder of this year and each of the three succeeding fiscal years:
|
| | | |
| (In Millions) |
| Amount |
Year Ending December 31 | |
2013 (remaining nine months) | $ | 44.1 |
|
2014 | 23.1 |
|
2015 | 23.0 |
|
2016 | 23.0 |
|
Total | $ | 113.2 |
|
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following represents the assets and liabilities of the Company measured at fair value at March 31, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | | |
| (In Millions) |
| March 31, 2013 |
Description | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | | | | | | |
Cash equivalents | $ | 135.0 |
| | $ | — |
| | $ | — |
| | $ | 135.0 |
|
Derivative assets | — |
| | — |
| | 53.3 |
| | 53.3 |
|
Marketable securities | 30.0 |
| | — |
| | — |
| | 30.0 |
|
Foreign exchange contracts | — |
| | 13.1 |
| | — |
| | 13.1 |
|
Total | $ | 165.0 |
| | $ | 13.1 |
| | $ | 53.3 |
| | $ | 231.4 |
|
Liabilities: |
| |
| |
| |
|
Derivative liabilities | $ | — |
| | $ | — |
| | $ | 6.8 |
| | $ | 6.8 |
|
Foreign exchange contracts | — |
| | 8.5 |
| | — |
| | 8.5 |
|
Total | $ | — |
| | $ | 8.5 |
| | $ | 6.8 |
| | $ | 15.3 |
|
|
| | | | | | | | | | | | | | | |
| (In Millions) |
| December 31, 2012 |
Description | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | | | | | | |
Cash equivalents | $ | 100.0 |
| | $ | — |
| | $ | — |
| | $ | 100.0 |
|
Derivative assets | — |
| | — |
| | 62.4 |
| | 62.4 |
|
Marketable securities | 27.0 |
| | — |
| | — |
| | 27.0 |
|
Foreign exchange contracts | — |
| | 16.2 |
| | — |
| | 16.2 |
|
Total | $ | 127.0 |
| | $ | 16.2 |
| | $ | 62.4 |
| | $ | 205.6 |
|
Liabilities: |
| |
| |
| |
|
Derivative liabilities | $ | — |
| | $ | — |
| | $ | 11.3 |
| | $ | 11.3 |
|
Foreign exchange contracts | — |
| | 1.9 |
| | — |
| | 1.9 |
|
Total | $ | — |
| | $ | 1.9 |
| | $ | 11.3 |
| | $ | 13.2 |
|
Financial assets classified in Level 1 at March 31, 2013 and December 31, 2012 include money market funds and available-for-sale marketable securities. The valuation of these instruments is based upon unadjusted quoted prices for identical assets in active markets.
The valuation of financial assets and liabilities classified in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable. Level 2 securities primarily include derivative financial instruments valued using financial models that use as their basis readily observable market parameters. At March 31, 2013 and December 31, 2012, such derivative financial instruments included our existing foreign currency exchange contracts. The
fair value of the foreign currency exchange contracts is based on forward market prices and represents the estimated amount we would receive or pay to terminate these agreements at the reporting date, taking into account creditworthiness, nonperformance risk and liquidity risks associated with current market conditions.
The derivative financial assets classified within Level 3 at March 31, 2013 and December 31, 2012 included a freestanding derivative instrument related to certain supply agreements with one of our U.S. Iron Ore customers. The agreements include provisions for supplemental revenue or refunds based on the customer’s annual steel pricing at the time the product is consumed in the customer’s blast furnaces. We account for this provision as a derivative instrument at the time of sale and adjust this provision to fair value as an adjustment to Product revenues each reporting period until the product is consumed and the amounts are settled. The fair value of the instrument is determined using a market approach based on an estimate of the annual realized price of hot-rolled steel at the steelmaker’s facilities, and takes into consideration current market conditions and nonperformance risk.
The Level 3 derivative assets and liabilities at March 31, 2013 and December 31, 2012, also consisted of derivatives related to certain provisional pricing arrangements with our U.S. Iron Ore and Asia Pacific Iron Ore customers at March 31, 2013 and our U.S. Iron Ore and Eastern Canadian Iron Ore customers at December 31, 2012. These provisional pricing arrangements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final sales price to be based on market inputs at a specified point in time in the future, per the terms of the supply agreements. The difference between the provisionally agreed-upon price and the estimated final sales price is characterized as a derivative and is required to be accounted for separately once the revenue has been recognized. The derivative instrument is adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates provided by management until the final sales price is determined.
The following table illustrates information about quantitative inputs and assumptions for the derivative assets and derivative liabilities categorized in Level 3 of the fair value hierarchy:
|
| | | | | | | | | | | |
Qualitative/Quantitative Information About Level 3 Fair Value Measurements |
($ in millions) | Fair Value at | | Balance Sheet Location | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
3/31/2013 |
Provisional Pricing Arrangements | $ | 3.9 |
| | Derivative assets | | Market Approach | | Managements Estimate of 62% Fe | | $137 |
| $ | 6.8 |
| | Other current liabilities | | | | | | |
Customer Supply Agreement | $ | 49.4 |
| | Derivative assets | | Market Approach | | Hot-Rolled Steel Estimate | | $600 - $645 ($630) |
The significant unobservable input used in the fair value measurement of the reporting entity’s provisional pricing arrangements is management’s estimate of 62 percent Fe price based upon current market data, including historical seasonality and forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively.
The significant unobservable input used in the fair value measurement of the reporting entity’s customer supply agreements is the future hot-rolled steel price that is estimated based on current market data, analysts' projections, projections provided by the customer and forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively.
These significant estimates are determined by a collaboration of our commercial, finance and treasury departments and are reviewed by management.
Substantially all of the financial assets and liabilities are carried at fair value or contracted amounts that approximate fair value.
We recognize any transfers between levels as of the beginning of the reporting period, including both transfers into and out of levels. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2013 and 2012. The following table represents a reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2013 and 2012.
|
| | | | | | | | | | | | | | | |
| (In Millions) |
| Derivative Assets (Level 3) | | Derivative Liabilities (Level 3) |
| Three Months Ended March 31, | | Three Months Ended March 31, |
| 2013 | | 2012 | | 2013 | | 2012 |
Beginning balance - January 1 | $ | 62.4 |
| | $ | 157.9 |
| | $ | (11.3 | ) | | $ | (19.5 | ) |
Total gains |
| |
| | | | |
Included in earnings | 28.0 |
| | 43.3 |
| | (6.8 | ) | | (1.1 | ) |
Included in other comprehensive income | — |
| | — |
| | — |
| | — |
|
Settlements | (37.1 | ) | | (132.0 | ) | | 11.3 |
| | 19.5 |
|
Transfers into Level 3 | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3 | — |
| | — |
| | — |
| | — |
|
Ending balance - March 31 | $ | 53.3 |
| | $ | 69.2 |
| | $ | (6.8 | ) | | $ | (1.1 | ) |
Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) on assets (liabilities) still held at the reporting date | $ | 28.0 |
| | $ | 43.3 |
| | $ | (6.8 | ) | | $ | (1.1 | ) |
Gains and losses included in earnings are reported in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2013 and 2012.
The carrying amount for certain financial instruments (e.g. Accounts receivable, net, Accounts payable and Accrued expenses) approximate fair value and, therefore, have been excluded from the table below. A summary of the carrying amount and fair value of other financial instruments at March 31, 2013 and December 31, 2012 were as follows:
|
| | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | March 31, 2013 | | December 31, 2012 |
| Classification | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Other receivables: | | | | | | | | | |
Customer supplemental payments | Level 2 | | $ | 16.7 |
| | $ | 16.1 |
| | $ | 22.3 |
| | $ | 21.3 |
|
ArcelorMittal USA—Receivable | Level 2 | | 17.4 |
| | 19.1 |
| | 19.3 |
| | 21.3 |
|
Other | Level 2 | | 10.5 |
| | 10.5 |
| | 10.9 |
| | 10.9 |
|
Total receivables | | | $ | 44.6 |
| | $ | 45.7 |
| | $ | 52.5 |
| | $ | 53.5 |
|
Long-term debt: | | | | | | | | | |
Term loan—$1.25 billion | Level 2 | | $ | — |
| | $ | — |
| | $ | 753.0 |
| | $ | 753.0 |
|
Senior notes—$700 million | Level 2 | | 699.4 |
| | 751.4 |
| | 699.4 |
| | 759.4 |
|
Senior notes—$1.3 billion | Level 2 | | 1,289.4 |
| | 1,513.2 |
| | 1,289.4 |
| | 1,524.7 |
|
Senior notes—$400 million | Level 2 | | 398.3 |
| | 458.8 |
| | 398.2 |
| | 464.3 |
|
Senior notes—$500 million | Level 2 | | 495.9 |
| | 527.7 |
| | 495.7 |
| | 528.4 |
|
Revolving loan | Level 2 | | 550.0 |
| | 550.0 |
| | 325.0 |
| | 325.0 |
|
Total long-term debt | | | $ | 3,433.0 |
| | $ | 3,801.1 |
| | $ | 3,960.7 |
| | $ | 4,354.8 |
|
The fair value of the receivables and debt are based on the fair market yield curves for the remainder of the term expected to be outstanding.
The terms of one of our U.S. Iron Ore pellet supply agreements require supplemental payments to be paid by the customer during the period 2009 through 2012, with the option to defer a portion of the 2009 monthly amount up to $22.3 million in exchange for interest payments until the deferred amount is repaid in 2013. Interest is payable by the customer quarterly and began in September 2009 at the higher of 9 percent or the prime rate plus 350 basis points. As of March 31, 2013 and December 31, 2012, the receivable of $16.7 million and $22.3 million, respectively, classified as current and was recorded in Other current assets in the Statements of Unaudited Condensed Consolidated Financial Position as all supplemental payments to be paid by the customer are due by the end of 2013. The fair value of the receivable of $16.1 million and $21.3 million at March 31, 2013 and December 31, 2012, respectively, is based on a discount rate of 2.14 percent and 2.81 percent, respectively, which represents the estimated credit-adjusted risk-free interest rate for the period the receivable is outstanding.
In 2002, we entered into an agreement with Ispat that restructured the ownership of the Empire mine and increased our ownership from 46.7 percent to 79.0 percent in exchange for the assumption of all mine liabilities. Under the terms of the agreement, we indemnified Ispat from obligations of Empire in exchange for certain future payments to Empire and to us by Ispat of $120.0 million, recorded at a present value of $17.4 million and $19.3 million at March 31, 2013 and December 31, 2012, respectively, of which $10.0 million was recorded in Other current assets for each respective period. The fair value of the receivable of $19.1 million and $21.3 million at March 31, 2013 and December 31, 2012, respectively, is based on a discount rate of 2.24 percent and 2.85 percent, respectively, which represents the estimated credit-adjusted risk-free interest rate for the period the receivable is outstanding.
The fair value of long-term debt was determined using quoted market prices or discounted cash flows based upon current borrowing rates. The term loan and revolving loan are variable rate interest and approximate fair value. See NOTE 9 - DEBT AND CREDIT FACILITIES for further information.
Items Measured at Fair Value on a Non-Recurring Basis
The following table presents information about the impairment charges on both financial and nonfinancial assets that were measured on a fair value basis for the year ended December 31, 2012. The table also indicates the fair value hierarchy of the valuation techniques used to determine such fair value. We had no financial assets and liabilities measured at fair value on a non-recurring basis at March 31, 2013.
|
| | | | | | | | | | | | | | | |
| (In Millions) |
| December 31, 2012 |
Description | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | | | | | | |
Investment in ventures impairment - Amapá | $ | — |
| | $ | — |
| | $ | 72.5 |
| | $ | 72.5 |
|
Financial Assets
On December 27, 2012, the board of directors approved the sale of our 30 percent investment in Amapá, which is recorded as an equity method investment in the Statements of Unaudited Condensed Consolidated Operations. The carrying value of the investment was reduced to fair value of $72.5 million as of December 31, 2012, resulting in an impairment charge of $365.4 million, which was recorded in the fourth quarter of 2012. We believe the sum of the sale proceeds approximates fair value. The fair value of the proceeds (and therefore the portion of the equity method investment measured at fair value) was determined using a probability-weighted cash flow approach.
NOTE 9 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt as of March 31, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | |
($ in Millions) | |
March 31, 2013 | |
Debt Instrument | Type | | Annual Effective Interest Rate | | Final Maturity | | Total Face Amount | | Total Debt | |
$700 Million 4.875% 2021 Senior Notes | Fixed | | 4.89% | | 2021 | | $ | 700.0 |
| | $ | 699.4 |
| (2) |
$1.3 Billion Senior Notes: | | | | | | | | | | |
$500 Million 4.80% 2020 Senior Notes | Fixed | | 4.83% | | 2020 | | 500.0 |
| | 499.2 |
| (3) |
$800 Million 6.25% 2040 Senior Notes | Fixed | | 6.34% | | 2040 | | 800.0 |
| | 790.2 |
| (4) |
$400 Million 5.90% 2020 Senior Notes | Fixed | | 5.98% | | 2020 | | 400.0 |
| | 398.3 |
| (5) |
$500 Million 3.95% 2018 Senior Notes | Fixed | | 4.14% | | 2018 | | 500.0 |
| | 495.9 |
| (6) |
$1.75 Billion Credit Facility: | | | | | | | | | | |
Revolving Loan | Variable | | 2.65% | | 2017 | | 1,750.0 |
| | 550.0 |
| (7) |
Total debt | | | | | | | $ | 4,650.0 |
| | $ | 3,433.0 |
| |
Less current portion | | | | | | | | | — |
| |
Long-term debt | | | | | | | | | $ | 3,433.0 |
| |
|
| | | | | | | | | | | | | | |
($ in Millions) | |
December 31, 2012 | |
Debt Instrument | Type | | Annual Effective Interest Rate | | Final Maturity | | Total Face Amount | | Total Debt | |
$1.25 Billion Term Loan | Variable | | 1.83% | | 2016 | | $ | 847.1 |
| (1) | $ | 847.1 |
| (1) |
$700 Million 4.875% 2021 Senior Notes | Fixed | | 4.88% | | 2021 | | 700.0 |
| | 699.4 |
| (2) |
$1.3 Billion Senior Notes: | | | | | | | | | | |
$500 Million 4.80% 2020 Senior Notes | Fixed | | 4.80% | | 2020 | | 500.0 |
| | 499.2 |
| (3) |
$800 Million 6.25% 2040 Senior Notes | Fixed | | 6.25% | | 2040 | | 800.0 |
| | 790.2 |
| (4) |
$400 Million 5.90% 2020 Senior Notes | Fixed | | 5.90% | | 2020 | | 400.0 |
| < |