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

Annual report pursuant to Section 13 and 15(d)

NEW ACCOUNTING STANDARDS

NEW ACCOUNTING STANDARDS

12 Months Ended

Dec. 31, 2018

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

NEW ACCOUNTING STANDARDS

NOTE 2 - NEW ACCOUNTING STANDARDS

Issued and Adopted

ASC Topic 606, Revenue from Contracts with Customers (Topic 606). On January 1, 2018, we adopted Topic 606 and applied it to all contracts that were not completed using the modified retrospective method. We recognized the cumulative effect of initially applying Topic 606 as an adjustment of $34.0 million to the opening balance of Retained deficit. The comparative period information has not been retrospectively revised and continues to be reported under the accounting standards in effect for those periods. On a prospective basis, we do not expect that the adoption of Topic 606 will have a material impact to our annual net income.

Under Topic 606, revenue is generally recognized upon delivery to our customers, which is earlier than under the previous guidance. As an example, for certain iron ore shipments where revenue was previously recognized upon title transfer when payment was received, we will now recognize revenue when control transfers, which is generally upon delivery. While we continue to retain title until we receive payment in many cases, we determined upon review of our customer contracts that the preponderance of control indicators pass to our customers' favor when we deliver our products; thus, we generally concluded that control transfers at that point. As a result of the adoption of Topic 606 and vessel deliveries not occurring during the winter months because of the closure of the Soo Locks and the Welland Canal, our revenues and net income will be relatively lower than historical levels during the first quarter of each year and relatively higher than historical levels during the remaining three quarters in 2018 and future years. However, the total amount of revenue recognized during the year should remain substantially the same as under previous accounting standards, assuming revenue rates and volumes are consistent between years.

The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of Topic 606 were as follows:



	(In Millions)
	Balance at December 31, 2017			Adjustments due to Topic 606			Balance at January 1, 2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	978.3		$	—		$	978.3
Accounts receivable, net	106.7			76.6			183.3
Inventories	138.4			(51.4		)	87.0
Supplies and other inventories	88.8			—			88.8
Derivative assets	37.9			11.6			49.5
Income tax receivable, current	13.3			—			13.3
Loans to and accounts receivables from the Canadian Entities	51.6			—			51.6
Current assets of discontinued operations	118.5			—			118.5
Other current assets	11.1			—			11.1
TOTAL CURRENT ASSETS	1,544.6			36.8			1,581.4
PROPERTY, PLANT AND EQUIPMENT, NET	1,033.8			—			1,033.8
OTHER ASSETS
Deposits for property, plant and equipment	17.8			—			17.8
Income tax receivable, non-current	235.3			—			235.3
Non-current assets of discontinued operations	20.3			—			20.3
Other non-current assets	101.6			—			101.6
TOTAL OTHER ASSETS	375.0			—			375.0
TOTAL ASSETS	$	2,953.4		$	36.8		$	2,990.2

LIABILITIES
CURRENT LIABILITIES
Accounts payable	$	99.5		$	1.4		$	100.9
Accrued employment costs	52.7			—			52.7
State and local taxes payable	30.2			—			30.2
Accrued interest	31.4			—			31.4
Contingent claims	55.6			—			55.6
Partnership distribution payable	44.2			—			44.2
Current liabilities of discontinued operations	75.0			—			75.0
Other current liabilities	63.6			1.4			65.0
TOTAL CURRENT LIABILITIES	452.2			2.8			455.0
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES	257.7			—			257.7
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS	167.7			—			167.7
LONG-TERM DEBT	2,304.2			—			2,304.2
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS	52.2			—			52.2
OTHER LIABILITIES	163.5			—			163.5
TOTAL LIABILITIES	3,397.5			2.8			3,400.3
EQUITY
CLIFFS SHAREHOLDERS' EQUITY (DEFICIT)	(444.3		)	34.0			(410.3		)
NONCONTROLLING INTEREST	0.2			—			0.2
TOTAL EQUITY (DEFICIT)	(444.1		)	34.0			(410.1		)
TOTAL LIABILITIES AND EQUITY (DEFICIT)	$	2,953.4		$	36.8		$	2,990.2

The impact of adoption on our Statements of Consolidated Operations and Statements of Consolidated Financial Position is as follows:



	($ in Millions)
	Year Ended December 31, 2018
	As Reported			Balances without Adoption of Topic 606			Effect of Change
REVENUES FROM PRODUCT SALES AND SERVICES
Product	$	2,172.3		$	2,108.1		$	64.2
Freight and venture partners' cost reimbursements	160.1			156.2			3.9
	2,332.4			2,264.3			68.1
COST OF GOODS SOLD AND OPERATING EXPENSES	(1,522.8		)	(1,513.2		)	(9.6		)
SALES MARGIN	809.6			751.1			58.5
OTHER OPERATING INCOME (EXPENSE)
Selling, general and administrative expenses	(116.8		)	(116.8		)	—
Miscellaneous - net	(19.6		)	(19.6		)	—
	(136.4		)	(136.4		)	—
OPERATING INCOME	673.2			614.7			58.5
OTHER INCOME (EXPENSE)
Interest expense, net	(118.9		)	(118.9		)	—
Loss on extinguishment of debt	(6.8		)	(6.8		)	—
Other non-operating income	17.2			17.2			—
	(108.5		)	(108.5		)	—
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	564.7			506.2			58.5
INCOME TAX BENEFIT	475.2			487.5			(12.3		)
INCOME FROM CONTINUING OPERATIONS	1,039.9			993.7			46.2
INCOME FROM DISCONTINUED OPERATIONS, net of tax	88.2			88.2			—
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS	$	1,128.1		$	1,081.9		$	46.2
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
Continuing operations	$	3.50		$	3.34		$	0.16
Discontinued operations	0.30			0.30			—
	$	3.80		$	3.64		$	0.16
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
Continuing operations	$	3.42		$	3.27		$	0.15
Discontinued operations	0.29			0.29			—
	$	3.71		$	3.56		$	0.15
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
Basic	297,176			297,176
Diluted	304,141			304,141

The increased revenue recognized under Topic 606 is due to higher tons shipped and a higher realized revenue rate in December 2018 versus December 2017. Under the previous accounting standard, December 2017 shipments would have been recognized as 2018 sales due to the fact that title and risk of loss does not transfer until payment is received from our customers.



	(In Millions)
	December 31, 2018
	As Reported		Balances without Adoption of Topic 606		Effect of Change
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	823.2	$	823.2	$	—
Accounts receivable, net	226.7		108.7		118.0
Inventories	87.9		141.3		(53.4		)
Supplies and other inventories	93.2		93.2		—
Derivative assets	91.5		60.7		30.8
Income tax receivable, current	117.3		117.3		—
Current assets of discontinued operations	12.4		12.4		—
Other current assets	27.4		27.4		—
TOTAL CURRENT ASSETS	1,479.6		1,384.2		95.4
PROPERTY, PLANT AND EQUIPMENT, NET	1,286.0		1,286.0		—
OTHER ASSETS
Deposits for property, plant and equipment	83.0		83.0		—
Income tax receivable, non-current	121.3		121.3		—
Deferred income taxes	464.8		477.1		(12.3		)
Other non-current assets	94.9		94.9		—
TOTAL OTHER ASSETS	764.0		776.3		(12.3		)
TOTAL ASSETS	$	3,529.6	$	3,446.5	$	83.1

LIABILITIES
CURRENT LIABILITIES
Accounts payable	$	186.8	$	184.9	$	1.9
Accrued employment costs	74.0		74.0		—
State and local taxes payable	35.5		35.5		—
Accrued interest	38.4		38.4		—
Partnership distribution payable	43.5		43.5		—
Current liabilities of discontinued operations	6.7		6.7		—
Other current liabilities	83.3		83.7		(0.4		)
TOTAL CURRENT LIABILITIES	468.2		466.7		1.5
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES	248.7		248.7		—
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS	172.0		172.0		—
LONG-TERM DEBT	2,092.9		2,092.9		—
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS	8.3		8.3		—
OTHER LIABILITIES	115.3		115.3		—
TOTAL LIABILITIES	3,105.4		3,103.9		1.5
EQUITY
CLIFFS SHAREHOLDERS' EQUITY	424.2		342.6		81.6
TOTAL LIABILITIES AND EQUITY	$	3,529.6	$	3,446.5	$	83.1

The adoption of Topic 606 did not have an impact on net cash flows in our Statements of Consolidated Cash Flows.

ASU 2017-07, Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. On January 1, 2018, we adopted the amendments to ASC Topic 715, Compensation - Retirement Benefits regarding the presentation of net periodic pension and postretirement benefit costs. We retrospectively adopted the presentation of service cost separate from the other components of net periodic costs. The interest cost, expected return on assets, amortization of prior service costs, net remeasurement, and other costs have been reclassified from Cost of goods sold and operating expenses, Selling, general and administrative expenses and Miscellaneous - net to Other non-operating income. We elected to apply the practical expedient, which allows us to reclassify amounts disclosed previously in our pension and other postretirement benefits footnote as the basis for applying retrospective presentation for comparative periods. On a prospective basis, only service costs will be included in amounts capitalized in inventory or property, plant, and equipment.

The effect of the retrospective presentation change related to the net periodic cost of our defined benefit pension and other postretirement employee benefits plans on our Statements of Consolidated Operations was as follows:



	(In Millions)
	Year Ended December 31, 2017									Year Ended December 31, 2016
	As Adjusted			Without Adoption of ASU 2017-07			Effect of Change			As Adjusted			Without Adoption of ASU 2017-07			Effect of Change
Cost of goods sold and operating expenses	$	(1,398.4	)	$	(1,400.7	)	$	2.3		$	(1,274.4	)	$	(1,278.7	)	$	4.3
Selling, general and administrative expenses	$	(102.9	)	$	(95.1	)	$	(7.8	)	$	(115.8	)	$	(106.3	)	$	(9.5	)
Miscellaneous - net	$	25.5		$	27.0		$	(1.5	)	$	(33.6	)	$	(32.0	)	$	(1.6	)
Operating income	$	390.2		$	397.2		$	(7.0	)	$	130.7		$	137.5		$	(6.8	)
Other non-operating income	$	10.2		$	3.2		$	7.0		$	7.3		$	0.5		$	6.8
Net income	$	363.1		$	363.1		$	—		$	199.3		$	199.3		$	—

In August 2018, the FASB issued ASU No. 2018-14, Defined Benefit Plans (Topic 715-20) - Changes to the Disclosure Requirements for Defined Benefit Plans. Certain of the existing required disclosures were modified for clarification or removed and additional disclosures were added. We elected to early adopt ASU No. 2018-14 for the year ended December 31, 2018. The effect of the adoption is an overall reduction in our annual disclosures related to defined benefit plans. The adoption of this standard required retrospective adoption, but did not impact prior-period financial results.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement. The new standard removes or modifies certain existing disclosure requirements and adds additional disclosure requirements related to fair value measurement. We elected to early adopt ASU No. 2018-13 for the year ended December 31, 2018. The affect of the adoption is an overall reduction in our quarterly and annual disclosures related to fair value measurement.

Issued and Not Effective

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases except for short-term leases. For lessees, leases will be classified as either operating or finance leases in the Statements of Consolidated Operations. We adopted this standard on its effective date of January 1, 2019 using the optional alternative approach, which requires application of the new guidance at the beginning of the standard's effective date. We have compiled an inventory of our existing leases and have finalized our implementation plan. Based on our analysis, the updated standard will not have a material effect on our consolidated financial statements.