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

Annual report pursuant to Section 13 and 15(d)

STOCK COMPENSATION PLANS

Year of Grant

Restricted Equity Grant Shares

Deferred Equity Grant Shares

STOCK COMPENSATION PLANS

12 Months Ended

Dec. 31, 2016

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

NOTE 8 - STOCK COMPENSATION PLANS

At December 31, 2016, we have outstanding awards under two share-based compensation plans, which are described below. The compensation cost that has been charged against income for those plans was $14.2 million, $13.9 million and $21.5 million in 2016, 2015 and 2014, respectively, which primarily was recorded in Selling, general and administrative expenses in the Statements of Consolidated Operations. The total income tax benefit recognized in the Statements of Consolidated Operations for share-based compensation arrangements was $7.5 million for 2014. There was no income tax benefit recognized for the year ended December 31, 2016 and 2015, due to the full valuation allowance.

Employees’ Plans

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

During the first quarter of 2016, the Compensation and Organization Committee of the Board of Directors approved grants under the 2015 Equity Plan of 3.4 million restricted share units to certain officers and employees with a grant date of February 23, 2016. The restricted share units granted under this award are subject to continued employment through the vesting date of December 31, 2018.

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

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

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

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

Performance Shares

The outstanding performance share or unit grants vest over a period of three years and are intended to be paid out in common shares or cash in certain circumstances. Performance is measured on the basis of relative TSR for the period and measured against the constituents of the S&P Metals and Mining ETF Index at the beginning of the relevant performance period. The final payouts for the outstanding performance period grants will vary from 0% to 200% of the original grant depending on whether and to what extent the Company achieves certain objectives and performance goals as established by the Compensation Committee.

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



Performance Share Plan Year	Performance Shares Granted	Estimated Forfeitures	Expected to Vest	Grant Date	Performance Period
2015	410,105	157,979	252,126	February 9, 2015	1/1/2015 - 12/31/2017
2015	464,470	82,636	381,834	January 12, 2015	1/1/2015 - 12/31/2017
2014¹	188,510	188,510	—	July 29, 2014	1/1/2014 - 12/31/2016
2014¹	80,560	80,560	—	May 12, 2014	1/1/2014 - 12/31/2016
2014¹	230,265	230,265	—	February 10, 2014	1/1/2014 - 12/31/2016

¹ The performance shares granted in 2014 will have a payout of 0% of the original grant based on the final performance evaluation versus the performance goals that were established in the grants.

Performance-Based Restricted Stock Units

For the outstanding 400,000 performance-based restricted stock units that were granted on November 17, 2014, the award may be earned and settled based upon certain VWAP performance for the Company’s common shares, (Threshold VWAP, Target VWAP, or Maximum VWAP) for any period of ninety (90) consecutive calendar days during a performance period commencing August 7, 2014 and ending December 31, 2017.

Restricted Share Units

All of the outstanding restricted share units are subject to continued employment, are retention based, and are payable in common shares or cash in certain circumstances at a time determined by the Compensation Committee at its discretion. The outstanding restricted share units that were granted in 2015, with the exception of the 2015 special retention awards that have a 27 months vesting period, have or will vest in equal thirds on each of December 31, 2016, December 31, 2017 and December 31, 2018. The outstanding restricted share units that were granted in 2016, cliff vest in three years on December 31, 2019.

Stock Options

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

Employee Stock Purchase Plan

On March 26, 2015, upon recommendation by the Compensation Committee, our Board of Directors approved and adopted, subject to the approval of Cliffs' shareholders at the 2015 Annual Meeting, the Cliffs Natural Resources Inc. 2015 Employee Stock Purchase Plan. This plan was approved by our shareholders at the 2015 Annual Meeting held May 19, 2015. 10 million common shares have been reserved for issuance under this plan; however, as of December 31, 2016, this program has not been made active and no common shares have been purchased. We sought shareholder approval of this plan for the purpose of qualifying the reserved common shares for special tax treatment under Section 423 of the Internal Revenue Code of 1986, as amended.

Nonemployee Directors

Equity Grants

During 2016, our nonemployee directors were entitled to receive restricted share awards under the Directors’ Plan. For 2016, nonemployee directors were granted a number of restricted shares, with a value equal to $85,000, based on the closing price of our common shares on April 27, 2016, the date of the 2016 Annual Meeting, subject to any deferral election and pursuant to the terms of the Directors’ Plan and an award agreement, effective on April 27, 2016.

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

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

Other Information

The following table summarizes the share-based compensation expense that we recorded for continuing operations in 2016, 2015 and 2014:



	(In Millions, except per share amounts)
	2016		2015		2014
Cost of goods sold and operating expenses	$	2.1	$	4.0	$	5.6
Selling, general and administrative expenses	12.1		9.9		15.9
Reduction of operating income from continuing operations before income taxes and equity loss from ventures	14.2		13.9		21.5
Income tax benefit¹	—		—		(7.5		)
Reduction of net income attributable to Cliffs shareholders	$	14.2	$	13.9	$	14.0
Reduction of earnings per share attributable to Cliffs shareholders:
Basic	$	0.07	$	0.09	$	0.09
Diluted	$	0.07	$	0.09	$	0.09

¹No income tax benefit for the year ended December 31, 2016 and December 31, 2015, due to the full valuation allowance.

Determination of Fair Value

Performance Shares

The fair value of each performance share grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. A correlation matrix of historical 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.

No performance shares were granted in 2016, therefore no fair value analysis was required.

Stock Options

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

No stock options were granted in 2016, therefore no fair value analysis was required.

Restricted Share Units

The fair value of the restricted share units is determined based on the closing price of our common shares on the grant date.

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



	2016		2015		2014
	Shares		Shares		Shares
Stock options:
Outstanding at beginning of year	607,489		250,000		—
Granted during the year	—		412,710		250,000
Forfeited/canceled	(7,619	)	(55,221	)	—
Outstanding at end of year	599,870		607,489		250,000
Restricted awards:
Outstanding and restricted at beginning of year	2,338,070		523,176		586,084
Granted during the year	3,571,337		2,482,415		531,030
Vested	(271,988	)	(477,157	)	(423,822	)
Forfeited/canceled	(175,636	)	(190,364	)	(170,116	)
Outstanding and restricted at end of year	5,461,783		2,338,070		523,176
Performance shares:
Outstanding at beginning of year	1,496,489		1,072,376		1,040,453
Granted during the year	—		874,575		1,233,685
Issued¹	(59,260	)	(242,920	)	(796,624	)
Forfeited/canceled	(68,760	)	(207,542	)	(405,138	)
Outstanding at end of year	1,368,469		1,496,489		1,072,376
Vested or expected to vest as of December 31, 2016	6,716,979
Directors’ retainer and voluntary shares:
Outstanding at beginning of year	—		—		7,329
Granted during the year	—		—		2,281
Vested	—		—		(9,610	)
Outstanding at end of year	—		—		—
Reserved for future grants or awards at end of year:
Employee plans	6,514,038
Directors’ plans	676,678
Total	7,190,716

¹ The performance shares granted in 2014 will have a payout of 0% of the original grant based on the final performance evaluation versus the performance goals that were established in the grants. These shares are not included in this number because they expire and will be ultimately forfeited in February 2017. For the year ended December 31, 2015, the shares vesting due to the change in control were paid out in cash, at target, and valued as of the respective participants' termination dates. For the year ended December 31, 2014, the shares vesting on December 31, 2013 were valued as of February 10, 2014, and the shares vesting due to the change in a majority of our Board of Directors that triggered the acceleration of vesting and payout of outstanding equity grants under our equity plans on August 6, 2014 were paid out in cash, at target, and valued as of that date.

A summary of our outstanding share-based awards as of December 31, 2016 is shown below:



	Shares		Weighted Average Grant Date Fair Value
Outstanding, beginning of year	4,442,048		$	8.93
Granted	3,571,337		$	1.93
Vested	(331,248	)	$	11.25
Forfeited/expired	(252,015	)	$	5.90
Outstanding, end of year	7,430,122		$	5.55

A summary of our stock option grants vested or expected to vest as of December 31, 2016 is shown below:



	Shares	Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Term (Years)
Expected to vest	417,914	$	8.88	$	239,640	7.43
Exercisable	166,667	$	13.83	$	—	4.88

The total compensation cost related to outstanding awards not yet recognized is $14.7 million at December 31, 2016. The weighted average remaining period for the awards outstanding at December 31, 2016 is approximately 1.8 years.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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