Annual report pursuant to Section 13 and 15(d)

ACQUISITIONS

v2.4.0.8
ACQUISITIONS
 12 Months Ended
Dec. 31, 2013
Business Combinations [Abstract]  
ACQUISITIONS AND OTHER INVESTMENTS
NOTE 6 - ACQUISITIONS AND OTHER INVESTMENTS
Acquisitions
We allocate the cost of acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. Any excess of cost over the fair value of the net assets acquired is recorded as goodwill.
Consolidated Thompson
On May 12, 2011, we completed our acquisition of Consolidated Thompson by acquiring all of the outstanding common shares of Consolidated Thompson for C$17.25 per share in an all-cash transaction, including net debt, pursuant to the terms of an arrangement agreement dated as of January 11, 2011. Upon the acquisition: (a) each outstanding Consolidated Thompson common share was acquired for a cash payment of C$17.25; (b) each outstanding option and warrant that was “in the money” was acquired for cancellation for a cash payment of C$17.25 less the exercise price per underlying Consolidated Thompson common share; (c) each outstanding performance share unit was acquired for cancellation for a cash payment of C$17.25; (d) all outstanding Quinto Mining Corporation rights to acquire common shares of Consolidated Thompson were acquired for cancellation for a cash payment of C$17.25 per underlying Consolidated Thompson common share; and (e) certain Consolidated Thompson management contracts were eliminated that contained certain change of control provisions for contingent payments upon termination. The acquisition date fair value of the consideration transferred totaled $4.6 billion. Our full ownership of Consolidated Thompson has been included in the consolidated financial statements since the acquisition date and the subsidiary CQIM is reported as a component of our Eastern Canadian Iron Ore segment.
The acquisition of Consolidated Thompson reflected our strategy to build scale by owning expandable and exportable steelmaking raw material assets serving international markets. Through our acquisition of Consolidated Thompson, we now own and operate an iron ore mine and processing facility near Bloom Lake in Quebec, Canada that produces iron ore concentrate of high quality. WISCO was a 25 percent partner in the Bloom Lake mine at the time of acquisition, but as of November 19, 2013, WISCO owns 17.2 percent in the Bloom Lake mine. We also own additional development properties known as Labrador Trough South located in Quebec. All of these properties are in proximity to our existing Canadian operations and will allow us to leverage our port facilities and supply this iron ore to the seaborne market.
The following table summarizes the consideration paid for Consolidated Thompson and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. We finalized the purchase price allocation for the acquisition of Consolidated Thompson during the second quarter of 2012.
 
(In Millions)
 
Initial
Allocation
 
Final
Allocation
 
Change
Consideration
 
 
 
 
 
Cash
$
4,554.0

 
$
4,554.0

 
$
—

Fair value of total consideration transferred
$
4,554.0

 
$
4,554.0

 
$
—

Recognized amounts of identifiable assets acquired and
    liabilities assumed
 
 
 
 
 
ASSETS:
 
 
 
 
 
Cash
$
130.6

 
$
130.6

 
$
—

Accounts receivable
102.8

 
102.4

 
(0.4
)
Product inventories
134.2

 
134.2

 
—

Other current assets
35.1

 
35.1

 
—

Mineral rights
4,450.0

 
4,825.6

 
375.6

Property, plant and equipment
1,193.4

 
1,193.4

 
—

Intangible assets
2.1

 
2.1

 
—

Total identifiable assets acquired
6,048.2

 
6,423.4

 
375.2

LIABILITIES:
 
 
 
 
 
Accounts payable
(13.6
)
 
(13.6
)
 
—

Accrued liabilities
(130.0
)
 
(123.8
)
 
6.2

Convertible debentures
(335.7
)
 
(335.7
)
 
—

Other current liabilities
(41.8
)
 
(47.9
)
 
(6.1
)
Long-term deferred tax liabilities
(831.5
)
 
(1,041.8
)
 
(210.3
)
Senior secured notes
(125.0
)
 
(125.0
)
 
—

Capital lease obligations
(70.7
)
 
(70.7
)
 
—

Other long-term liabilities
(25.1
)
 
(32.8
)
 
(7.7
)
Total identifiable liabilities assumed
(1,573.4
)
 
(1,791.3
)
 
(217.9
)
Total identifiable net assets acquired
4,474.8

 
4,632.1

 
157.3

Noncontrolling interest in Bloom Lake
(947.6
)
 
(1,075.4
)
 
(127.8
)
Goodwill
1,026.8

 
997.3

 
(29.5
)
Total net assets acquired
$
4,554.0

 
$
4,554.0

 
$
—


Included in the changes to the initial purchase price allocation for Consolidated Thompson, which was performed during the second quarter of 2011, are changes recorded in the first quarter of 2012, when we further refined the fair value of the assets acquired and liabilities assumed. The acquisition date fair value was adjusted to record a $16.4 million increase related to pre-acquisition date Quebec mining duties tax. We recorded $6.1 million and $10.3 million as increases to current and long-term liabilities, respectively. This resulted in a reduction of our calculated minimum distribution payable to the minority partner by $2.6 million. These adjustments resulted in a net $13.8 million increase to our goodwill during the period. As our fair value estimates remained materially unchanged from December 31, 2011, the immaterial adjustments made to the initial purchase price allocation during the first quarter of 2012 were recorded in that period. All other changes to the initial allocation were recorded retrospectively to the acquisition date. During the second quarter of 2012, no further adjustments were recorded when the allocation was finalized.
During 2011, subsequent to the initial purchase price allocation for Consolidated Thompson, we adjusted the fair values of the assets acquired and liabilities assumed. Based on this process, the acquisition date fair value of the Consolidated Thompson mineral rights, deferred tax liability and noncontrolling interest in Bloom Lake were adjusted to $4,825.6 million, $1,041.8 million and $1,075.4 million, respectively, in the revised purchase price allocation during the fourth quarter of 2011. The change in mineral rights was caused by further refinements to the valuation model, most specifically as it related to potential tax structures that have value from a market participant standpoint and the risk premium used in determining the discount rate. The change in the deferred tax liability primarily was a result of the movement in the mineral rights value and obtaining additional detail of the acquired tax basis in the acquired assets and liabilities. Finally, the change in the noncontrolling interest in Bloom Lake was due to the change in mineral rights and a downward adjustment to the discount for lack of control being used in the valuation. A complete comparison of the initial and final purchase price allocation has been provided in the table above.
The fair value of the noncontrolling interest in the assets acquired and liabilities assumed in Bloom Lake has been allocated proportionately, based upon WISCO’s 25 percent interest in Bloom Lake at the time of acquisition. We then reduced the allocated fair value of WISCO’s ownership interest in Bloom Lake to reflect the noncontrolling interest discount.
The $997.3 million of goodwill resulting from the acquisition was assigned to our Eastern Canadian Iron Ore business segment through the CQIM reporting unit. The goodwill recognized primarily is attributable to the proximity to our existing Canadian operations and potential for future expansion in Eastern Canada, which would allow us to leverage our port facilities and supply iron ore to the seaborne market. None of the goodwill will be deductible for income tax purposes. After performing our annual goodwill impairment test in the fourth quarter of 2012, we determined that the goodwill resulting from the acquisition was impaired as the carrying value exceeded its fair value. The impairment charge was recorded as Impairment of goodwill and other long-lived assets in the Statements of Consolidated Operations for the year ended December 31, 2012. Refer to NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.
Acquisition-related costs in the amount of $25.4 million were charged directly to operations and are included within Consolidated Thompson acquisition costs in the Statements of Consolidated Operations for the year ended December 31, 2011. In addition, we recognized $15.7 million of deferred debt issuance costs, net of accumulated amortization of $1.9 million, associated with issuing and registering the debt required to fund the acquisition as of December 31, 2011. Of these costs, $1.7 million and $14.0 million, respectively, have been recorded in Other current assets and Other non-current assets in the Statements of Consolidated Financial Position at December 31, 2011. Upon the termination of the bridge credit facility that we entered into to provide a portion of the financing for Consolidated Thompson, $38.3 million of related debt issuance costs were recognized in Interest expense, net in the Statements of Consolidated Operations for the year ended December 31, 2011.
The Statements of Consolidated Operations for the year ended December 31, 2011 include incremental revenue of $571.0 million and income of $143.7 million related to the acquisition of Consolidated Thompson since the date of acquisition. Income during the period includes the impact of expensing an additional $59.8 million of costs due to stepping up the value of inventory in purchase accounting through Cost of goods sold and operating expenses for the year ended December 31, 2011.
The following unaudited consolidated pro forma information summarizes the results of operations for the years ended December 31, 2011 and 2010, as if the Consolidated Thompson acquisition and the related financing had been completed as of January 1, 2010. The pro forma information gives effect to actual operating results prior to the acquisition. The unaudited consolidated pro forma information does not purport to be indicative of the results that actually would have been obtained if the acquisition of Consolidated Thompson had occurred as of the beginning of the periods presented or that may be obtained in the future.
 
(In Millions, Except
Per Common Share)
 
2011
 
2010
REVENUES FROM PRODUCT SALES AND SERVICES
$
6,772.3

 
$
4,784.6

NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS COMMON SHAREHOLDERS
$
1,612.3

 
$
912.5

EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
$
11.50

 
$
6.74

EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
$
11.43

 
$
6.70


The 2011 pro forma Net Income (Loss) Attributable to Cliffs Common Shareholders was adjusted to exclude $69.6 million of Cliffs and Consolidated Thompson acquisition-related costs and $59.8 million of non-recurring inventory purchase accounting adjustments incurred during the year ended December 31, 2011. The 2010 pro forma Net Income (Loss) Attributable to Cliffs Common Shareholders was adjusted to include the $59.8 million of non-recurring inventory purchase accounting adjustments.