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, 2017

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

NOTE 8 - STOCK COMPENSATION PLANS

At December 31, 2017, 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 $18.7 million, $14.2 million and $13.9 million in 2017, 2016 and 2015, respectively, which primarily was recorded in Selling, general and administrative expenses in the Statements of Consolidated Operations. There was no income tax benefit recognized for the years ended December 31, 2017, 2016 and 2015, due to the full valuation allowance.

Employees’ Plans

The Amended 2015 Equity Plan was approved by our Board of Directors on February 21, 2017 and by our shareholders on April 25, 2017. The Amended 2015 Equity Plan increased the maximum number of shares that may be issued by 15.0 million common shares. 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, and allowed for a maximum of 12.9 million common shares to be issued. No additional grants were issued from the 2012 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.

Following is a summary of approved grants by the Compensation Committee:



Grant Year	Vesting Date	Plan	Restricted Stock Granted	Performance Shares Granted	Stock Options Granted
2017	12/31/2019	Amended 2015 Equity Plan	532,358	249,106	—
2017	12/31/2019	2015 Equity Plan	553,725	553,725	—
2016	12/31/2018	2015 Equity Plan	3,406,716	—	—
2015	12/15/2017	2015 Equity Plan	1,473,184	—	—
2015	12/31/2017	2012 Equity Plan	874,575	874,575	412,710

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	Forfeitures to Date	Expected to Vest	Grant Date	Performance Period
2017	249,106	—	249,106	June 26, 2017	5/31/2017 - 12/31/2019
2017	553,725	5,192	548,533	February 21, 2017	1/1/2017 - 12/31/2019
2015¹	410,105	155,235	254,870	February 9, 2015	1/1/2015 - 12/31/2017
2015¹	464,470	68,667	395,803	January 12, 2015	1/1/2015 - 12/31/2017

¹ The performance shares granted in 2015 will have a payout of 75.3% 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. The performance-based restricted stock units will not have a payout based on the final performance evaluation versus the performance goals that were established in the grants.

Restricted Stock Units

All of the outstanding restricted stock 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 stock units that were granted in 2016, cliff vest in three years on December 31, 2018 and the outstanding restricted stock units that were granted in 2017, cliff vest in three years on December 31, 2019.

Stock Options

The 412,710 stock options that were granted during the first quarter of 2015 vested on December 31, 2017, are exercisable at a strike price of $7.70 after the vesting date and expire on January 12, 2025. The 187,160 stock options that were granted in the fourth quarter of 2014 vested in equal thirds on each of December 31, 2015, 2016 and 2017 and are exercisable at a strike price of $13.83 and expire on November 17, 2021. As of December 31, 2017, 599,870 shares are exercisable with a weighted average price of $10.25.

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, 2017, 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

Our nonemployee directors are entitled to receive restricted share awards under the Directors’ Plan. For 2017, 2016 and 2015, nonemployee directors were granted a specified number of restricted shares, with a value equal to $100,000, $85,000 and $85,000, respectively. The amount of shares is based on the closing price of our common shares on the date of the Annual Meeting. The awards are subject to any deferral election and pursuant to the terms of the Directors’ Plan and an award agreement.

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

Other Information

The following table summarizes the share-based compensation expense that we recorded for continuing operations in 2017, 2016 and 2015:



	(In Millions, except per share amounts)
	2017		2016		2015
Cost of goods sold and operating expenses	$	2.3	$	2.1	$	4.0
Selling, general and administrative expenses	16.4		12.1		9.9
Reduction of operating income from continuing operations before income taxes and equity loss from ventures	18.7		14.2		13.9
Income tax benefit¹	—		—		—
Reduction of net income attributable to Cliffs shareholders	$	18.7	$	14.2	$	13.9
Reduction of earnings per share attributable to Cliffs shareholders:
Basic	$	0.06	$	0.07	$	0.09
Diluted	$	0.06	$	0.07	$	0.09

¹No income tax benefit 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.

Performance shares were granted in February and June 2017. A fair value analysis was required for each of these grants and the fair value was determined to be $19.69 and $10.74, respectively.

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 2017, therefore no fair value analysis was required.

Restricted Stock Units

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

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



	2017		2016		2015
	Shares		Shares		Shares
Stock options:
Outstanding at beginning of year	599,870		607,489		250,000
Granted during the year	—		—		412,710
Forfeited/canceled	—		(7,619	)	(55,221	)
Outstanding at end of year	599,870		599,870		607,489
Restricted awards:
Outstanding and restricted at beginning of year	5,461,783		2,338,070		523,176
Granted during the year	1,196,731		3,571,337		2,482,415
Vested	(1,813,315	)	(271,988	)	(477,157	)
Forfeited/canceled	(68,716	)	(175,636	)	(190,364	)
Outstanding and restricted at end of year	4,776,483		5,461,783		2,338,070
Performance shares:
Outstanding at beginning of year	1,368,469		1,496,489		1,072,376
Granted during the year	802,831		—		874,575
Issued¹	—		(59,260	)	(242,920	)
Forfeited/canceled	(322,988	)	(68,760	)	(207,542	)
Outstanding at end of year	1,848,312		1,368,469		1,496,489
Vested or expected to vest as of December 31, 2017²	7,224,665
Directors’ retainer and voluntary shares:
Outstanding at beginning of year	—		—		—
Granted during the year	25,476		—		—
Vested	(25,476	)	—		—
Outstanding at end of year	—		—		—
Reserved for future grants or awards at end of year:
Employee plans	16,606,386
Directors’ plans	612,266
Total	17,218,652

¹ 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.
² With the adoption of ASU 2016-09, we assume all shares are expected to vest and none will forfeit.

A summary of our outstanding share-based awards as of December 31, 2017 is shown below:



	Shares		Weighted Average Grant Date Fair Value
Outstanding, beginning of year	7,430,122		$	5.55
Granted	1,999,562		$	12.19
Vested	(1,813,315	)	$	5.52
Forfeited/expired	(391,704	)	$	12.84
Outstanding, end of year	7,224,665		$	6.79

The total compensation cost related to outstanding awards not yet recognized is $20.1 million at December 31, 2017. The weighted average remaining period for the awards outstanding at December 31, 2017 is approximately 1.5 years.