CLF-2013.6.30 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 June 30, 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 $0.125 per share, was 153,125,504 as of July 22, 2013.
TABLE OF CONTENTS |
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| | | Page Number |
| | | | | |
DEFINITIONS | | | |
| | | |
PART I - FINANCIAL INFORMATION | | | |
| Item 1. | Financial Statements | | | |
| | Statements of Unaudited Condensed Consolidated Operations Three and Six Months Ended June 30, 2013 and 2012 | | | |
| | Statements of Unaudited Condensed Consolidated Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012 | | | |
| | Statements of Unaudited Condensed Consolidated Financial Position as of June 30, 2013 and December 31, 2012 | | | |
| | Statements of Unaudited Condensed Consolidated Cash Flows for the Six Months Ended June 30, 2013 and 2012 | | | |
| | Notes to Unaudited Condensed Consolidated Financial Statements | | | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | | | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | | | |
| Item 4. | Controls and Procedures | | | |
| | | |
PART II - OTHER INFORMATION | | | |
| Item 1A. | Risk Factors | | | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | | | |
| Item 4. | Mine Safety Disclosures | | | |
| Item 6. | Exhibits | | | |
| | | | | |
Signatures | | | |
| | | |
DEFINITIONS
The following abbreviations or acronyms are used in the text. References in this report to the “Company,” “we,” “us,” “our” and “Cliffs” are to Cliffs Natural Resources Inc. and subsidiaries, collectively. References to “A$” or “AUD” refer to Australian currency, “C$” to Canadian currency and “$” to United States currency.
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| | |
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
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| |
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 June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
REVENUES FROM PRODUCT SALES AND SERVICES | | | | | | | |
Product | $ | 1,391.6 |
| | $ | 1,500.0 |
| | $ | 2,474.2 |
| | $ | 2,648.5 |
|
Freight and venture partners' cost reimbursements | 96.9 |
| | 79.4 |
| | 154.8 |
| | 143.2 |
|
| 1,488.5 |
| | 1,579.4 |
| | 2,629.0 |
| | 2,791.7 |
|
COST OF GOODS SOLD AND OPERATING EXPENSES | (1,220.3 | ) | | (1,136.0 | ) | | (2,122.9 | ) | | (2,056.5 | ) |
SALES MARGIN | 268.2 |
| | 443.4 |
| | 506.1 |
| | 735.2 |
|
OTHER OPERATING INCOME (EXPENSE) | | | | | | | |
Selling, general and administrative expenses | (48.9 | ) | | (80.8 | ) | | (97.3 | ) | | (140.4 | ) |
Exploration costs | (12.6 | ) | | (29.1 | ) | | (35.3 | ) | | (47.9 | ) |
Miscellaneous - net | 55.3 |
| | 28.4 |
| | 56.8 |
| | 38.0 |
|
| (6.2 | ) | | (81.5 | ) | | (75.8 | ) | | (150.3 | ) |
OPERATING INCOME | 262.0 |
| | 361.9 |
| | 430.3 |
| | 584.9 |
|
OTHER INCOME (EXPENSE) | | | | | | | |
Interest expense, net | (40.7 | ) | | (45.3 | ) | | (89.8 | ) | | (90.4 | ) |
Other non-operating expense | (2.8 | ) | | (2.2 | ) | | (1.7 | ) | | (0.4 | ) |
| (43.5 | ) | | (47.5 | ) | | (91.5 | ) | | (90.8 | ) |
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY LOSS FROM VENTURES | 218.5 |
| | 314.4 |
| | 338.8 |
| | 494.1 |
|
INCOME TAX BENEFIT (EXPENSE) | (9.3 | ) | | (41.9 | ) | | (3.3 | ) | | 171.2 |
|
EQUITY LOSS FROM VENTURES, net of tax | (67.9 | ) | | (0.5 | ) | | (73.4 | ) | | (7.4 | ) |
INCOME FROM CONTINUING OPERATIONS | 141.3 |
| | 272.0 |
| | 262.1 |
| | 657.9 |
|
INCOME FROM DISCONTINUED OPERATIONS, net of tax | — |
| | 2.3 |
| | — |
| | 7.8 |
|
NET INCOME | 141.3 |
| | 274.3 |
| | 262.1 |
| | 665.7 |
|
LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST | 4.7 |
| | (16.3 | ) | | (9.1 | ) | | (31.9 | ) |
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | 146.0 |
| | $ | 258.0 |
| | $ | 253.0 |
| | $ | 633.8 |
|
PREFERRED STOCK DIVIDENDS | (12.9 | ) | | — |
| | (22.8 | ) | | — |
|
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | 133.1 |
| | $ | 258.0 |
| | $ | 230.2 |
| | $ | 633.8 |
|
| | | | | | | |
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC | | | | | | | |
Continuing operations | $ | 0.87 |
| | $ | 1.79 |
| | $ | 1.53 |
| | $ | 4.40 |
|
Discontinued operations | — |
| | 0.02 |
| | — |
| | 0.05 |
|
| $ | 0.87 |
| | $ | 1.81 |
| | $ | 1.53 |
| | $ | 4.45 |
|
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED | | | | | | | |
Continuing operations | $ | 0.82 |
| | $ | 1.79 |
| | $ | 1.49 |
| | $ | 4.39 |
|
Discontinued operations | — |
| | 0.02 |
| | — |
| | 0.05 |
|
| $ | 0.82 |
| | $ | 1.81 |
| | $ | 1.49 |
| | $ | 4.44 |
|
AVERAGE NUMBER OF SHARES (IN THOUSANDS) | | | | | | | |
Basic | 153,011 |
| | 142,380 |
| | 150,418 |
| | 142,303 |
|
Diluted | 178,428 |
| | 142,814 |
| | 169,708 |
| | 142,762 |
|
CASH DIVIDENDS DECLARED PER DEPOSITARY SHARE | $ | 0.44 |
| | $ | — |
| | $ | 0.78 |
| | $ | — |
|
CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.15 |
| | $ | 0.63 |
| | $ | 0.30 |
| | $ | 0.91 |
|
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 June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | 146.0 |
| | $ | 258.0 |
| | $ | 253.0 |
| | $ | 633.8 |
|
OTHER COMPREHENSIVE INCOME (LOSS) | | | | | | | |
Pension and OPEB liability, net of tax | 7.7 |
| | 7.1 |
| | 14.2 |
| | 13.3 |
|
Unrealized net gain (loss) on marketable securities, net of tax | 0.6 |
| | (2.8 | ) | | 3.2 |
| | (0.5 | ) |
Unrealized net loss on foreign currency translation | (151.0 | ) | | (17.4 | ) | | (147.7 | ) | | (6.5 | ) |
Unrealized net loss on derivative financial instruments, net of tax | (44.4 | ) | | (4.4 | ) | | (51.4 | ) | | (0.6 | ) |
OTHER COMPREHENSIVE INCOME (LOSS) | (187.1 | ) | | (17.5 | ) | | (181.7 | ) | | 5.7 |
|
OTHER COMPREHENSIVE INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST | (1.1 | ) | | (1.5 | ) | | (2.3 | ) | | (3.0 | ) |
TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS | $ | (42.2 | ) | | $ | 239.0 |
| | $ | 69.0 |
| | $ | 636.5 |
|
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
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| | | | | | | |
| (In Millions) |
| June 30, 2013 | | December 31, 2012 |
ASSETS | | | |
CURRENT ASSETS | | | |
Cash and cash equivalents | $ | 263.3 |
| | $ | 195.2 |
|
Accounts receivable, net | 259.1 |
| | 329.0 |
|
Inventories | 529.2 |
| | 436.5 |
|
Supplies and other inventories | 252.9 |
| | 289.1 |
|
Derivative assets | 45.1 |
| | 78.6 |
|
Other current assets | 316.3 |
| | 321.6 |
|
TOTAL CURRENT ASSETS | 1,665.9 |
| | 1,650.0 |
|
PROPERTY, PLANT AND EQUIPMENT, NET | 11,189.6 |
| | 11,207.3 |
|
OTHER ASSETS | | | |
Investments in ventures | 68.7 |
| | 135.8 |
|
Goodwill | 157.2 |
| | 167.4 |
|
Intangible assets, net | 115.0 |
| | 129.0 |
|
Deferred income taxes | 202.8 |
| | 91.8 |
|
Other non-current assets | 195.7 |
| | 193.6 |
|
TOTAL OTHER ASSETS | 739.4 |
| | 717.6 |
|
TOTAL ASSETS | $ | 13,594.9 |
| | $ | 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) |
| June 30, 2013 | | December 31, 2012 |
LIABILITIES | | | |
CURRENT LIABILITIES | | | |
Accounts payable | $ | 306.6 |
| | $ | 555.5 |
|
Accrued expenses | 425.4 |
| | 442.6 |
|
Income taxes payable | 107.1 |
| | 28.3 |
|
Current portion of debt | — |
| | 94.1 |
|
Deferred revenue | 20.8 |
| | 35.9 |
|
Derivative liabilities | 88.6 |
| | 13.2 |
|
Other current liabilities | 206.1 |
| | 211.9 |
|
TOTAL CURRENT LIABILITIES | 1,154.6 |
| | 1,381.5 |
|
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES | 586.9 |
| | 618.3 |
|
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS | 235.8 |
| | 252.8 |
|
DEFERRED INCOME TAXES | 1,098.2 |
| | 1,108.1 |
|
LONG-TERM DEBT | 3,323.3 |
| | 3,960.7 |
|
OTHER LIABILITIES | 412.3 |
| | 492.6 |
|
TOTAL LIABILITIES | 6,811.1 |
| | 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 - 153,121,032 shares (2012 - 142,495,902 shares) | 19.8 |
| | 18.5 |
|
Capital in excess of par value of shares | 2,024.3 |
| | 1,774.7 |
|
Retained earnings | 3,401.9 |
| | 3,217.7 |
|
Cost of 6,424,437 common shares in treasury (2012 - 6,699,567 shares) | (306.5 | ) | | (322.6 | ) |
Accumulated other comprehensive loss | (239.6 | ) | | (55.6 | ) |
TOTAL CLIFFS SHAREHOLDERS' EQUITY | 5,631.2 |
| | 4,632.7 |
|
NONCONTROLLING INTEREST | 1,152.6 |
| | 1,128.2 |
|
TOTAL EQUITY | 6,783.8 |
| | 5,760.9 |
|
TOTAL LIABILITIES AND EQUITY | $ | 13,594.9 |
| | $ | 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) |
| Six Months Ended June 30, |
| 2013 | | 2012 |
OPERATING ACTIVITIES | | | |
Net income | $ | 262.1 |
| | $ | 665.7 |
|
Adjustments to reconcile net income to net cash provided (used) by operating activities: | | | |
Depreciation, depletion and amortization | 284.9 |
| | 249.4 |
|
Derivatives and currency hedges | 40.2 |
| | 9.0 |
|
Equity loss in ventures (net of tax) | 73.4 |
| | 7.4 |
|
Deferred income taxes | (121.5 | ) | | (259.2 | ) |
Changes in deferred revenue and below-market sales contracts | (31.7 | ) | | (23.2 | ) |
Other | (29.6 | ) | | (40.7 | ) |
Changes in operating assets and liabilities: | | | |
Receivables and other assets | 87.2 |
| | (86.4 | ) |
Product inventories | (105.8 | ) | | (265.9 | ) |
Payables and accrued expenses | (70.3 | ) | | (288.9 | ) |
Net cash provided (used) by operating activities | 388.9 |
| | (32.8 | ) |
INVESTING ACTIVITIES | | | |
Purchase of property, plant and equipment | (501.2 | ) | | (517.0 | ) |
Other investing activities | 0.9 |
| | (3.9 | ) |
Net cash used by investing activities | (500.3 | ) | | (520.9 | ) |
FINANCING ACTIVITIES | | | |
Net proceeds from issuance of Series A, Mandatory Convertible Preferred Stock, Class A | 709.4 |
| | — |
|
Net proceeds from issuance of common shares | 285.3 |
| | — |
|
Repayment of term loan | (847.1 | ) | | (25.0 | ) |
Borrowings under credit facilities | 437.0 |
| | 550.0 |
|
Repayment under credit facilities | (322.0 | ) | | (225.0 | ) |
Contributions by joint ventures, net | 13.0 |
| | 31.5 |
|
Common stock dividends | (46.0 | ) | | (128.8 | ) |
Preferred stock dividends | (10.0 | ) | | — |
|
Other financing activities | (26.3 | ) | | (11.1 | ) |
Net cash provided by financing activities | 193.3 |
| | 191.6 |
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH | (13.8 | ) | | (0.3 | ) |
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 68.1 |
| | (362.4 | ) |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 195.2 |
| | 521.6 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 263.3 |
| | $ | 159.2 |
|
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 and six months ended June 30, 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:
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| | | | | | |
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 June 30, 2013 and December 31, 2012. Parentheses indicate a net liability.
|
| | | | | | | | | | | | | | |
| | | | | | | | (In Millions) |
Investment | | Classification | | Accounting Method | | Interest Percentage | | June 30, 2013 | | December 31, 2012 |
Amapá | | Investments in ventures | | Equity Method | | 30 | | $ | 29.4 |
| | $ | 101.9 |
|
Cockatoo | | Other liabilities2 | | Equity Method | | — | | N/A |
| | (25.3 | ) |
Hibbing | | Investments in ventures1 | | Equity Method | | 23 | | 6.4 |
| | (2.1 | ) |
Other | | Investments in ventures | | Equity Method | | Various | | 32.9 |
| | 33.9 |
|
| | | | | | | | $ | 68.7 |
| | $ | 108.4 |
|
1 At December 31, 2012 the classification for Hibbing was Other liabilities.
2 At December 31, 2012 our ownership interest percentage for Cockatoo was 50 percent.
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 closing date until the port situation is clarified.
In light of the March 28, 2013 collapse of the Santana port shiploader and subsequent discussions with Anglo American plc, we have evaluated the carrying value of our investment in Amapá as of June 30, 2013 and do not expect to recover the amounts previously recorded in our financial statements, resulting in an impairment charge of $67.6 million in the second quarter of 2013.
Cockatoo Island
On July 31, 2012, we entered into a definitive asset sale agreement 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, 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. The rehabilitation obligations and assumed liabilities that are inherently attached to the tenements were transferred to Pluton Resources upon registration by the Department of Mining and Petroleum denoting Pluton Resources as the tenement holder. Final settlement of the sale was completed during the second quarter of 2013. We transferred approximately $18.6 million relating to the estimated cost of the rehabilitation, upon final settlement of the sale.
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 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 was applied 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 five 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. 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 and six months ended June 30, 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 June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Revenues from product sales and services: | | | | | | | | | | | | | | | |
U.S. Iron Ore | $ | 701.7 |
| | 47 | % | | $ | 705.0 |
| | 45 | % | | $ | 1,111.8 |
| | 42 | % | | $ | 1,146.7 |
| | 41 | % |
Eastern Canadian Iron Ore | 213.9 |
| | 14 | % | | 303.9 |
| | 19 | % | | 459.2 |
| | 17 | % | | 524.6 |
| | 19 | % |
Asia Pacific Iron Ore | 327.0 |
| | 22 | % | | 361.3 |
| | 23 | % | | 597.8 |
| | 23 | % | | 721.1 |
| | 26 | % |
North American Coal | 245.9 |
| | 17 | % | | 209.2 |
| | 13 | % | | 460.2 |
| | 18 | % | | 399.2 |
| | 14 | % |
Other | — |
| | — | % | | — |
| | — | % | | — |
| | — | % | | 0.1 |
| | — | % |
Total revenues from product sales and services | $ | 1,488.5 |
| | 100 | % | | $ | 1,579.4 |
| | 100 | % | | $ | 2,629.0 |
| | 100 | % | | $ | 2,791.7 |
| | 100 | % |
| | | | | | | | | | | | | | | |
Sales margin: | | | | | | | | | | | | | | | |
U.S. Iron Ore | $ | 216.3 |
| | | | $ | 286.1 |
| | | | $ | 373.6 |
| | | | $ | 452.9 |
| | |
Eastern Canadian Iron Ore | (49.7 | ) | | | | 11.7 |
| | | | (30.3 | ) | | | | (2.6 | ) | | |
Asia Pacific Iron Ore | 95.0 |
| | | | 146.8 |
| | | | 156.3 |
| | | | 271.9 |
| | |
North American Coal | 6.6 |
| | | | (9.6 | ) | | | | 8.4 |
| | | | 5.0 |
| | |
Other | — |
| | | | 8.4 |
| | | | (1.9 | ) | | | | 8.0 |
| | |
Sales margin | 268.2 |
| | | | 443.4 |
| | | | 506.1 |
| | | | 735.2 |
| | |
Other operating expense | (6.2 | ) | | | | (81.5 | ) | | | | (75.8 | ) | | | | (150.3 | ) | | |
Other income (expense) | (43.5 | ) | | | | (47.5 | ) | | | | (91.5 | ) | | | | (90.8 | ) | | |
Income from continuing operations before income taxes and equity loss from ventures | $ | 218.5 |
| | | | $ | 314.4 |
| | | | $ | 338.8 |
| | | | $ | 494.1 |
| | |
| | | | | | | | | | | | | | | |
Depreciation, depletion and amortization: | | | | | | | | | | | | | | | |
U.S. Iron Ore | $ | 28.4 |
| | | | $ | 23.8 |
| | | | $ | 55.0 |
| | | | $ | 47.0 |
| | |
Eastern Canadian Iron Ore | 42.4 |
| | | | 38.6 |
| | | | 83.5 |
| | | | 76.5 |
| | |
Asia Pacific Iron Ore | 41.7 |
| | | | 39.8 |
| | | | 78.1 |
| | | | 69.8 |
| | |
North American Coal | 28.4 |
| | | | 24.3 |
| | | | 60.9 |
| | | | 44.4 |
| | |
Other | 3.4 |
| | | | 5.6 |
| | | | 7.4 |
| | | | 11.7 |
| | |
Total depreciation, depletion and amortization | $ | 144.3 |
| | | | $ | 132.1 |
| | | | $ | 284.9 |
| | | | $ | 249.4 |
| | |
| | | | | | | | | | | | | | | |
Capital additions (1): | | | | | | | | | | | | | | | |
U.S. Iron Ore | $ | 12.2 |
| | | | $ | 28.1 |
| | | | $ | 23.9 |
| | | | $ | 62.9 |
| | |
Eastern Canadian Iron Ore | 186.8 |
| | | | 177.3 |
| | | | 353.8 |
| | | | 307.9 |
| | |
Asia Pacific Iron Ore | 2.3 |
| | | | 16.9 |
| | | | 6.6 |
| | | | 126.2 |
| | |
North American Coal | 15.7 |
| | | | 32.7 |
| | | | 26.8 |
| | | | 71.8 |
| | |
Other | 1.1 |
| | | | 11.1 |
| | | | 2.7 |
| | | | 50.7 |
| | |
Total capital additions | $ | 218.1 |
| | | | $ | 266.1 |
| | | | $ | 413.8 |
| | | | $ | 619.5 |
| | |
(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) |
| June 30, 2013 | | December 31, 2012 |
Assets: | | | |
U.S. Iron Ore | $ | 1,791.6 |
| | $ | 1,735.1 |
|
Eastern Canadian Iron Ore | 7,860.8 |
| | 7,605.1 |
|
Asia Pacific Iron Ore | 1,261.6 |
| | 1,506.3 |
|
North American Coal | 1,867.7 |
| | 1,877.8 |
|
Other | 643.9 |
| | 570.9 |
|
Total segment assets | 13,425.6 |
| | 13,295.2 |
|
Corporate | 169.3 |
| | 279.7 |
|
Total assets | $ | 13,594.9 |
| | $ | 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 June 30, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| Derivative Assets | | Derivative Liabilities |
| June 30, 2013 | | December 31, 2012 | | June 30, 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 | | $ | 16.2 |
| | Derivative liabilities | | $ | 56.6 |
| | Derivative liabilities | | $ | 1.9 |
|
Total derivatives designated as hedging instruments under ASC 815 | | | $ | — |
| | | | $ | 16.2 |
| | | | $ | 56.6 |
| | | | $ | 1.9 |
|
Derivatives not designated as hedging instruments under ASC 815: | | | | | | | | | | | | | | | |
Customer Supply Agreements | Derivative assets | | $ | 44.2 |
| | Derivative assets | | $ | 58.9 |
| | | | $ | — |
| | | | $ | — |
|
Provisional Pricing Arrangements | Derivative assets | | 0.9 |
| | Derivative assets | | 3.5 |
| | Derivative liabilities | | 32.0 |
| | Derivative liabilities | | 11.3 |
|
Total derivatives not designated as hedging instruments under ASC 815 | | | $ | 45.1 |
| | | | $ | 62.4 |
| | | | $ | 32.0 |
| | | | $ | 11.3 |
|
Total derivatives | | | $ | 45.1 |
| | | | $ | 78.6 |
| | | | $ | 88.6 |
| | | | $ | 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 June 30, 2013, we had outstanding Australian and Canadian foreign currency exchange contracts with notional amounts of $358.0 million and $611.7 million, respectively, in the form of forward contracts with varying maturity dates ranging from July 2013 to June 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 June 30, 2013 and 2012, there were 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 losses of $24.7 million and $15.6 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 and six months ended June 30, 2013 and 2012:
|
| | | | | | | | | | | | | | | | | |
| (In Millions) |
Derivatives in Cash Flow | Amount of Gain (Loss) Recognized in OCI on Derivative | | Location of Gain (Loss) Reclassified from Accumulated OCI into Earnings | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Earnings |
Hedging Relationships | (Effective Portion) | | (Effective Portion) | | (Effective Portion) |
| Three Months Ended June 30, | | | | Three Months Ended June 30, |
| 2013 | | 2012 | | | | 2013 | | 2012 |
Australian Dollar Foreign Exchange Contracts (hedge designation) | $ | (31.3 | ) | | $ | 2.1 |
| | Product revenues | | $ | 2.6 |
| | $ | (0.4 | ) |
Canadian Dollar Foreign Exchange Contracts (hedge designation) | (10.9 | ) | | (5.9 | ) | | Cost of goods sold and operating expenses | | (0.4 | ) | | (0.2 | ) |
Total | $ | (42.2 | ) | | $ | (3.8 | ) | | | | $ | 2.2 |
| | $ | (0.6 | ) |
| | | | | | | | | |
| Six Months Ended June 30, | | | | Six Months Ended June 30, |
| 2013 | | 2012 | | | | 2013 | | 2012 |
Australian Dollar Foreign Exchange Contracts (hedge designation) | $ | (28.1 | ) | | $ | 5.1 |
| | Product revenues | | $ | 4.4 |
| | $ | 2.7 |
|
Canadian Dollar Foreign Exchange Contracts (hedge designation) | (19.1 | ) | | (5.2 | ) | | Cost of goods sold and operating expenses | | (0.2 | ) | | 0.3 |
|
| $ | (47.2 | ) | | $ | (0.1 | ) | | | | $ | 4.2 |
| | $ | 3.0 |
|
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 $35.4 million and $59.5 million as Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and six months ended June 30, 2013, respectively, related to the supplemental payments. This compares with Product revenues of $42.6 million and $82.0 million for the comparable respective periods in 2012. Derivative assets, representing the fair value of the pricing factors, were $44.2 million and $58.9 million in the June 30, 2013 and December 31, 2012 Statements of Unaudited Condensed Consolidated Financial Position, respectively.
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 revenue rate 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 revenue rate is characterized as a freestanding derivative and is required to be accounted for separately once the provisional 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 revenue rate is determined. We have recorded $0.9 million and $3.5 million, respectively, as Derivative assets and $32.0 million and $11.3 million, respectively, as Derivative liabilities in the Statements of Unaudited Condensed Consolidated Financial Position at June 30, 2013 and December 31, 2012, respectively, related to our estimate of final revenue rate with our U.S. Iron Ore, Eastern Canadian Iron Ore and Asia Pacific Iron Ore customers at June 30, 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 revenue rate based on the price calculations established in the supply agreements. As a result, we recognized a net $28.2 million and a net $31.1 million as a decrease in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and six months ended June 30, 2013, respectively, related to these arrangements. This compares with a net $5.2 million decrease and a net $2.2 million decrease in Product revenues for the comparable respective periods in 2012.
In instances when we were still working to revise components of the pricing calculations referenced within our supply agreements to incorporate new market inputs to the pricing mechanisms, we recorded certain shipments made to customers based on an agreed-upon provisional price. The shipments were recorded based on the provisional price until settlement of the market inputs to the pricing mechanisms were finalized. The lack of agreed-upon market inputs resulted in these provisional prices being characterized as derivatives. The derivative instrument, which will be settled and billed or credited once the determinations of the market inputs to the pricing mechanisms are finalized, was adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates determined by management. During the third quarter of 2012, we reached final pricing settlements on the customer supply agreements in which components of the pricing calculations still were being revised. As such, at June 30, 2013, no shipments were recorded based upon this type of provisional pricing. For the three and six months ended June 30, 2012, we recognized $96.1 million as an increase in Product revenues in the Statements of Unaudited Condensed Consolidated Operations under the pricing provisions for certain shipments to one U.S. Iron Ore customer as we were still in the process of revising the terms of the related customer supply agreement.
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 and six months ended June 30, 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 June 30, | | Six Months Ended June 30, |
| | 2013 | | 2012 | | 2013 | | 2012 |
Foreign Exchange Contracts | Other income (expense) | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.3 |
|
Customer Supply Agreements | Product revenues | 35.4 |
| | 42.6 |
| | 59.5 |
| | 82.0 |
|
Provisional Pricing Arrangements | Product revenues | (28.2 | ) | | 98.3 |
| | (31.1 | ) | | 98.3 |
|
Total | | $ | 7.2 |
| | $ | 140.9 |
| | $ | 28.4 |
| | $ | 180.6 |
|
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 June 30, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| June 30, 2013 | | December 31, 2012 |
Segment | Finished Goods | | Work-in Process | | Total Inventory | | Finished Goods | | Work-in Process | | Total Inventory |
U.S. Iron Ore | $ | 242.1 |
| | $ | 22.2 |
| | $ | 264.3 |
| | $ | 147.2 |
| | $ | 22.9 |
| | $ | 170.1 |
|
Eastern Canadian Iron Ore | 94.0 |
| | 36.5 |
| | 130.5 |
| | 62.6 |
| | 44.2 |
| | 106.8 |
|
Asia Pacific Iron Ore | 51.6 |
| | 28.4 |
| | 80.0 |
| | 36.7 |
| | 37.2 |
| | 73.9 |
|
North American Coal | 40.2 |
| | 14.2 |
| | 54.4 |
| | 36.7 |
| | 49.0 |
| | 85.7 |
|
Total | $ | 427.9 |
| | $ | 101.3 |
| | $ | 529.2 |
| | $ | 283.2 |
| | $ | 153.3 |
| | $ | 436.5 |
|
We recorded lower-of-cost-or-market inventory charges of $0.7 million and $2.7 million in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations for the three and six months ended June 30, 2013, respectively, for our North American Coal operations. These charges were a result of market declines and costs associated with operational and geological issues. For the three and six months ended June 30, 2012, we recorded lower-of-cost-or-market inventory charges of $8.6 million and $9.9 million, respectively, for our North American Coal operations due to softening in the market prices for coal.
We recorded a lower-of-cost-or-market inventory charge during the second quarter of 2013 of $11.1 million relating to Wabush pellets that are contractually committed tons. We additionally recorded a lower-of-cost-or-market inventory charge during the second quarter of 2013 of $4.7 million relating to the Wabush sinter feed caused by higher costs as a result of the transition of product being produced and the forest fire that temporarily idled the mine in June. An unsaleable inventory impairment charge was recorded in the second quarter of 2013 relating to Wabush pellets of $10.6 million as a result of our idling of the Wabush pellet plant during the second quarter of 2013. All of these charges recorded during the second quarter were recorded in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations for the three and six months ended June 30, 2013 for our Eastern Canadian Iron Ore operations.
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 June 30, 2013 and December 31, 2012:
|
| | | | | | | |
| (In Millions) |
| June 30, 2013 | | December 31, 2012 |
Land rights and mineral rights | $ | 7,807.6 |
| | $ | 7,920.8 |
|
Office and information technology | 118.8 |
| | 92.4 |
|
Buildings | 184.9 |
| | 162.0 |
|
Mining equipment | 1,401.3 |
| | 1,290.7 |
|
Processing equipment | 2,069.5 |
| | 1,937.4 |
|
Railroad equipment | 218.9 |
| | 240.8 |
|
Electric power facilities | 62.1 |
| | 58.7 |
|
Port facilities | 100.7 |
| | 114.3 |
|
Interest capitalized during construction | 23.1 |
| | 20.8 |
|
Land improvements | 60.0 |
| | 43.9 |
|
Other | 37.5 |
| | 39.0 |
|
Construction in progress | 1,131.6 |
| | 1,123.9 |
|
| 13,216.0 |
| | 13,044.7 |
|
Allowance for depreciation and depletion | (2,026.4 | ) | | (1,837.4 | ) |
| $ | 11,189.6 |
| | $ | 11,207.3 |
|
We recorded depreciation and depletion expense of $138.9 million and $274.9 million in the Statements of Unaudited Condensed Consolidated Operations for the three and six months ended June 30, 2013, respectively. This compares with depreciation and depletion expense of $125.8 million and $237.2 million for the three and six months ended June 30, 2012, respectively.
The accumulated amount of capitalized interest included within construction in progress at June 30, 2013 is $28.6 million, of which $13.8 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 June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
REVENUES FROM PRODUCT SALES AND SERVICES | | | | | | | |
Product | $ | — |
| | $ | 46.6 |
| | $ | — |
| | $ | 99.0 |
|
| | | | | | | |
INCOME FROM DISCONTINUED OPERATIONS, net of tax | $ | — |
| | $ | 2.3 |
| | $ | — |
| | $ | 7.8 |
|
We recorded income from discontinued operations of $2.3 million, net of $1.0 million in tax expense, and income from discontinued operations of $7.8 million, net of $3.3 million in tax expense in Income from Discontinued Operations, net of tax in the Statements of Unaudited Condensed Consolidated Operations for the three and six months ended June 30, 2012, respectively, related to our previously owned interest in the Sonoma operations.
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 six months ended June 30, 2013 and the year ended December 31, 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) |
| June 30, 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 | — |
| | — |
| | (10.2 | ) | | — |
| | — |
| | (10.2 | ) | | — |
| | — |
| | 1.5 |
| | — |
| | — |
| | 1.5 |
|
Ending Balance | $ | 2.0 |
| | $ | — |
| | $ | 74.3 |
| | $ | — |
| | $ | 80.9 |
| | $ | 157.2 |
| | $ | 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 June 30, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In Millions) |
| | | June 30, 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 | | $ | 129.3 |
| | $ | (33.3 | ) | | $ | 96.0 |
| | $ | 136.1 |
| | $ | (31.7 | ) | | $ | 104.4 |
|
Utility contracts | Intangible assets, net | | 54.7 |
| | (38.0 | ) | | 16.7 |
| | 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 | | | $ | 189.7 |
| | $ | (74.7 | ) | | $ | 115.0 |
| | $ | 196.5 |
| | $ | (67.5 | ) | | $ | 129.0 |
|
Below-market sales contracts | Other current liabilities | | $ | (46.0 | ) | | $ | 7.6 |
| | $ | (38.4 | ) | | $ | (46.0 | ) | | $ | — |
| | $ | (46.0 | ) |
Below-market sales contracts | Other liabilities | | (250.7 | ) | | 190.6 |
| | (60.1 | ) | | (250.7 | ) | | 181.6 |
| | (69.1 | ) |
Total below-market sales contracts | | | $ | (296.7 | ) | | $ | 198.2 |
| | $ | (98.5 | ) | | $ | (296.7 | ) | | $ | 181.6 |
| | $ | (115.1 | ) |
Amortization expense relating to intangible assets was $5.3 million and $10.0 million for the three and six months ended June 30, 2013, respectively, and is recognized in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations. Amortization expense relating to intangible assets was $4.5 million and $9.3 million for the comparable respective periods in 2012. 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 six months) | $ | 11.0 |
|
2014 | 19.3 |
|
2015 | 8.5 |
|
2016 | 8.4 |
|
2017 | 8.4 |
|
2018 | 7.8 |
|
Total | $ | 63.4 |
|
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 and six months ended June 30, 2013 and 2012, we recognized $14.7 million and $16.6 million, respectively, 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 six months) | $ | 29.4 |
|
2014 | 23.1 |
|
2015 | 23.0 |
|
2016 | 23.0 |
|
Total | $ | 98.5 |
|
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following represents the assets and liabilities of the Company measured at fair value at June 30, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | | |
| (In Millions) |
| June 30, 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 | $ | 140.0 |
| | $ | — |
| | $ | — |
| | $ | 140.0 |
|
Derivative assets | — |
| | — |
| | 45.1 |
| | 45.1 |
|
Marketable securities | 23.2 |
| | — |
| | — |
| | 23.2 |
|
Foreign exchange contracts | — |
| | — |
| | — |
| | — |
|
Total | $ | 163.2 |
| | $ | — |
| | $ | 45.1 |
| | $ | 208.3 |
|
Liabilities: |
| |
| |
| |
|
Derivative liabilities | $ | — |
| | $ | — |
| | $ | 32.0 |
| | $ | 32.0 |
|
Foreign exchange contracts | — |
| | 56.6 |
| | — |
| | 56.6 |
|
Total | $ | — |
| | $ | 56.6 |
| | $ | 32.0 |
| | $ | 88.6 |
|
|
| | | | | | | | | | | | | | | |
| (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: |
| |
| |
| |
|
|