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

Annual report pursuant to Section 13 and 15(d)

ACQUISITIONS

ACQUISITIONS

12 Months Ended

Dec. 31, 2021

NOTE 3 - ACQUISITIONS

In 2020, we acquired two major steelmakers, AK Steel and ArcelorMittal USA, vertically integrating our legacy iron ore business with steel production. In 2021, we also entered into the scrap business with the FPT Acquisition. We are vertically integrated from mined raw materials, direct reduced iron and ferrous scrap to primary steelmaking and downstream finishing, stamping, tooling and tubing. We now have a presence across the entire steel manufacturing process, from mining to pelletizing to the development and production of finished high value steel products. The AK Steel Merger combined Cliffs, a historic producer of iron ore pellets, with AK Steel, a producer of flat-rolled carbon, stainless and electrical steel products, to create a vertically integrated producer of value-added iron ore and steel products. The AM USA Transaction transformed us into a fully-integrated steel enterprise with the size and scale to expand product offerings and improve through-the-cycle margins. The FPT Acquisition gives us a competitive advantage in sourcing prime scrap, a key raw material for our steelmaking facilities.

FPT Acquisition

Overview

On November 18, 2021, pursuant to the FPT Acquisition Agreement, we completed the FPT Acquisition, in which we were the acquirer. Following the FPT Acquisition, the operating results of FPT are included in our consolidated financial statements. For the period subsequent to the FPT Acquisition (November 18, 2021 through December 31, 2021), FPT generated Revenues of $153 million and a loss of $18 million included within Net income (loss) attributable to Cliffs shareholders, which included $22 million related to amortization of the fair value inventory step-up.

Additionally, we incurred acquisition-related costs, excluding severance costs, of $1 million for the year ended December 31, 2021 in connection with the FPT Acquisition, which was recorded in Acquisition-related costs on the Statements of Consolidated Operations.

The fair value of the total purchase consideration was determined as follows:


	(In Millions)
Cash consideration (subject to customary working capital adjustments)	$	775
Fair value of settlement of a pre-existing relationship	(20)
Total purchase consideration	$	755

The cash portion of the purchase price is subject to customary working capital adjustments. Additionally, if the Company decides to make any elections under Section 338(h)(10) of the IRC with respect to entities acquired in connection with the FPT Acquisition, the final cash consideration could potentially change.

Valuation Assumption and Purchase Price Allocation

We estimated fair values at November 18, 2021 for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed in connection with the FPT Acquisition. During the measurement period, we will continue to obtain information to assist in finalizing the fair value of assets acquired and

liabilities assumed, which may differ materially from these preliminary estimates. If we determine any measurement period adjustments are material, we will apply those adjustments, including any related impacts to net income, in the reporting period in which the adjustments are determined. We are in the process of conducting a valuation of the assets acquired and liabilities assumed related to the FPT Acquisition, most notably, inventories, personal and real property, leases, investments, deferred taxes, environmental obligations and intangible assets, and the final allocation will be made when completed, including the result of any identified goodwill. Accordingly, the provisional measurements noted below are preliminary and subject to modification in the future.

The preliminary purchase price allocation to assets acquired and liabilities assumed in the FPT Acquisition was:


	(In Millions)
	Initial Allocation of Consideration
Cash and cash equivalents	$	9
Accounts receivable, net	233
Inventories	137
Other current assets	4
Property, plant and equipment	179
Other non-current assets	74
Accounts payable	(122)
Accrued employment costs	(8)
State and local taxes	(1)
Other current liabilities	(8)



Other non-current liabilities	(21)

Net identifiable assets acquired	476
Goodwill	279
Total net assets acquired	$	755

The goodwill resulting from the FPT Acquisition primarily represents the incremental benefit of providing substantial access to prime scrap for our vertically integrated steelmaking business, as well as any synergistic benefits to be realized from the FPT Acquisition within our Steelmaking segment.

The preliminary purchase price allocated to identifiable intangible assets acquired was:


	(In Millions)		Weighted Average Life (In Years)
Customer relationships	$	18	15
Supplier relationships	18		18
Trade names and trademarks	7		15
Total identifiable intangible assets	$	43	16

Intangible assets are classified as Other non-current assets on the Statements of Consolidated Financial Position.

Acquisition of ArcelorMittal USA

Overview

On December 9, 2020, pursuant to the terms of the AM USA Transaction Agreement, we purchased ArcelorMittal USA from ArcelorMittal. In connection with the closing of the AM USA Transaction, as contemplated by the terms of the AM USA Transaction Agreement, ArcelorMittal’s former joint venture partner in Kote and Tek exercised its put right pursuant to the terms of the Kote and Tek joint venture agreements. As a result, we purchased all of such joint venture partner’s interests in Kote and Tek. Following the closing of the AM USA Transaction, we own 100% of the interests in Kote and Tek.

We incurred acquisition-related costs, excluding severance costs, of $3 million and $26 million for the years ended December 31, 2021 and 2020, respectively, in connection with the AM USA Transaction, which were recorded in Acquisition-related costs on the Statements of Consolidated Operations.

The fair value of the total purchase consideration was determined as follows:


	(In Millions)
Fair value of Cliffs common shares issued	$	990
Fair value of Cliffs Series B Participating Redeemable Preferred Stock issued	738
Fair value of settlement of a pre-existing relationship	237
Cash consideration	639
Total purchase consideration	$	2,604

The fair value of Cliffs common shares issued was calculated as follows:


Number of Cliffs common shares issued	78,186,671
Closing price of Cliffs common share as of December 9, 2020	$	12.66
Fair value of Cliffs common shares issued (in millions)	$	990

The fair value of Cliffs Series B Participating Redeemable Preferred Stock issued was calculated as follows:


Number of Cliffs Series B Participating Redeemable Preferred Stock issued	583,273
Redemption price per share as of December 9, 2020	$	1,266
Fair value of Cliffs Series B Participating Redeemable Preferred Stock issued (in millions)	$	738

The fair value of the cash consideration was comprised of the following:


	(In Millions)
Cash consideration pursuant to the AM USA Transaction Agreement	$	505
Cash consideration for purchase of the remaining JV partner's interest of Kote and Tek	182
Total cash consideration receivable	(48)
Total cash consideration	$	639

The cash portion of the purchase price was subject to customary working capital adjustments, and the working capital adjustments were finalized during the second quarter of 2021. We made certain elections under Section 338(h)(10) of the IRC with respect to entities acquired in connection with the AM USA Transaction, which did not change the final cash consideration.

The fair value of the settlement of a pre-existing relationship was comprised of the following:


	(In Millions)
Accounts receivable	$	97
Freestanding derivative asset from customer supply agreement	140
Total fair value of settlement of a pre-existing relationship	$	237

Valuation Assumption and Purchase Price Allocation

The allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed in connection with the AM USA Transaction was based on estimated fair values at December 9, 2020, and was finalized during the quarter ended December 31, 2021. The following is a summary of the purchase price allocation to assets acquired and liabilities assumed in the AM USA Transaction:


	(In Millions)
	Initial Allocation of Consideration		Measurement Period Adjustments		Final Allocation Consideration as of December 31, 2021
Cash and cash equivalents	$	35	$	—	$	35
Accounts receivable, net	349		(3)		346
Inventories	2,115		14		2,129
Other current assets	34		2		36
Property, plant and equipment	4,017		387		4,404
Deferred income taxes	—		285		285
Other non-current assets	158		7		165
Accounts payable	(736)		8		(728)
Accrued employment costs	(271)		5		(266)
State and local taxes	(76)		—		(76)
Other current liabilities	(453)		23		(430)

Pension liability, non-current	(730)		—		(730)
OPEB liability, non-current	(2,465)		—		(2,465)
Other non-current liabilities	(598)		(171)		(769)
Noncontrolling interest	(13)		21		8
Net identifiable assets acquired	1,366		578		1,944
Goodwill	1,230		(570)		660
Total net assets acquired	$	2,596	$	8	$	2,604

During the period subsequent to the AM USA Transaction, we made certain measurement period adjustments to the acquired assets and liabilities assumed due to clarification of information utilized to determine fair value during the measurement period. The measurement period adjustments related to the revaluation of the Company's previously held equity method investment, which is now being consolidated post-acquisition, resulting in a loss of $31 million, within Miscellaneous – net for the year ended December 31, 2021.

The goodwill resulting from the acquisition of ArcelorMittal USA primarily represents the growth opportunities in the automotive, construction, appliances, infrastructure and machinery and equipment markets, as well as any synergistic benefits to be realized from the AM USA Transaction, and was assigned to our flat steel operations within our Steelmaking segment.

Acquisition of AK Steel

Overview

On March 13, 2020, pursuant to the AK Steel Merger Agreement, we completed the acquisition of AK Steel, in which we were the acquirer. As a result of the AK Steel Merger, each share of AK Steel common stock issued and outstanding immediately prior to the effective time of the AK Steel Merger (other than excluded shares) was converted into the right to receive 0.400 Cliffs common shares and, if applicable, cash in lieu of any fractional Cliffs common shares.

We incurred acquisition-related costs, excluding severance costs, of $1 million and $26 million for the years ended December 31, 2021 and 2020, respectively, in connection with the AK Steel Merger, which were recorded in Acquisition-related costs on the Statements of Consolidated Operations.

The fair value of the total purchase consideration was determined as follows:


	(In Millions)
Fair value of AK Steel debt	$	914
Fair value of Cliffs common shares issued for AK Steel outstanding common stock	618
Other	3
Total purchase consideration	$	1,535

The fair value of Cliffs common shares issued for outstanding shares of AK Steel common stock and with respect to Cliffs common shares underlying converted AK Steel equity awards that vested upon completion of the AK Steel Merger was calculated as follows:


	(In Millions, Except Per Share Amounts)
Number of shares of AK Steel common stock issued and outstanding	317
Exchange ratio	0.400
Shares of Cliffs common shares issued to AK Steel stockholders	127
Price per share of Cliffs common shares	$	4.87
Fair value of Cliffs common shares issued for outstanding AK Steel common stock	$	618

The fair value of AK Steel's debt included in the consideration was calculated as follows:


	(In Millions)
Credit Facility	$	590
7.500% Senior Secured Notes due July 2023	324
Fair value of debt included in consideration	$	914

Valuation Assumption and Purchase Price Allocation

The allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed in connection with the AK Steel Merger was based on estimated fair values at March 13, 2020, and was finalized during the quarter ended March 31, 2021. The following is a summary of the purchase price allocation to assets acquired and liabilities assumed in the AK Steel Merger:


	(In Millions)
	Initial Allocation of Consideration		Measurement Period Adjustments		Final Allocation of Consideration as of March 31, 2021
Cash and cash equivalents	$	38	$	1	$	39
Accounts receivable, net	666		(2)		664
Inventories	1,563		(243)		1,320
Other current assets	68		(16)		52
Property, plant and equipment	2,184		90		2,274
Deferred income taxes	—		69		69
Other non-current assets	475		(4)		471
Accounts payable	(636)		(8)		(644)
Accrued employment costs	(94)		1		(93)
State and local taxes	(35)		4		(31)
Other current liabilities	(276)		2		(274)
Long-term debt	(1,179)		—		(1,179)
Pension liability, non-current	(473)		10		(463)
OPEB liability, non-current	(400)		(8)		(408)
Other non-current liabilities	(507)		72		(435)
Noncontrolling interest	—		(1)		(1)
Net identifiable assets acquired	1,394		(33)		1,361
Goodwill	141		33		174
Total net assets acquired	$	1,535	$	—	$	1,535

During the period subsequent to the AK Steel Merger, we made certain measurement period adjustments to the acquired assets and liabilities assumed due to clarification of information utilized to determine fair value during the measurement period.

The goodwill resulting from the acquisition of AK Steel was assigned to our downstream Tubular and Tooling and Stamping operating segments. Goodwill is calculated as the excess of the purchase price over the net identifiable assets recognized and primarily represents the growth opportunities in light weighting solutions to automotive customers, as well as any synergistic benefits to be realized. Goodwill from the AK Steel Merger is not expected to be deductible for income tax purposes.

The purchase price allocated to identifiable intangible assets and liabilities acquired was:


	(In Millions)		Weighted Average Life (In Years)
Intangible assets:
Customer relationships	$	77	18
Developed technology	60		17
Trade names and trademarks	11		10
Total identifiable intangible assets	$	148	17
Intangible liabilities:
Above-market supply contracts	$	(71)	12

Intangible assets are classified as Other non-current assets on the Statements of Consolidated Financial Position. Intangible liabilities are classified as Other non-current liabilities on the Statements of Consolidated Financial Position.

The above-market supply contracts relate to the long-term coke and energy supply agreements with SunCoke Energy, which includes SunCoke Middletown, a consolidated VIE. Refer to NOTE 18 - VARIABLE INTEREST ENTITIES for further information.

Pro Forma Results

2020 Acquisitions

The following table provides unaudited pro forma financial information, prepared in accordance with Topic 805, as if ArcelorMittal USA and AK Steel had been acquired as of January 1, 2019:


	(In Millions)
	Year Ended December 31,
	2020		2019
Revenues	$	12,837	$	17,163
Net income (loss) attributable to Cliffs shareholders	(520)		(11)

The unaudited pro forma financial information has been calculated after applying our accounting policies and adjusting the historical results with pro forma adjustments, net of tax, that assume the 2020 Acquisitions occurred on January 1, 2019. Significant pro forma adjustments include the following:

1.The elimination of intercompany revenues between Cliffs and ArcelorMittal USA and AK Steel of $844 million and $1,499 million for the years ended December 31, 2020 and 2019, respectively.

2.The 2020 pro forma net loss was adjusted to exclude $96 million of non-recurring inventory acquisition accounting adjustments incurred during the year ended December 31, 2020. The 2019 pro forma net loss was adjusted to include $362 million of non-recurring inventory acquisition accounting adjustments for the year ended December 31, 2019.

3.The elimination of non-recurring transaction costs incurred by Cliffs, AK Steel and ArcelorMittal USA in connection with the 2020 Acquisitions were $93 million for the year ended December 31, 2020. The 2019 pro forma net loss was adjusted to include $93 million of non-recurring transaction cost adjustments for the year ended December 31, 2019.

4.The 2020 pro forma net loss was adjusted to exclude restructuring costs of $1,820 million of non-recurring costs incurred by ArcelorMittal USA prior to the AM USA Transaction.

5.The 2020 and 2019 pro forma net losses were adjusted to exclude $140 million and $129 million for the years ended December 31, 2020 and 2019, respectively, for the impact of reversal of the fees charged for management, financial and legal services under the Industrial Franchise Agreement with the former parent.

6.Total other pro forma adjustments included reduced expenses of $32 million for the year ended December 31, 2020, primarily due to decreased depreciation expense and pension and OPEB expense, offset partially by increased interest and amortization expense.

7.Total other pro forma adjustments included an expense of $76 million for the year ended December 31, 2019, primarily due to increased interest, amortization and pension and OPEB expense, offset partially by decreased depreciation expense.

8.The income tax impact of pro forma transaction adjustments that affect Net income (loss) attributable to Cliffs shareholders at a statutory rate of 24.3% resulted in an increased benefit to Income tax benefit (expense) of $170 million and $117 million for the years ended December 31, 2020 and 2019, respectively.

FPT Acquisition

The following table provides unaudited pro forma financial information, prepared in accordance with Topic 805, as if FPT had been acquired as of January 1, 2020:


	(In Millions)
	Year Ended December 31,
	2021		2020
Revenues	$	21,701	$	13,549
Net income (loss) attributable to Cliffs shareholders	3,074		(526)

The unaudited pro forma financial information has been calculated after applying our accounting policies and adjusting the historical results with pro forma adjustments, net of tax, that assume the FPT Acquisition occurred on January 1, 2020. There were no significant pro forma adjustments for the FPT Acquisition.

The unaudited pro forma financial information does not reflect the potential realization of synergies or cost savings, nor does it reflect other costs relating to the integration of the acquired companies. This unaudited pro forma financial information should not be considered indicative of the results that would have actually occurred if the 2020 Acquisitions had been consummated on January 1, 2019, or if the FPT Acquisition had been consummated on January 1, 2020, nor are they indicative of future results.