Annual report pursuant to Section 13 and 15(d)

STOCK COMPENSATION PLANS

v2.4.1.9
STOCK COMPENSATION PLANS
 12 Months Ended
Dec. 31, 2014
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
STOCK COMPENSATION PLANS
NOTE 8 - STOCK COMPENSATION PLANS
At December 31, 2014, we have two share-based compensation plans, which are described below. The compensation cost that has been charged against income for those plans was $23.7 million, $21.1 million and $20.6 million in 2014, 2013 and 2012, respectively, which primarily was recorded in Selling, general and administrative expenses in the Statements of Consolidated Operations. The total income tax benefit recognized in the Statements of Consolidated Operations for share-based compensation arrangements was $8.3 million, $7.4 million and $7.2 million for 2014, 2013 and 2012, respectively.
Employees’ Plans
The 2012 Equity Plan was approved by our Board of Directors on March 13, 2012 and our shareholders approved it on May 8, 2012, effective as of March 13, 2012. The 2012 Equity Plan replaced the ICE Plan. The maximum number of shares that may be issued under the 2012 Equity Plan is 6.0 million common shares. On February 10, 2014, upon recommendation by the Compensation and Organization Committee, Cliffs’ Board of Directors approved and adopted, subject to the approval of Cliffs' shareholders at the 2014 Annual Meeting, the 2012 Amended Equity Plan. The principal reason for amending and restating the 2012 Equity Plan was to increase the number of common shares available for issuance by 5.0 million common shares. This amended plan was approved by Cliffs' shareholders at the 2014 Annual Meeting held on July 29, 2014.
The Compensation and Organization Committee of the Board of Directors approved grants under the 2012 Equity Plan and the 2012 Amended Equity Plan to certain officers and employees for the 2014 to 2016 performance period. Shares granted under the awards during 2014 consisted of 0.8 million performance shares based on TSR, 0.5 million restricted share units, 0.3 million stock options and 0.4 million performance-based restricted stock units, each of which may, or may not, convert into shares based on our shares achieving and maintaining certain milestones above an absolute threshold during the performance period.
At our July 29, 2014 Annual Meeting, the shareholders voted on the election of eleven directors. Thirteen persons were nominated for election to the eleven board positions. On August 6, 2014, the Company received the final report of the inspector of election that confirmed the election of six new directors to our Board of Directors. Such an event constituted a change in control pursuant to our incentive equity plans. As a result of such change in the majority of our directors and pursuant to the terms of the various plans and applicable award agreements, all of the outstanding and unvested equity incentives awarded to participants prior to October 2013 became vested. Accordingly, this resulted in recognizing $11.7 million of additional equity-based compensation expense in the accompanying financial statements, representing the remaining unrecognized compensation expense of the awards. For any equity grants awarded after September 2013, the vesting of all such grants will accelerate and pay out in cash only following a participant's qualifying termination of employment associated with the change in control and if the common shares are not substituted with a replacement award. This potential liability for additional double-trigger payments for share-based compensation in cash will expire entirely in two years.
For the outstanding 2012 Equity Plan and 2012 Amended Equity Plan awards that were issued subsequent to October 2013, each performance share, if earned, entitles the holder to receive common shares or cash within a range between a threshold and maximum number of our common shares, with the actual number of common shares earned dependent upon whether the Company achieves certain objectives and performance goals as established by the Compensation and Organization Committee. The performance share or unit grants vest over a period of three years and are intended to be paid out in common shares or cash in certain circumstances. Performance for the 2014 to 2016 performance periods is measured only on the basis of relative TSR for the period and measured against the constituents of the S&P Metals and Mining ETF Index on the last day of trading of the performance period. The final payouts for the 2014 to 2016 performance period will vary from zero to 200 percent of the original grant. For the outstanding performance-based restricted stock units, the award may be earned and settled based upon certain VWAP performance for the Company’s common shares, (Threshold VWAP, Target VWAP, or Maximum VWAP) for any period of ninety (90) consecutive calendar days during a performance period commencing August 7, 2014 and ending December 31, 2017 (the “Performance Period”). The stock options vest in equal thirds on each of December 31, 2015, December 31, 2016 and December 31, 2017 subject to continued employment through each vesting date, and are exercisable cumulatively at a strike price of $13.83 after each vesting date and expire on November 17, 2021. The restricted share units are subject to continued employment, are retention based, will vest at the end of the respective performance period, and are payable in common shares or cash in certain circumstances at a time determined by the Committee at its discretion.
Following is a summary of our performance share award agreements currently outstanding:
Performance
Share
Plan Year
Performance Shares Granted
 
Estimated Forfeitures
 
Expected to Vest
 
Grant Date
 
Performance Period
2014
400,000

 
40,911

 
359,089

 
November 17, 2014
 
8/7/2014 - 12/31/2017
2014
283,530

 
24,380

 
259,150

 
July 29, 2014
 
1/1/2014 - 12/31/2016
2014
124,630

 
21,098

 
103,532

 
May 12, 2014
 
1/1/2014 - 12/31/2016
2014
385,585

 
120,299

 
265,286

 
February 10, 2014
 
1/1/2014 - 12/31/2016

Nonemployee Directors
At our 2014 annual meeting, the shareholders approved the Directors' Plan which became effective December 1, 2014. The Directors’ Plan authorizes us to issue up to 300,000 common shares from time to time to nonemployee Directors. Under the Share Ownership Guidelines in effect for 2014 ("Guidelines"), a Director is required by the end of five years from date of election to hold common shares with a market value of at least $250,000. The Directors’ Plan offers the nonemployee Director the opportunity to defer all or a portion of the awards granted.
The 2008 Directors’ Plan in effect for most of 2014 provided for an Annual Equity Grant ("Equity Grant") to be awarded at our annual meeting each year to all nonemployee Directors elected or re-elected by the shareholders and a pro-rata amount was awarded to new directors upon their appointment. The value of the Equity Grant was payable in restricted shares with a three-year vesting period from the date of grant. The closing market price of our common shares on October 16, 2014 was divided into the number of common shares remaining available for issuance under the 2008 Directors' Plan to determine the number of restricted shares awarded as the Equity Grant. In 2014, nonemployee Directors each received Equity Grants valued at $85,000 which was bifurcated into two tranches since the 2008 Director's Plan did not have a sufficient number of shares available for issuance. The first tranche of the 2014 Equity Grant was granted under the 2008 Directors' Plan on October 16, 2014 and valued at $42,500. The second tranche was granted under the Directors' Plan on December 2, 2014 and valued at $42,500.
For the last three years, Equity Grant shares have been awarded to elected or re-elected nonemployee Directors as follows:
Year of Grant
 
Unrestricted Equity Grant Shares
 
Restricted Equity Grant Shares
 
Deferred Equity Grant Shares
2012
 
1,498

 
8,988

 
2,996

2013
 
3,985

 
31,506

 
7,970

2014
 
—

 
73,635

 
—


Other Information
The following table summarizes the share-based compensation expense that we recorded for continuing operations in 2014, 2013 and 2012:
 
(In Millions, except  per
share amounts)
 
2014
 
2013
 
2012
Cost of goods sold and operating expenses
$
7.8

 
$
6.3

 
$
4.0

Selling, general and administrative expenses
15.9

 
14.8

 
16.6

Reduction of operating income from continuing operations before income
    taxes and equity income (loss) from ventures
23.7

 
21.1

 
20.6

Income tax benefit
(8.3
)
 
(7.4
)
 
(7.2
)
Reduction of net income attributable to Cliffs shareholders
$
15.4

 
$
13.7

 
$
13.4

Reduction of earnings per share attributable to Cliffs shareholders:

 

 

Basic
$
0.10

 
$
0.09

 
$
0.09

Diluted
$
0.10

 
$
0.08

 
$
0.09


Determination of Fair Value
The fair value of each grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. A correlation matrix of historic and projected stock prices was developed for both the Company and our predetermined peer group of mining and metals companies. The fair value assumes that performance goals will be achieved.
The expected term of the grant represents the time from the grant date to the end of the service period for each of the three plan-year agreements. We estimate the volatility of our common shares and that of the peer group of mining and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds, with a term commensurate with the remaining life of the performance period.
The following assumptions were utilized to estimate the fair value for the 2014 performance share grants:
Grant Date
 
Grant Date Market Price
 
Average Expected Term (Years)
 
Expected Volatility
 
Risk-Free Interest Rate
 
Dividend Yield
 
Fair Value
 
Fair Value (Percent of Grant Date Market Price)
February 10, 2014
 
$
20.58

 
2.89
 
54.0%
 
0.54%
 
2.92%
 
$
22.21

 
107.92%
May 12, 2014
 
$
17.54

 
2.61
 
54.0%
 
0.54%
 
2.92%
 
$
18.93

 
107.92%
July 29, 2014
 
$
17.62

 
2.42
 
51.3%
 
0.83%
 
3.40%
 
$
19.02

 
107.92%
November 17, 2014
 
$
10.85

 
3.12
 
52.9%
 
1.18%
 
4.30%
 
$
10.61

 
97.79%

The fair value of the restricted share units is determined based on the closing price of our common shares on the grant date. The restricted share units granted under either the 2012 Equity Plan or the 2012 Amended Equity Plan generally vest over a period of three years.
Restricted share units, restricted stock awards, deferred stock allocation and performance share activity under our long-term equity plans and Directors’ Plans are as follows:
 
2014
 
2013
 
2012
 
Shares
 
Shares
 
Shares
Stock options:
 
 
 
 
 
Outstanding at beginning of year
—

 
—

 
—

Granted during the year
250,000

 
—

 
—

Vested
—

 
—

 
—

Forfeited/canceled
—

 
—

 
—

Outstanding at end of year
250,000

 
—

 
—

Restricted awards:
 
 
 
 
 
Outstanding and restricted at beginning of year
586,084

 
393,787

 
425,166

Granted during the year
531,030

 
396,844

 
151,869

Vested
(423,822
)
 
(118,973
)
 
(161,741
)
Forfeited/canceled
(170,116
)
 
(85,574
)
 
(21,507
)
Outstanding and restricted at end of year
523,176

 
586,084

 
393,787

Performance shares:

 

 

Outstanding at beginning of year
1,040,453

 
772,484

 
877,435

Granted during the year 1
1,233,685

 
806,271

 
501,346

Issued 2
(796,624
)
 
(289,054
)
 
(574,518
)
Forfeited/canceled
(405,138
)
 
(249,248
)
 
(31,779
)
Outstanding at end of year
1,072,376

 
1,040,453

 
772,484

Vested or expected to vest as of
    December 31, 2014
1,723,728

 
 
 
 
Directors’ retainer and voluntary shares:

 

 

Outstanding at beginning of year
7,329

 
2,880

 
2,611

Granted during the year
2,281

 
8,136

 
1,823

Forfeited/canceled
—

 
(1,521
)
 
—

Vested
(9,610
)
 
(2,166
)
 
(1,554
)
Outstanding at end of year
—

 
7,329

 
2,880

Reserved for future grants or awards at end
    of year:
 
 
 
 
 
Employee plans
6,222,434

 
 
 
 
Directors’ plans
225,955

 
 
 
 
Total
6,448,389

 
 
 
 
                                         
1
The shares granted in 2013 and 2012 include 54,051 shares and 191,506 shares, respectively, related to the 23% and 50% payouts associated with the prior-year pool as actual payout exceeded target.
2
For the year ended December 31, 2014, the shares vesting on December 31, 2013 were valued as of February 10, 2014, and the shares vesting due to the change in a majority of our Board of Directors that triggered the acceleration of vesting and payout of outstanding equity grants under our equity plans on August 6, 2014, were valued as of that date.
For the years ended December 31, 2013 and December 31, 2012, the shares vested on December 31, 2012 and December 31, 2011, respectively, and were valued on February 21, 2013 and February 13, 2012, respectively.
A summary of our outstanding share-based awards as of December 31, 2014 is shown below:
 
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding, beginning of year
1,633,866

 

$40.20

Granted
2,016,996

 

$16.67

Vested
(1,230,056
)
 

$38.48

Forfeited/expired
(575,254
)
 

$24.76

Outstanding, end of year
1,845,552

 

$16.55


The total compensation cost related to outstanding awards not yet recognized is $18.3 million at December 31, 2014. The weighted average remaining period for the awards outstanding at December 31, 2014 is approximately 2.5 years.