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NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and in the opinion of management, contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly, the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of results to be expected for the year ended December 31, 2011 or any other future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2010.
The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly-owned and majority-owned subsidiaries, including the following subsidiaries:
|
Name |
Location |
Ownership Interest |
Operation | |||
|
Northshore |
Minnesota | 100.0% | Iron Ore | |||
|
United Taconite |
Minnesota | 100.0% | Iron Ore | |||
|
Wabush |
Labrador/Quebec, Canada | 100.0% | Iron Ore | |||
|
Bloom Lake |
Quebec, Canada | 75.0% | Iron Ore | |||
|
Tilden |
Michigan | 85.0% | Iron Ore | |||
|
Empire |
Michigan | 79.0% | Iron Ore | |||
|
Asia Pacific Iron Ore |
Western Australia | 100.0% | Iron Ore | |||
|
Pinnacle |
West Virginia | 100.0% | Coal | |||
|
Oak Grove |
Alabama | 100.0% | Coal | |||
|
CLCC |
West Virginia | 100.0% | Coal | |||
|
renewaFUEL(1) |
Michigan | 95.0% | Biomass | |||
|
Freewest |
Ontario, Canada | 100.0% | Chromite | |||
|
Spider |
Ontario, Canada | 100.0% | Chromite |
| (1) |
On September 27, 2011, we announced our plans to cease the operations of renewaFUEL. See the Discontined Operations disclosure below for further details. |
Intercompany transactions and balances are eliminated upon consolidation.
On May 12, 2011, we acquired all of the outstanding common shares of Consolidated Thompson for C$17.25 per share in an all-cash transaction, including net debt. The unaudited condensed consolidated financial statements as of and for the period ended September 30, 2011 reflect our 100 percent interest in Consolidated Thompson since that date. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for further information.
The following table presents the detail of our investments in unconsolidated ventures and where those investments are classified on the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011 and December 31, 2010. Parentheses indicate a net liability.
|
Investment |
Classification |
Interest Percentage |
September 30, 2011 |
December 31, 2010 |
||||||||
|
Amapá |
Investments in ventures | 30 | $ | 489.0 | $ | 461.3 | ||||||
|
AusQuest |
Investments in ventures | 30 | 5.7 | 24.1 | ||||||||
|
Hibbing (1) |
Investments in ventures | 23 | 2.1 | (5.8) | ||||||||
|
Cockatoo (2) |
Other Liabilities | 50 | (4.5) | 10.5 | ||||||||
|
Other |
Investments in ventures | 19.0 | 18.9 | |||||||||
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|
|
|
|
|||||||||
| $ | 511.3 | $ | 509.0 | |||||||||
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| (1) |
Recorded as Other liabilities at December 31, 2010. |
| (2) |
Recorded as Investments in ventures at December 31, 2010. |
During the second quarter of 2011, we recorded an impairment charge of $17.6 million related to the decline in the fair value of our 30 percent ownership interest in AusQuest, that was determined to be other than temporary. We evaluated the severity of the decline in the fair value of the investment as compared to our historical carrying amount, considering the broader macroeconomic conditions and the status of current exploration prospects, and could not reasonably assert that the impairment period would be temporary. As of June 30, 2011, our investment in AusQuest had a fair value of $7.3 million based upon the closing market price of the 68.3 million shares held as of June 30, 2011. As we account for this investment as an equity method investment, we recorded the impairment charge as a component of Equity Income (Loss) from Ventures on the Statements of Unaudited Condensed Consolidated Operations for the nine months ended September 30, 2011. There were no additional impairment indicators during the third quarter of 2011.
In August 2011, we entered into a term sheet with our joint venture partner, HWE Cockatoo Pty Ltd., to sell our beneficial interest in the mining tenements and certain infrastructure of Cockatoo to Pluton Resources Limited. As consideration for the acquisition, Pluton Resources Limited will be responsible for the environmental rehabilitation of Cockatoo when it concludes its mining. As of September 30, 2011, our portion of the current estimated cost of the rehabilitation is approximately $20 million. The potential transaction is expected to occur at the end of the current stage of mining, Stage III, which is anticipated to be complete in late 2012. The consummation of the transaction is subject to completion of due diligence and definitive agreements between all parties, and will be conditional on regulatory and third-party consents and other customary closing conditions.
Immaterial Errors
The accounting for our 79 percent interest in the Empire mine was previously based upon the assessment that the mining venture functions as a captive cost company, supplying product only to the venture partners effectively on a cost basis. Upon the execution of the partnership arrangement in 2002, the underlying notion of the arrangement was for the partnership to provide pellets to the venture partners at an agreed upon rate to cover operating and capital costs. Furthermore, any gains or losses generated by the mining venture throughout the life of the partnership were expected to be minimal and the mine has historically been in a net loss position. The partnership arrangement provides that the venture partners share profits and losses on an ownership percentage basis of 79 percent and 21 percent, with the noncontrolling interest partner limited on the losses produced by the mining venture to its equity interest. Therefore, the noncontrolling interest partner cannot have a negative ownership interest in the mining venture. Under our captive cost company arrangements, the noncontrolling interests' revenue amounts are stated at an amount that is offset entirely by an equal amount included in cost of goods sold and operating expenses, resulting in no sales margin attributable to noncontrolling interest participants. In addition, under the Empire partnership arrangement, the noncontrolling interest net losses were historically recorded on the Statements of Unaudited Condensed Consolidated Operations through cost of goods sold and operating expenses. This was based on the assumption that the partnership would operate in a net liability position, and as mentioned, the noncontrolling partner is limited on the partnership losses that can be allocated to its ownership interest. Due to a change in the partnership pricing arrangement to align with the industry's shift towards shorter-term pricing arrangements linked to the spot market, the partnership began to generate profits. The change in partnership pricing was a result of the negotiated settlement with ArcelorMittal effective beginning for the three months ended March 31, 2011. The modification of the pricing mechanism
changed the nature of our cost sharing arrangement and we determined that we should have been recording a noncontrolling interest adjustment in accordance with ASC 810 on the Statements of Unaudited Condensed Consolidated Operations and on the Statements of Unaudited Condensed Consolidated Financial Position to the extent that the partnership was in a net asset position, beginning in the first quarter of 2011.
In accordance with applicable GAAP, management has quantitatively and qualitatively evaluated the materiality of the error and has determined the error to be immaterial to the quarterly reports previously filed for the periods ended March 31, 2011 and June 30, 2011, and also immaterial for this quarterly report for the period ended September 30, 2011. Accordingly, all of the resulting adjustments have been recorded prospectively on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011 and the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011. The adjustment to record the noncontrolling interest related to the Empire mining venture of $84.0 million, resulted in an increase to Income From Continuing Operations of $16.1 million, as a result of reductions in income tax expenses, and a decrease to Net Income Attributable To Cliffs Shareholders of $67.9 million on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. The adjustments resulted in a decrease to basic and diluted earnings per common share of $0.47 per common share and $0.49 and $0.48 per common share for the three and nine months ended September 30, 2011, respectively. In addition, Retained Earnings was decreased by $67.9 million and Noncontrolling Interest was increased by $84.0 million on the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011.
In addition to the noncontrolling interest adjustment, the application of consolidation accounting for the Empire partnership arrangement also resulted in several financial statement line item reclassifications on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. Under the captive cost company accounting, we historically recorded the reimbursements for our venture partners' cost through Freight and venture partners' cost reimbursements, with a corresponding offset in Cost of Goods Sold and Operating Expenses on the Statements of Unaudited Condensed Consolidated Operations. Accordingly, we have reclassified $46.0 million of revenues from Freight and venture partners' cost reimbursements to Product Revenues on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. We also reclassified $54.1 million related to the ArcelorMittal price re-opener settlement recorded during the first quarter of 2011 from Cost of Goods Sold and Operating Expenses to Product Revenues on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011.
The impact of the prospective adjustments on the Statements of Unaudited Condensed Consolidated Operations for each of the prior interim periods of 2011 have been included within the table below. The prior period amounts included within the accompanying Condensed Consolidated Financial Statements have not been retrospectively adjusted for these impacts due to management's materiality assessment as discussed above.
| (In Millions, Except Per Share Amounts) | ||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||
| March 31, | June 30, | June 30, | ||||||||||
| 2011 | 2011 | 2011 | ||||||||||
|
Revenues from Product Sales and Services |
||||||||||||
|
Product |
$ | 54.1 | $ | 46.0 | $ | 100.1 | ||||||
|
Freight and venture partners' cost reimbursements |
- | (46.0) | (46.0) | |||||||||
|
|
|
|
|
|
|
|||||||
| 54.1 | - | 54.1 | ||||||||||
|
Cost of Goods Sold and Operating Expenses |
(54.1) | - | (54.1) | |||||||||
|
Income from Continuing Operations |
8.4 | 7.7 | 16.1 | |||||||||
|
LESS: Income Attributable to Noncontrolling Interest |
45.9 | 38.1 | 84.0 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Net Income Attributable to Cliffs Shareholders |
$ | (37.5) | $ | (30.4) | $ | (67.9) | ||||||
|
Earnings per Common Share Attributable to Cliffs Shareholders - Basic and Diluted |
$ | (0.28) | $ | (0.22) | $ | (0.49) | ||||||
Discontinued Operations
On September 27, 2011, we announced our plans to cease and dispose of the operations at the renewaFUEL biomass production facility in Michigan. As we continue to successfully grow our core iron ore mining business, the decision to sell our interest in the renewaFUEL operations was made to allow our management focus and allocation of capital resources to be deployed where we believe we can have the most impact for our stakeholders. We are currently in the process of executing a plan to dispose of the renewaFUEL assets. The results of operations of the renewaFUEL operations are reflected as discontinued operations in the accompanying consolidated financial statements for all periods presented. We recorded $17.5 million, net of $7.3 million in tax benefits, and $18.7 million, net of $7.9 million in tax benefit, respectively, as Loss From Discontinued Operations on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. This compares to losses of $0.7 million, net of $0.4 million of tax benefits, and $2.0 million, net of $1.0 million in tax benefits, respectively, for each of the comparable prior year periods. The results recorded as Loss From Discontinued Operations on Statements of Unaudited Condensed Consolidated Operations for both the three and nine months ended September 30, 2011, include a $16.7 million impairment charge, net of $7.1 million in tax benefits, taken to write the renewaFUEL asset down to fair value.
The impairment charge was based on an internal assessment around the recovery of the renewaFUEL assets, primarily property, plant and equipment. The assessment considered several factors including the unique industry, the highly customized nature of the related property, plant and equipment and the fact that the plant had not performed up to design capacity. Given these points of consideration, it was determined that the expected recovery values on the renewaFUEL assets are low. The renewaFUEL total assets have been recorded at fair value on the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011, and are primarily comprised of property, plant and equipment. The renewaFUEL operations are included in our Alternative Energies operating segment.
Reportable Segments
As a result of the acquisition of Consolidated Thompson, we have revised the number of our operating and reportable segments as determined under ASC 280. Our company's primary operations are organized and managed according to product category and geographic location and now include: U.S. Iron Ore, Eastern Canadian Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal, Latin American Iron Ore, Alternative Energies, Ferroalloys and our Global Exploration Group. Our historical presentation of segment information consisted of three reportable segments: North American Iron Ore, North American Coal and Asia Pacific Iron Ore. Our restated presentation consists of four reportable segments: U.S. Iron Ore, Eastern Canadian Iron Ore, North American Coal and Asia Pacific Iron Ore. The amounts disclosed in NOTE 2 – SEGMENT REPORTING reflect this restatement.
Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the audited financial statements for the fiscal year ended December 31, 2010, included in our Annual Report on Form 10-K filed with the SEC. Due to the completion of our acquisition of Consolidated Thompson and the immaterial error identified around our accounting for the Empire partnership arrangement, there have been several changes in our significant accounting policies and estimates from those disclosed therein. The significant accounting policies requiring updates have been included within the disclosures below.
Inventories
U.S. Iron Ore
U.S. Iron Ore product inventories are stated at the lower of cost or market. Cost of iron ore inventories is determined using the LIFO method. We maintain ownership of the inventories until title has transferred to the customer, usually when payment is made. Maintaining ownership of the iron ore products at ports on the lower Great Lakes reduces risk of non-payment by customers, as we retain title to the product until payment is received from the customer. We track the movement of the inventory and verify the quantities on hand.
Eastern Canadian Iron Ore
Iron ore pellet inventories are stated at the lower of cost or market. Similar to U.S. Iron Ore product inventories, the cost is determined using the LIFO method. For the majority of these inventories, ownership is maintained until loading of the product at the port.
Iron ore concentrate inventories are stated at the lower of cost or market. The cost of iron ore concentrate inventories is determined using weighted average cost. For the majority of the iron ore concentrate inventories, we maintain ownership of the inventories until title passes on the bill of lading date, which is upon the loading of the product at the port.
Revenue Recognition and Cost of Goods Sold and Operating Expenses
U.S. Iron Ore
Revenue is recognized on the sale of products when title to the product has transferred to the customer in accordance with the specified provisions of each term supply agreement and all applicable criteria for revenue recognition have been satisfied. Most of our U.S. Iron Ore term supply agreements provide that title and risk of loss transfer to the customer when payment is received.
We recognize revenue based on the gross amount billed to a customer as we earn revenue from the sale of the goods or services. Revenue from product sales also includes reimbursement for freight charges paid on behalf of customers in Freight and Venture Partners' Cost Reimbursements separate from product revenue.
Costs of goods sold and operating expenses represents all direct and indirect costs and expenses applicable to the sales and revenues of our mining operations. Operating expenses within this line item primarily represent the portion of the Tilden mining venture costs for which we do not own; that is, the costs attributable to the share of the mine's production owned by the other joint venture partner in the Tilden mine. The mining venture functions as a captive cost company; it supplies product only to its owners effectively on a cost basis. Accordingly, the noncontrolling interests' revenue amounts are stated at cost of production and are offset in entirety by an equal amount included in cost of goods sold and operating expenses resulting in no sales margin reflected in the noncontrolling interest participant. As we are responsible for product fulfillment, we retain the risks and rewards of a principal in the transaction and accordingly record revenue under these arrangements on a gross basis.
As of September 30, 2011, Product Revenues and Costs of goods sold and operating expenses on the Statements of Unaudited Condensed Consolidated Operations reflect consolidation of the Empire mining venture and recognition of a noncontrolling interest. ArcelorMittal is a 21 percent partner in the Empire mining venture, resulting in a noncontrolling interest adjustment for ArcelorMittal's ownership percentage to Net income (loss) attributable to noncontrolling interest on the Statements of Unaudited Condensed Consolidated Operations. As result of ArcelorMittal's 21 percent ownership in the Empire mining venture, we recognized $157.1 million of related party revenues included in Product Revenue on the Statements of Unaudited Condensed Consolidated Operations for the nine months ended September 30, 2011. See the Immaterial Errors disclosure above for further details regarding these prospective changes.
Under certain term supply agreements, we ship the product to ports on the lower Great Lakes or to the customer's facilities prior to the transfer of title. Our rationale for shipping iron ore products to certain customers and retaining title until payment is received for these products is to minimize credit risk exposure. In addition, certain supply agreements with one customer include provisions for supplemental revenue or refunds based on the customer's annual steel pricing for the year the product is consumed in the customer's blast furnaces. We account for this provision as a derivative instrument at the time of sale and record this provision at fair value until the year the product is consumed and the amounts are settled as an adjustment to revenue.
Where we are joint venture participants in the ownership of a mine, our contracts entitle us to receive royalties and/or management fees, which we earn as the pellets are produced. Revenue is recognized on the sale of services when the services are performed.
Eastern Canadian Iron Ore
Revenue is recognized on the sale of products when title to the product has transferred to the customer in accordance with the specified provisions of each term supply agreement and all applicable criteria for revenue recognition have been satisfied. Most of our Eastern Canadian Iron Ore term supply agreements provide that title and risk of loss transfer to the customer upon loading of the product at the port.
Since the acquisition date of Consolidated Thompson, Product Revenues and Costs of goods sold and operating expenses on the Statements of Unaudited Condensed Consolidated Operations reflect our 100 percent ownership interest in Consolidated Thompson. WISCO is a 25 percent partner in Bloom Lake, resulting in a noncontrolling interest adjustment for WISCO's ownership percentage to Net income (loss) attributable to noncontrolling interest on the Statements of Unaudited Condensed Consolidated Operations. As WISCO is a 25 percent partner in Bloom Lake and also our customer, we recognized $224.9 million and $313.6 million, respectively, of related party revenues included in Product Revenue on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011, and $68.8 million of related party receivables included in Accounts receivable from associated companies on the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011.
Related Party Revenues
Total related party revenues were $837.8 million and $1.7 billion for the three and nine months ended September 30, 2011, respectively. Our joint venture partners are also our customers and account for the total related party revenues. This compares with total related party revenues of $379.4 million and $905.4 million for the three and nine months ended September 30, 2010, respectively.
Retrospective Adjustments
In accordance with the business combination guidance in ASC 805, we retrospectively recorded adjustments to the Wabush purchase price allocation that occurred during the second half of 2010 back to the date of acquisition that occurred during the first quarter of 2010. The adjustments were due to further refinements of the fair values of the assets acquired and liabilities assumed. Additionally, we continued to ensure our existing interest in Wabush was incorporating all of the book basis, including amounts recorded in Accumulated other comprehensive income (loss). Due to these adjustments, the financial statements for the three months ended March 31, 2010 have been retrospectively adjusted for these changes, resulting in a decrease to Income From Continuing Operations Before Income Taxes and Equity Income (Loss) from Ventures of $22.0 million and a decrease to Net Income Attributable to Cliffs Shareholders of $16.1 million, respectively, on the Statements of Unaudited Condensed Consolidated Operations. The adjustments resulted in a decrease to basic and diluted earnings per common share of $0.12 per common share, respectively. As a portion of the total adjustments were recorded during the third quarter of 2010, the financial statements for the nine months ended September 30, 2010 have been retrospectively adjusted, resulting in an increase to Income From Continuing Operations Before Income Taxes and Equity Income (Loss) from Ventures of $12.3 million and an increase to Net Income Attributable to Cliffs Shareholders of $8.9 million, respectively, on the Statements of Unaudited Condensed Consolidated Operations from the previously filed information. The adjustments resulted in an increase to basic and diluted earnings per common share of $0.07 per common share, respectively. In addition, Retained Earnings was decreased by $16.1 million and Accumulated other comprehensive income (loss) was increased by $25.3 million, respectively, on the Statements of Unaudited Condensed Consolidated Financial Position as of December 31, 2010 for the effect of these retrospective adjustments. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for further information.
Recent Accounting Pronouncements
In January 2010, the FASB amended the guidance on fair value to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The amendment also revises the guidance on employers' disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The amended guidance is effective for the first reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted the provisions of guidance required for the period beginning January 1, 2011; however, adoption of this amendment did not have a material impact on our consolidated financial statements.
In December 2010, the FASB issued amended guidance on business combinations in order to clarify the disclosure requirements around pro forma revenue and earnings. The update was issued in response to the diversity in practice about the interpretation of such requirements. The amendment specifies that pro forma revenue and earnings of the combined entity be presented as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The new guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We adopted the amended guidance upon our acquisition of Consolidated Thompson. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for further information.
In May 2011, the FASB amended the guidance on fair value as a result of the joint efforts by the FASB and the IASB to develop a single, converged fair value framework. The converged fair value framework provides converged guidance on how to measure fair value and on what disclosures to provide about fair value measurements. The significant amendments to the fair value measurement guidance and the new disclosure requirements include: (1) the highest and best use and valuation premise for nonfinancial assets; (2) the application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risks; (3) premiums or discounts in fair value measurement; (4) fair value of an instrument classified in a reporting entity's shareholders' equity; (5) for Level 3 measurements, a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation process in place, and a narrative description of the sensitivity of the fair value to changes in the unobservable inputs and interrelationships between those inputs; and (6) the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed. The new guidance is effective for interim and annual periods beginning after December 15, 2011. We are currently evaluating the impact that the adoption of this amendment will have on our consolidated financial statements.
In June 2011, the FASB issued amended guidance on the presentation of comprehensive income in order to improve comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in OCI. The update also facilitates the convergence of GAAP and IFRS. The amendment eliminates the presentation options under ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. In either presentation option, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statements where the components of net income and the components of OCI are presented. The amendment does not change the items that must be reported in other comprehensive income. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and the amendments are required to be applied retrospectively. We are currently evaluating the impact that the adoption of this amendment will have on our consolidated financial statements.
In September 2011, the FASB issued amended guidance in order to simplify how entities test goodwill for impairment under ASC 350. The revised guidance provides entities testing goodwill for impairment with the option of performing a qualitative assessment before calculating the fair value of the reporting unit as required in step 1 of the goodwill impairment test. If the qualitative assessment provides the basis that the fair value of the reporting unit is more likely than not less than the carrying amount, then step 1 of the impairment test is required. The amended guidance does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. In addition, the revised guidance does not amend the requirement to test goodwill for impairment between annual tests if certain events or circumstances warrant that such a test be performed. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We are currently evaluating the impact that the adoption of this amendment will have on our annual goodwill impairment test and do not expect that this amendment will have a material impact on our consolidated financial statements.
In September 2011, the FASB issued amended guidance to increase the quantitative and qualitative disclosures an employer is required to provide about its participation in significant multiemployer plans that offer pension and other post retirement benefits. The objective of the amended guidance is to enhance the transparency of disclosures about: (1) the significant multiemployer plans in which an employer participates, including the plan names and identifying numbers; (2) the level of the employer's participation in those plans; (3) the financial health of the plans; and (4) the nature of the employer's commitments to the plans. For plans for which additional public information outside of the employer's financial statements is not available, the amended guidance requires additional disclosures, including: (1) a description of the nature of the plan benefits; (2) a qualitative description of the extent to which the employer could be responsible for the obligation of the plan; and (3) other information to help users understand the financial information about the plan, to the extent available. The new guidance is effective for fiscal years ending after December 15, 2011, and the amendments are required to be applied retrospectively for all prior periods presented. We are currently evaluating the impact that the adoption of this amendment will have on our consolidated financial statements.
|
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NOTE 2 – SEGMENT REPORTING
Our company's primary operations are organized and managed according to product category and geographic location: U.S. Iron Ore, Eastern Canadian Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal, Latin American Iron Ore, Alternative Energies, Ferroalloys and our Global Exploration Group. The U.S. Iron Ore segment is comprised of our interests in five U.S. mines that provide iron ore to the integrated steel industry. The Eastern Canadian Iron Ore segment is comprised of two Eastern Canadian mines that provide iron ore primarily to the seaborne market to Asian steel producers. The North American Coal segment is comprised of our five metallurgical coal mines and one thermal coal mine that provide metallurgical coal primarily to the integrated steel industry and thermal coal primarily to the energy industry. The Asia Pacific Iron Ore segment is comprised of two iron ore mining complexes in Western Australia and provides iron ore to steel producers in China and Japan. There are no intersegment revenues.
The Asia Pacific Coal operating segment is comprised of our 45 percent economic interest in Sonoma, located in Queensland, Australia. The Latin American Iron Ore operating segment is comprised of our 30 percent Amapá interest in Brazil. The Alternative Energies operating segment is comprised primarily of our 95 percent interest in renewaFUEL located in Michigan. As previously discussed, the results of operations of the renewaFUEL operations are reflected as discontinued operations in the accompanying consolidated financial statements for all periods presented due to our plans to dispose of the operations. The Ferroalloys operating segment is comprised of our interests in chromite deposits held by Freewest and Spider in Northern Ontario, Canada, and the Global Exploration Group is focused on early involvement in exploration activities to identify new world-class projects for future development or projects that add significant value to existing operations. The Asia Pacific Coal, Latin American Iron Ore, Alternative Energies, Ferroalloys and Global Exploration Group operating segments do not meet reportable segment disclosure requirements and therefore are not separately reported.
We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold and operating expenses identifiable to each segment. This measure of operating performance is an effective measurement as we focus on reducing production costs throughout the Company.
The following table presents a summary of our reportable segments for the three and nine months ended September 30, 2011 and 2010:
| (In Millions) | ||||||||||||||||||||||||||||||||
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
|
Revenues from product sales and services: |
||||||||||||||||||||||||||||||||
|
U.S. Iron Ore |
$ | 1,106.7 | 52% | $ | 741.4 | 55% | $ | 2,502.0 | 49% | $ | 1,729.8 | 53% | ||||||||||||||||||||
|
Eastern Canadian Iron Ore |
517.3 | 24% | 124.4 | 9% | 942.2 | 18% | 308.1 | 9% | ||||||||||||||||||||||||
|
North American Coal |
64.0 | 3% | 126.1 | 9% | 388.7 | 8% | 323.4 | 10% | ||||||||||||||||||||||||
|
Asia Pacific Iron Ore |
400.1 | 19% | 298.2 | 22% | 1,127.1 | 22% | 767.1 | 24% | ||||||||||||||||||||||||
|
Other |
54.7 | 2% | 55.9 | 5% | 171.8 | 3% | 129.5 | 4% | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Total revenues from product sales and services for reportable segments |
$ | 2,142.8 | 100% | $ | 1,346.0 | 100% | $ | 5,131.8 | 100% | $ | 3,257.9 | 100% | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Sales margin: |
||||||||||||||||||||||||||||||||
|
U.S. Iron Ore |
$ | 481.3 | $ | 264.2 | $ | 1,283.7 | $ | 545.5 | ||||||||||||||||||||||||
|
Eastern Canadian Iron Ore |
193.0 | 39.6 | 296.0 | 76.3 | ||||||||||||||||||||||||||||
|
North American Coal |
(42.7) | (17.8) | (60.4) | (5.4) | ||||||||||||||||||||||||||||
|
Asia Pacific Iron Ore |
214.6 | 169.7 | 615.4 | 382.5 | ||||||||||||||||||||||||||||
|
Other |
17.1 | 21.5 | 60.2 | 43.7 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Sales margin |
863.3 | 477.2 | 2,194.9 | 1,042.6 | ||||||||||||||||||||||||||||
|
Other operating expense |
(43.0) | (86.8) | (214.2) | (170.9) | ||||||||||||||||||||||||||||
|
Other income (expense) |
(54.8) | 20.2 | (61.8) | 39.8 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Income from continuing operations before income taxes and equity income (loss) from ventures |
$ | 765.5 | $ | 410.6 | $ | 1,918.9 | $ | 911.5 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Depreciation, depletion and amortization: |
||||||||||||||||||||||||||||||||
|
U.S. Iron Ore |
$ | 23.0 | $ | 17.6 | $ | 62.5 | $ | 45.1 | ||||||||||||||||||||||||
|
Eastern Canadian Iron Ore |
41.2 | 10.6 | 81.1 | 36.2 | ||||||||||||||||||||||||||||
|
North American Coal |
19.7 | 19.6 | 62.1 | 42.6 | ||||||||||||||||||||||||||||
|
Asia Pacific Iron Ore |
25.4 | 31.0 | 74.3 | 97.2 | ||||||||||||||||||||||||||||
|
Other |
8.4 | 5.6 | 22.9 | 18.4 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Total depreciation, depletion and amortization |
$ | 117.7 | $ | 84.4 | $ | 302.9 | $ | 239.5 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Capital additions (1): |
||||||||||||||||||||||||||||||||
|
U.S. Iron Ore |
$ | 28.5 | $ | 32.7 | $ | 115.8 | $ | 59.9 | ||||||||||||||||||||||||
|
Eastern Canadian Iron Ore |
103.3 | 4.8 | 167.5 | 9.4 | ||||||||||||||||||||||||||||
|
North American Coal |
60.3 | 28.1 | 116.3 | 42.0 | ||||||||||||||||||||||||||||
|
Asia Pacific Iron Ore |
57.3 | 10.4 | 140.6 | 30.6 | ||||||||||||||||||||||||||||
|
Other |
6.5 | 7.5 | 13.1 | 12.3 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Total capital additions |
$ | 255.9 | $ | 83.5 | $ | 553.3 | $ | 154.2 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
(1) Includes capital lease additions and non-cash accruals.
A summary of assets by segment is as follows:
| (In Millions) | ||||||||
| September 30, 2011 |
December 31, 2010 |
|||||||
|
Segment Assets: |
||||||||
|
U.S. Iron Ore |
$ | 1,772.2 | $ | 1,537.1 | ||||
|
Eastern Canadian Iron Ore |
7,712.6 | 629.6 | ||||||
|
North American Coal |
1,718.9 | 1,623.8 | ||||||
|
Asia Pacific Iron Ore |
1,343.1 | 1,195.3 | ||||||
|
Other |
1,165.6 | 1,257.8 | ||||||
|
|
|
|
|
|||||
|
Total segment assets |
13,712.4 | 6,243.6 | ||||||
|
Corporate |
232.9 | 1,534.6 | ||||||
|
|
|
|
|
|||||
|
Total assets |
$ | 13,945.3 | $ | 7,778.2 | ||||
|
|
|
|
|
|||||
|
|||
NOTE 3 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The following table presents the fair value of our derivative instruments and the classification of each on the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011 and December 31, 2010:
| (In Millions) | ||||||||||||||||||||||||
| Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||
| September 30, 2011 | December 31, 2010 | September 30, 2011 | December 31, 2010 | |||||||||||||||||||||
|
Derivative Instrument |
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
||||||||||||||||
|
Derivatives designated as hedging instruments under ASC 815: |
||||||||||||||||||||||||
|
Foreign Exchange Contracts |
Derivative assets (current) |
$ | 1.2 | Derivative assets (current) |
$ | 2.8 | Other current liabilities |
$ | 15.9 | $ | - | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total derivatives designated as hedging instruments under ASC 815 |
$ | 1.2 | $ | 2.8 | $ | 15.9 | $ | - | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Derivatives not designated as hedging instruments under ASC 815: |
||||||||||||||||||||||||
|
Foreign Exchange Contracts |
Derivative assets (current) |
$ | 4.6 | Derivative assets (current) |
$ | 34.2 | $ | - | $ | - | ||||||||||||||
| Deposits and miscellaneous |
- | Deposits and miscellaneous |
2.0 | - | - | |||||||||||||||||||
|
Customer Supply Agreements |
Derivative assets (current) |
67.8 | Derivative assets (current) |
45.6 | - | - | ||||||||||||||||||
|
Provisional Pricing Arrangements |
Accounts Receivable |
49.0 | - | - | - | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total derivatives not designated as hedging instruments under ASC 815 |
$ | 121.4 | $ | 81.8 | $ | - | $ | - | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total derivatives |
$ | 122.6 | $ | 84.6 | $ | 15.9 | $ | - | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
There were no derivative instruments classified as a liability as of December 31, 2010.
Derivatives Designated as Hedging Instruments
Cash Flow Hedge
Australian Dollar Foreign Exchange Contracts
We are subject to changes in foreign currency exchange rates as a result of our operations in Australia. Foreign exchange risk arises from our exposure to fluctuations in foreign currency exchange rates because the functional currency of our Asia Pacific operations is the Australian dollar. Our Asia Pacific operations receive funds in U.S. currency for their iron ore and coal sales. We use foreign currency exchange forward contracts, call options and collar options to hedge our foreign currency exposure for a portion of our sales receipts. U.S. currency is converted to Australian dollars at the currency exchange rate in effect at the time of the transaction. The primary objective for the use of these instruments is to reduce exposure to changes in Australian and U.S. currency exchange rates and to protect against undue adverse movement in these exchange rates. Effective October 1, 2010, we elected hedge accounting for certain types of our foreign exchange contracts entered into subsequent to September 30, 2010. These instruments are subject to formal documentation, intended to achieve qualifying hedge treatment, and are tested for effectiveness at inception and at least once each reporting period. During the third quarter of 2011, we implemented a global foreign exchange hedging policy to apply to all of our operating segments and our wholly-owned subsidiaries that engage in foreign exchange risk mitigation. The policy allows for no more than 75 percent, but not less than 40 percent for up to 12 months and not less than 10 percent for up to 15 months, of forecasted net currency exposures that are probable to occur. For our Asia Pacific operations, the forecasted net currency exposures are in relation to anticipated operating costs designated as cash flow hedges on future sales. Previously, our Asia Pacific operations had a policy in place that was specific to local operations and allowed for no more than 75 percent of anticipated operating costs for up to 12 months and no more than 50 percent of operating costs for up to 24 months to be designated as cash flow hedges of future sales. If and when these hedge contracts are determined not to be highly effective as hedges, the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, hedge accounting is discontinued.
sAs of September 30, 2011, we had outstanding foreign currency exchange contracts with a notional amount of $315 million in the form of forward contracts with varying maturity dates ranging from October 2011 to September 2012. This compares with outstanding foreign currency exchange contracts with a notional amount of $70 million as of December 31, 2010.
Changes in fair value of highly effective hedges are recorded as a component of Accumulated other comprehensive income (loss) on the Statements of Unaudited Condensed Consolidated Financial Position. Unrealized losses of $15.2 million and $10.3 million, respectively, were recorded for the three and nine months ended September 30, 2011 related to these hedge contracts, based on the Australian to U.S. dollar spot rate of 0.97 as of September 30, 2011. Any ineffectiveness is recognized immediately in income and as of September 30, 2011, there was no ineffectiveness recorded for these foreign exchange contracts. Amounts recorded as a component of Accumulated other comprehensive income (loss) are reclassified into earnings in the same period the forecasted transaction affects earnings and are recorded as Product Revenues on the Statements of Unaudited Condensed Consolidated Operations. For the three and nine months ended September 30, 2011, we recorded realized gains of $1.8 million and $4.0 million, respectively. Of the amounts remaining in Accumulated other comprehensive income (loss), we estimate that net losses of $10.3 million will be reclassified into earnings within the next 12 months.
The following summarizes the effect of our derivatives designated as hedging instruments on Accumulated other comprehensive income (loss) and the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011 and 2010:
| (In Millions) | ||||||||||||||||||
|
Derivatives in Cash Flow Hedging Relationships |
Amount of Gain/(Loss) Recognized in OCI on Derivative (Effective Portion) |
Location of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
|||||||||||||||
| Three months ended September 30, |
Three months ended September 30, |
|||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||
|
Australian Dollar Foreign Exchange Contracts (hedge designation) |
$ | (15.2) | $ | - | Product Revenue | $ | 1.5 | $ | - | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total |
$ | (15.2) | $ | - | $ | 1.5 | $ | - | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Nine months ended September 30, |
Nine months ended September 30, |
|||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||
|
Australian Dollar Foreign Exchange Contracts (hedge designation) |
$ | (10.3) | $ | - | Product Revenue | $ | 2.5 | $ | - | |||||||||
|
Australian Dollar Foreign Exchange Contracts (prior to de-designation) |
- | - | Product Revenue | 0.7 | 3.2 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total |
$ | (10.3) | $ | - | $ | 3.2 | $ | 3.2 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
Derivatives Not Designated as Hedging Instruments
Australian Dollar Foreign Exchange Contracts
Effective July 1, 2008, we discontinued hedge accounting for all outstanding foreign currency exchange contracts entered into at the time and continued to hold such instruments as economic hedges to manage currency risk as described above. The notional amount of the outstanding non-designated foreign exchange contracts was $45 million as of September 30, 2011. The contracts are in the form of collar options with varying maturity dates ranging from October 2011 to January 2012. This compares with outstanding non-designated foreign exchange contracts with a notional amount of $230 million as of December 31, 2010.
As a result of discontinuing hedge accounting, the instruments are prospectively marked to fair value each reporting period through Changes in fair value of foreign currency contracts, net on the Statements of Unaudited Condensed Consolidated Operations. For the three and nine months ended September 30, 2011, the change in fair value of our foreign currency contracts resulted in net losses of $6.2 million and net gains of $7.4 million, respectively, based on the Australian to U.S. dollar spot rate of 0.97 at September 30, 2011. This compares with net gains of $32.5 million and $24.8 million for the three and nine months ended September 30, 2010, respectively, based on the Australian to U.S. dollar spot rate of 0.97 at September 30, 2010. The amounts that were previously recorded as a component of Accumulated other comprehensive income (loss) were all reclassified to earnings as of June 30, 2011, with a corresponding realized gain or loss recognized in the same period the forecasted transaction affected earnings.
Canadian Dollar Foreign Exchange Contracts and Options
On January 11, 2011, we entered into a definitive arrangement agreement with Consolidated Thompson to acquire all of its common shares in an all-cash transaction, including net debt. We hedged a portion of the purchase price on the open market by entering into foreign currency exchange forward contracts and an option contract with a combined notional amount of C$4.7 billion. The hedge contracts were considered economic hedges which do not qualify for hedge accounting. The forward contracts had various maturity dates and the option contract had a maturity date of April 14, 2011.
During the first half of 2011, swaps were executed in order to extend the maturity dates of certain of the forward contracts through the consummation of the Consolidated Thompson acquisition and the repayment of the Consolidated Thompson convertible debentures. These swaps and the maturity of the forward contracts resulted in net realized gains of $93.1 million recognized through Changes in fair value of foreign currency contracts, net on the Statements of Unaudited Condensed Consolidated Operations for the nine months ended September 30, 2011.
Customer Supply Agreements
Most of our U.S. Iron Ore long-term supply agreements are comprised of a base price with annual price adjustment factors, some of which are subject to annual price collars in order to limit the percentage increase or decrease in prices for our iron ore pellets during any given year. The price adjustment factors vary based on the agreement but typically include adjustments based upon changes in international pellet prices, changes in specified Producers Price Indices including those for all commodities, industrial commodities, energy and steel. The adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. The price adjustment factors have been evaluated to determine if they contain embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host contract and are integral to the host contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments.
Certain supply agreements with one U.S. Iron Ore customer provide for supplemental revenue or refunds based on the customer's average annual steel pricing at the time the product is consumed in the customer's blast furnace. The supplemental pricing is characterized as a freestanding derivative and is required to be accounted for separately once the product is shipped. The derivative instrument, which is finalized based on a future price, is marked to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled. We recognized $53.8 million and $124.9 million, respectively, as Product revenues on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011, related to the supplemental payments. This compares with Product revenues of $25.1 million and $93.4 million, respectively, for the comparable periods in 2010. Derivative assets, representing the fair value of the pricing factors, were $67.8 million and $45.6 million, respectively, on the September 30, 2011 and December 31, 2010 Statements of Unaudited Condensed Consolidated Financial Position.
Provisional Pricing Arrangements
During 2010, the world's largest iron ore producers began to move away from the annual international benchmark pricing mechanism referenced in certain of our customer supply agreements, resulting in a shift in the industry toward shorter-term pricing arrangements linked to the spot market. This change has impacted certain of our U.S. Iron Ore and Eastern Canadian Iron Ore customer supply agreements for the 2011 contract year. We have reached final pricing settlement with a majority of our U.S. Iron Ore customers through the third quarter of 2011. However, in some cases we are still in the process of revising the terms of our customer supply agreements to incorporate changes to historical pricing mechanisms. As a result, we have recorded certain shipments made to our U.S. Iron Ore and Eastern Canadian Iron Ore customers in the first nine months of 2011 on a provisional basis until final settlement is reached. The pricing provisions are characterized as freestanding derivatives and are required to be accounted for separately once the product is shipped. The derivative instrument, which is settled and billed once final pricing settlement is reached, is marked to fair value as a revenue adjustment each reporting period based upon the estimated forward settlement until prices are actually settled. We recognized $193.0 million and $623.5 million, respectively, as an increase in Product revenues on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011 under these pricing provisions for certain shipments to our U.S. Iron Ore and Eastern Canadian Iron Ore customers. For the three and nine months ended September 30, 2011, $309.4 million of the revenues were realized due to the pricing settlements that occurred with the majority of our U.S. Iron Ore customers during the third quarter of 2011. This compares with an increase in Product revenues of $229.2 million and $960.7 million, respectively, for the three and nine months ended September 30, 2010 related to estimated forward price settlements for shipments to our Asia Pacific Iron Ore, U.S. Iron Ore and Eastern Canadian Iron Ore customers until prices actually settled. For the three and nine months ended September 30, 2010, $455.7 million of the revenues were realized due to pricing settlements.
As of September 30, 2011, we have derivatives of $49.0 million classified as Accounts receivable on the Statements of Unaudited Condensed Consolidated Financial Position to reflect the amount we have provisionally agreed upon with certain of our U.S. Iron Ore and Eastern Canadian Iron Ore customers until a final price settlement is reached. It also represents the amount we have invoiced for shipments made to such customers and expect to collect in cash in the short-term to fund operations. As the amounts provisionally agreed upon with such customers are in line with our estimated forward settlement of the provisional prices, no incremental amounts were recorded as current Derivative assets on the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011. In 2010, the derivative instrument was settled in the fourth quarter upon the settlement of pricing provisions with some of our U.S. Iron Ore customers and therefore is not reflected in the Statements of Unaudited Condensed Consolidated Financial Position at December 31, 2010.
The following summarizes the effect of our derivatives that are not designated as hedging instruments, on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011 and 2010:
|
(In Millions) |
||||||||||||||||||
|
Derivative Not Designated as Hedging Instruments |
Location of Gain/(Loss) Recognized in Income on Derivative |
Amount of Gain/(Loss) Recognized in Income on Derivative | ||||||||||||||||
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||
|
Foreign Exchange Contracts |
Product Revenues | $ | - | $ | 3.3 | $ | 1.0 | $ | 8.8 | |||||||||
|
Foreign Exchange Contracts |
Other Income (Expense) | (6.2) | 32.5 | 100.5 | 24.8 | |||||||||||||
|
Customer Supply Agreements |
Product Revenues | 53.8 | 25.1 | 124.9 | 93.4 | |||||||||||||
|
Provisional Pricing Arrangements |
Product Revenues | 193.0 | 229.2 | 623.5 | 960.7 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total |
$ | 240.6 | $ | 290.1 | $ | 849.9 | $ | 1,087.7 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
Refer to NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS for additional information.
|
|||
NOTE 4 – INVENTORIES
The following table presents the detail of our Inventories on the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011 and December 31, 2010:
| (In Millions) | ||||||||||||||||||||||||
| September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
|
Segment |
Finished Goods |
Work-in Process |
Total Inventory |
Finished Goods |
Work-in Process |
Total Inventory |
||||||||||||||||||
|
U.S. Iron Ore |
$ | 235.4 | $ | 21.5 | $ | 256.9 | $ | 101.1 | $ | 9.7 | $ | 110.8 | ||||||||||||
|
Eastern Canadian Iron Ore |
101.1 | 28.8 | 129.9 | 43.5 | 21.2 | 64.7 | ||||||||||||||||||
|
North American Coal |
7.1 | 65.9 | 73.0 | 16.1 | 19.8 | 35.9 | ||||||||||||||||||
|
Asia Pacific Iron Ore |
37.5 | 14.0 | 51.5 | 34.7 | 20.4 | 55.1 | ||||||||||||||||||
|
Other |
14.6 | 2.3 | 16.9 | 2.6 | 0.1 | 2.7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
$ | 395.7 | $ | 132.5 | $ | 528.2 | $ | 198.0 | $ | 71.2 | $ | 269.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|||
NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS
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.
Wabush
We acquired entities from our former partners that held their respective interests in Wabush on February 1, 2010, thereby increasing our ownership interest to 100 percent. Our full ownership of Wabush has been included in the consolidated financial statements since that date. The acquisition date fair value of the consideration transferred totaled $103 million, which consisted of a cash purchase price of $88 million and a working capital adjustment of $15 million. With Wabush's 5.5 million tons of production capacity, acquisition of the remaining interest has increased our Eastern Canadian Iron Ore equity production capacity by approximately 4.0 million tons and has added more than 50 million tons of additional reserves. Furthermore, acquisition of the remaining interest has provided us additional access to the seaborne iron ore markets serving steelmakers in Europe and Asia.
Prior to the acquisition date, we accounted for our 26.8 percent interest in Wabush as an equity-method investment. We initially recognized an acquisition date fair value of the previous equity interest of $39.7 million, and a gain of $47.0 million as a result of remeasuring our prior equity interest in Wabush held before the business combination. The gain was recognized in the first quarter of 2010 and was included in Gain on acquisition of controlling interests in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2010.
In the months subsequent to the initial purchase price allocation, we further refined the fair values of the assets acquired and liabilities assumed. Additionally, we also continued to ensure our existing interest in Wabush was incorporating all of the book basis, including amounts recorded in Accumulated other comprehensive income (loss). Based on this process the acquisition date fair value of the previous equity interest was adjusted to $38.0 million. The changes required to finalize the U.S. and Canadian deferred tax valuations and to incorporate additional information on assumed asset retirement obligations offset to a net decrease of $1.7 million in the fair value of the equity interest from the initial purchase price allocation. Thus, the gain resulting from the remeasurement of our prior equity interest, net of amounts previously recorded in Accumulated other comprehensive income (loss) of $20.3 million, was adjusted to $25.0 million as of December 31, 2010.
Under the business combination guidance in ASC 805, prior periods, beginning with the period of acquisition, are required to be revised to reflect changes to the original purchase price allocation. In accordance with this guidance, we have retrospectively recorded the adjustments to the fair value of the acquired assets and assumed liabilities and the resulting Goodwill and Gain on acquisition of controlling interests, made during the second half of 2010, back to the date of acquisition. Accordingly, such amounts are reflected in the Statements of Unaudited Condensed Consolidated Operations for the nine months ended September 30, 2010 and have been excluded from the three months ended September 30, 2010. We finalized the purchase price allocation for the acquisition of Wabush during the fourth quarter of 2010.
Freewest
During 2009, we acquired 29 million shares, or 12.4 percent, of Freewest, a Canadian-based mineral exploration company focused on acquiring, exploring and developing high-quality chromite, gold and base-metal properties in Canada. On January 27, 2010, we acquired all of the remaining outstanding shares of Freewest for C$1.00 per share, including its interest in the Ring of Fire properties in Northern Ontario, Canada, which comprise three premier chromite deposits. As a result of the transaction, our ownership interest in Freewest increased from 12.4 percent as of December 31, 2009 to 100 percent as of the acquisition date. Our full ownership of Freewest has been included in the consolidated financial statements since the acquisition date. The acquisition of Freewest is consistent with our strategy to broaden our geographic and mineral diversification and allows us to apply our expertise in open-pit mining and mineral processing to a chromite ore resource base that could form the foundation of North America's only ferrochrome production operation. Assuming favorable results from pre-feasibility and feasibility studies and receipt of all applicable approvals, the planned mine is expected to allow us to produce 600 thousand metric tons of ferrochrome and to produce one million metric tons of chromite concentrate annually. Total purchase consideration for the remaining interest in Freewest was approximately $185.9 million, comprised of the issuance of 0.0201 of our common shares for each Freewest share, representing a total of 4.2 million common shares or $173.1 million, and $12.8 million in cash. The acquisition date fair value of the consideration transferred was determined based upon the closing market price of our common shares on the acquisition date.
Prior to the acquisition date, we accounted for our 12.4 percent interest in Freewest as an available-for-sale equity security. The acquisition date fair value of the previous equity interest was $27.4 million, which was determined based upon the closing market price of the 29 million previously owned shares on the acquisition date. We recognized a gain of $13.6 million in the first quarter of 2010 as a result of remeasuring our ownership interest in Freewest held prior to the business acquisition. The gain is included in Gain on acquisition of controlling interests in the Statements of Consolidated Operations for the nine months ended September 30, 2010.
We finalized the purchase price allocation in the fourth quarter of 2010. Under the business combination guidance in ASC 805, prior periods, beginning with the period of acquisition, are required to be revised to reflect changes to the original purchase price allocation. In accordance with this guidance, we have retrospectively recorded the adjustments to the fair value of the acquired assets and assumed liabilities and the resulting Goodwill, made during the fourth quarter of 2010, back to the date of acquisition.
Spider
During the second quarter of 2010, we commenced a formal cash offer to acquire all of the outstanding common shares of Spider, a Canadian-based mineral exploration company, for C$0.19 per share. As of June 30, 2010, we held 27.4 million shares of Spider, representing approximately four percent of its issued and outstanding shares. On July 6, 2010, all of the conditions to acquire the remaining common shares of Spider had been satisfied or waived, and we consequently acquired all of the common shares that were validly tendered as of that date. When combined with our prior ownership interest, the additional shares acquired increased our ownership percentage to 52 percent on the date of acquisition, representing a majority of the common shares outstanding on a fully-diluted basis. Our 52 percent ownership of Spider was included in the consolidated financial statements since the July 6, 2010 acquisition date, and Spider was included as a component of our Ferroalloys operating segment. The acquisition date fair value of the consideration transferred totaled a cash purchase price of $56.9 million. Subsequent to the acquisition date, we extended the cash offer to permit additional shares to be tendered and taken up, thereby increasing our ownership percentage in Spider to 85 percent as of July 26, 2010. Effective October 6, 2010, we completed the acquisition of the remaining shares of Spider through an amalgamation, bringing our ownership percentage to 100 percent as of December 31, 2010. As noted above, through our acquisition of Freewest during the first quarter of 2010, we acquired an interest in the Ring of Fire properties in Northern Ontario, which comprise three premier chromite deposits. The Spider acquisition allowed us to obtain majority ownership of the "Big Daddy" chromite deposit, based on Spider's ownership percentage in this deposit of 26.5 percent at the time of the closing of the acquisition.
Prior to the July 6, 2010 acquisition date, we accounted for our four percent interest in Spider as an available-for-sale equity security. The acquisition date fair value of the previous equity interest was $4.9 million, which was determined based upon the closing market price of the 27.4 million previously owned shares on the acquisition date. The acquisition date fair value of the 48 percent noncontrolling interest in Spider was estimated to be $51.9 million, which was determined based upon the closing market price of the 290.5 million shares of noncontrolling interest on the acquisition date.
We finalized the purchase price allocation in the fourth quarter of 2010. Under the business combination guidance in ASC 805, prior periods, beginning with the period of acquisition, are required to be revised to reflect changes to the original purchase price allocation. In accordance with this guidance, we have retrospectively recorded the adjustments to the fair value of the acquired assets and assumed liabilities and the resulting Goodwill, made during the fourth quarter of 2010, back to the date of acquisition.
The $75.2 million of goodwill resulting from the acquisition was assigned to our Ferroalloys business segment. The goodwill recognized is primarily attributable to obtaining majority ownership of the "Big Daddy" chromite deposit. When combined with the interest we acquired in the Ring of Fire properties through our acquisition of Freewest, we now control three premier chromite deposits in Northern Ontario, Canada. None of the goodwill is expected to be deductible for income tax purposes. Refer to NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.
CLCC
On July 30, 2010, we acquired the coal operations of privately-owned INR, and since that date, the operations acquired from INR have been conducted through our wholly-owned subsidiary known as CLCC. Our full ownership of CLCC has been included in the consolidated financial statements since the acquisition date, and the subsidiary is reported as a component of our North American Coal segment. The acquisition date fair value of the consideration transferred totaled $775.9 million, which consisted of a cash purchase price of $757 million and a working capital adjustment of $18.9 million.
CLCC is a producer of high-volatile metallurgical and thermal coal located in southern West Virginia. CLCC's operations include two underground continuous mining method metallurgical coal mines and one open surface thermal coal mine. The acquisition includes a metallurgical and thermal coal mining complex with a coal preparation and processing facility as well as a large, long-life reserve base with an estimated 59 million tons of metallurgical coal and 62 million tons of thermal coal. This reserve base increases our total global reserve base to over 166 million tons of metallurgical coal and over 67 million tons of thermal coal. This acquisition represents an opportunity for us to add complementary high-quality coal products and provides certain advantages, including among other things, long-life mine assets, operational flexibility, and new equipment.
The following table summarizes the consideration paid for CLCC and the fair values of the assets acquired and liabilities assumed at the acquisition date. We finalized the purchase price allocation in the second quarter of 2011. Under the business combination guidance in ASC 805, prior periods, beginning with the period of acquisition, are required to be revised to reflect changes to the original purchase price allocation. In accordance with this guidance, we have retrospectively recorded the adjustments to the fair value of the acquired assets and assumed liabilities and the resulting Goodwill back to the date of acquisition. We adjusted the initial purchase price allocation for the acquisition of CLCC as follows:
| (In Millions) | ||||||||||||
| Initial Allocation |
Final Allocation |
Change | ||||||||||
|
Consideration |
||||||||||||
|
Cash |
$ | 757.0 | $ | 757.0 | $ | - | ||||||
|
Working capital adjustments |
17.5 | 18.9 | 1.4 | |||||||||
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|||||||
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Fair value of total consideration transferred |
$ | 774.5 | $ | 775.9 | $ | 1.4 | ||||||
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Recognized amounts of identifiable assets acquired and liabilities assumed |
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ASSETS: |
||||||||||||
|
Product inventories |
$ | 20.0 | $ | 20.0 | $ | - | ||||||
|
Other current assets |
11.8 | 11.8 | - | |||||||||
|
Land and mineral rights |
640.3 | 639.3 | (1.0) | |||||||||
|
Plant and equipment |
111.1 | 112.3 | 1.2 | |||||||||
|
Deferred taxes |
16.5 | 15.9 | (0.6) | |||||||||
|
Intangible assets |
7.5 | 7.5 | - | |||||||||
|
Other non-current assets |
0.8 | 0.8 | - | |||||||||
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|
|
|||||||
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Total identifiable assets acquired |
808.0 | 807.6 | (0.4) | |||||||||
|
LIABILITIES: |
||||||||||||
|
Current liabilities |
(22.8) | (24.1) | (1.3) | |||||||||
|
Mine closure obligations |
(2.8) | (2.8) | - | |||||||||
|
Below-market sales contracts |
(32.6) | (32.6) | - | |||||||||
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|
|||||||
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Total identifiable liabilities assumed |
(58.2) | (59.5) | (1.3) | |||||||||
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|
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|
|
|
|||||||
|
Total identifiable net assets acquired |
749.8 | 748.1 | (1.7) | |||||||||
|
Goodwill |
24.7 | 27.8 | 3.1 | |||||||||
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|
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|
|||||||
|
Total net assets acquired |
$ | 774.5 | $ | 775.9 | $ | 1.4 | ||||||
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|||||||
As our fair value estimates remain materially unchanged from 2010, there were no significant changes to the purchase price allocation from the initial allocation reported during the third quarter of 2010.
Of the $7.5 million of acquired intangible assets, $5.4 million was assigned to the value of in-place permits and will be amortized on a straight-line basis over the life of the mine. The remaining $2.1 million was assigned to the value of favorable mineral leases and will be amortized on a straight-line basis over the corresponding mine life.
The $27.8 million of goodwill resulting from the acquisition was assigned to our North American Coal business segment. The goodwill recognized is primarily attributable to the addition of complementary high-quality coal products to our existing operations and operational flexibility. None of the goodwill is expected to be deductible for income tax purposes. Refer to NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.
With regard to the acquisitions discussed above, pro forma results of operations have not been presented because the effects of the business combinations, individually and in the aggregate, were not material to our consolidated results of operations.
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 the definitive 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 is reported as a component of our Eastern Canadian Iron Ore segment.
The acquisition of Consolidated Thompson reflects 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 is a 25 percent partner in Bloom Lake. Bloom Lake is currently ramping up towards an initial production rate of 8.0 million metric tons of iron ore concentrate per year. During the second quarter of 2011, additional capital investments were approved in order to increase the initial production rate to 16.0 million metric tons of iron ore concentrate per year. We also own two additional development properties, Lamêlée and Peppler Lake, in Quebec. All three 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 acquisition is also expected to further diversify our existing customer base.
The following table summarizes the consideration paid for Consolidated Thompson and the estimated fair values of the assets and liabilities assumed at the acquisition date. We are in the process of conducting a valuation of the assets acquired and liabilities assumed related to the acquisition, most notably, tangible assets, deferred taxes and goodwill, and the final allocation will be made when completed. We expect to finalize the purchase price allocation for the acquisition of Consolidated Thompson early in 2012. Accordingly, the provisional measurements noted below are preliminary and subject to modification in the future.
| (In Millions) | ||||||||||||
| Initial Allocation |
Revised Allocation |
Change | ||||||||||
|
Consideration |
||||||||||||
|
Cash |
$ | 4,554.0 | $ | 4,554.0 | $ | - | ||||||
|
|
|
|
|
|
|
|||||||
|
Fair value of total consideration transferred |
$ | 4,554.0 | $ | 4,554.0 | $ | - | ||||||
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|
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|
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|
|||||||
|
Recognized amounts of identifiable assets acquired and liabilities assumed |
||||||||||||
|
ASSETS: |
||||||||||||
|
Cash |
$ | 130.6 | $ | 130.6 | $ | - | ||||||
|
Accounts receivable |
102.8 | 102.8 | - | |||||||||
|
Product inventories |
134.2 | 134.2 | - | |||||||||
|
Other current assets |
35.1 | 35.0 | (0.1) | |||||||||
|
Mineral rights |
4,450.0 | 4,450.0 | - | |||||||||
|
Property, plant and equipment |
1,193.4 | 1,193.4 | - | |||||||||
|
Intangible assets |
2.1 | 2.1 | - | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total identifiable assets acquired |
6,048.2 | 6,048.1 | (0.1) | |||||||||
|
LIABILITIES: |
||||||||||||
|
Accounts payable |
(13.6) | (13.6) | - | |||||||||
|
Accrued liabilities |
(130.0) | (123.6) | 6.4 | |||||||||
|
Convertible debentures |
(335.7) | (335.7) | - | |||||||||
|
Other current liabilities |
(41.8) | (41.8) | - | |||||||||
|
Long-term deferred tax liabilities |
(831.5) | (856.7) | (25.2) | |||||||||
|
Wabush Easement |
(11.1) | (11.2) | (0.1) | |||||||||
|
Senior secured notes |
(125.0) | (125.0) | - | |||||||||
|
Capital lease obligations |
(70.7) | (70.7) | - | |||||||||
|
Other long-term liabilities |
(14.0) | (14.0) | - | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total identifiable liabilities assumed |
(1,573.4) | (1,592.3) | (18.9) | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total identifiable net assets acquired |
4,474.8 | 4,455.8 | (19.0) | |||||||||
|
Noncontrolling interest in Bloom Lake |
(947.6) | (947.6) | - | |||||||||
|
Preliminary goodwill |
1,026.8 | 1,045.8 | 19.0 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total net assets acquired |
$ | 4,554.0 | $ | 4,554.0 | $ | - | ||||||
|
|
|
|
|
|
|
|||||||
Our fair value estimates were updated during the third quarter of 2011 from the initial allocation performed in the second quarter of 2011 in order to reflect adjustments made to the deferred tax liability recorded as of the acquisition date. These adjustments were due to updates to the tax basis of acquired inventories, mineral reserve step-up, and federal and provincial net operating loss carryforwards. There were no other material changes to our purchase allocation during the third quarter of 2011.
The fair value of the noncontrolling interest in the assets acquired and liabilities assumed of Bloom Lake has been proportionately allocated, based upon WISCO's 25 percent interest in Bloom Lake. We then reduced the allocated fair value of WISCO's ownership interest in Bloom Lake to reflect the noncontrolling interest discount.
The $1.0 billion of preliminary goodwill resulting from the acquisition has been assigned to our Eastern Canadian Iron Ore business segment. The preliminary goodwill recognized is primarily attributable to the proximity to our existing Canadian operations, which will allow us to leverage our port facilities and supply iron ore to the seaborne market. None of the preliminary goodwill is expected to be deductible for income tax purposes. Refer to NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.
Acquisition related costs in the amount of $2.1 million and $25.0 million, respectively, have been charged directly to operations and are included within Consolidated Thompson acquisition costs on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. In addition, we recognized $16.3 million of deferred debt issuance costs, net of accumulated amortization of $0.7 million, associated with issuing and registering the debt required to fund the acquisition as of September 30, 2011. Of these costs, $1.7 million and $14.6 million, respectively, have been recorded in Other current assets and Other non-current assets on the September 30, 2011 Statements of Unaudited Condensed Consolidated Financial Position. 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 on the Statements of Unaudited Condensed Consolidated Operations for the nine months ended September 30, 2011.
The Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011 include incremental revenue of $285.2 million and $431.0 million, respectively, and operating income of $167.8 million and $160.6 million, respectively, related to the acquisition of Consolidated Thompson since the date of acquisition. Operating income during the period includes the impact of expensing an additional $11.2 million and $59.8 million, respectively, of stepped-up value of inventory and reserves due to purchase accounting through Cost of goods sold and operating expenses for the three and nine months ended September 30, 2011.
The following unaudited consolidated pro forma information summarizes the results of operations for the three and nine months ended September 30, 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 would have actually 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) |
||||||||||||||||
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Revenues from product sales and services |
$ | 2,142.8 | $ | 1,487.5 | $ | 5,340.2 | $ | 3,435.2 | ||||||||
|
Net income attributable to Cliffs shareholders |
$ | 595.6 | $ | 315.2 | $ | 1,426.2 | $ | 515.5 | ||||||||
|
Earnings per common share attributable to Cliffs shareholders - Basic |
$ | 4.13 | $ | 2.33 | $ | 10.22 | $ | 3.81 | ||||||||
|
Earnings per common share attributable to Cliffs shareholders - Diluted |
$ | 4.11 | $ | 2.31 | $ | 10.16 | $ | 3.79 | ||||||||
The pro forma net income attributable to Cliffs shareholders was adjusted to exclude $2.1 million and $69.2 million, respectively, of Cliffs and Consolidated Thompson acquisition related costs and $11.2 million and $59.8 million, respectively, of non-recurring inventory purchase accounting adjustments incurred during the three and nine months ended September 30, 2011. The pro forma net income attributable to Cliffs shareholders for the nine months ended September 30, 2010 was adjusted to include the $59.8 million of non-recurring inventory purchase accounting adjustments.
|
|||
NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
Goodwill
The following table summarizes changes in the carrying amount of goodwill allocated by reporting unit for the nine months ended September 30, 2011 and the year ended December 31, 2010:
| (In Millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2011 | December 31, 2010 (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Iron Ore |
Eastern Canadian Iron Ore |
North American Coal |
Asia Pacific Iron Ore |
Other | Total | U.S. Iron Ore |
Eastern Canadian Iron Ore |
North American Coal |
Asia Pacific Iron Ore |
Other | Total | |||||||||||||||||||||||||||||||||||||
|
Beginning Balance |
$ 2.0 | $ 3.1 | $ 27.9 | $ 82.6 | $ 80.9 | $ 196.5 | $ 2.0 | $ - | $ - | $ 72.6 | $ - | $ 74.6 | ||||||||||||||||||||||||||||||||||||
|
Arising in business combinations |
- | 1,045.8 | - | - | - | 1,045.8 | - | 3.1 | 27.9 | - | 80.9 | 111.9 | ||||||||||||||||||||||||||||||||||||
|
Impact of foreign currency translation |
- | - | - | (4.1) | - | (4.1) | - | - | - | 10.0 | - | 10.0 | ||||||||||||||||||||||||||||||||||||
|
Other |
- | (0.4) | (0.1) | - | - | (0.5) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
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Ending Balance |
$ 2.0 | $ 1,048.5 | $ 27.8 | $ 78.5 | $ 80.9 | $ 1,237.7 | $ 2.0 | $ 3.1 | $ 27.9 | $ 82.6 | $ 80.9 | $ 196.5 | ||||||||||||||||||||||||||||||||||||
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(1) Represents a 12-month rollforward of our goodwill by reportable unit at December 31, 2010.
The increase in the balance of Goodwill as of September 30, 2011 is due to the assignment of $1.0 billion to Goodwill in the first nine months of 2011 based on the preliminary purchase price allocation for the acquisition of Consolidated Thompson. The balance of $1.2 billion and $196.5 million at September 30, 2011 and December 31, 2010, respectively, is presented as Goodwill on the Statements of Unaudited Condensed Consolidated Financial Position. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for additional information.
Goodwill is not subject to amortization and is tested for impairment annually or when events or circumstances indicate that impairment may have occurred.
Other Intangible Assets and Liabilities
Following is a summary of intangible assets and liabilities as of September 30, 2011 and December 31, 2010:
| September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||
|
Classification |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||||||||||||
|
Definite lived intangible assets: |
||||||||||||||||||||||||||
|
Permits |
Intangible assets, net | $ | 131.4 | $ | (20.8) | $ | 110.6 | $ | 132.4 | $ | (16.3) | $ | 116.1 | |||||||||||||
|
Utility contracts |
Intangible assets, net | 54.7 | (18.6) | 36.1 | 54.7 | (10.2) | 44.5 | |||||||||||||||||||
|
Easements (1) |
Intangible assets, net | - | - | - | 11.7 | (0.4) | 11.3 | |||||||||||||||||||
|
Leases |
Intangible assets, net | 5.5 | (2.9) | 2.6 | 5.2 | (2.9) | 2.3 | |||||||||||||||||||
|
Unpatented technology (2) |
Intangible assets, net | - | - | - | 4.0 | (2.4) | 1.6 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Total intangible assets |
$ | 191.6 | $ | (42.3) | $ | 149.3 | $ | 208.0 | $ | (32.2) | $ | 175.8 | ||||||||||||||
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|
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|
Below-market sales contracts |
Other current liabilities | $ | (77.0) | $ | 24.3 | $ | (52.7) | $ | (77.0) | $ | 19.9 | $ | (57.1) | |||||||||||||
|
Below-market sales contracts |
Below-Market Sales Contracts | (252.3) | 123.9 | (128.4) | (252.3) | 87.9 | (164.4) | |||||||||||||||||||
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|
|||||||||||||||
|
Total below-market sales contracts |
$ | (329.3) | $ | 148.2 | $ | (181.1) | $ | (329.3) | $ | 107.8 | $ | (221.5) | ||||||||||||||
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| (1) |
Upon the acquistion of Consolidated Thompson this intangible asset is now eliminated through intercompany eliminations. The easement agreement is between Wabush and Consolidated Thompson. |
| (2) |
Upon recording the renewaFUEL operations as discontinued operations, this intangible asset was written down in the resulting impairment charge recorded during the third quarter of 2011. |
The intangible assets are subject to periodic amortization on a straight-line basis over their estimated useful lives as follows:
|
Intangible Asset |
Useful Life (years) | |
|
Permits |
15 - 28 | |
|
Utility contracts |
5 | |
|
Easements |
30 | |
|
Leases |
1.5 - 4.5 |
Amortization expense relating to intangible assets was $3.3 million and $12.5 million, respectively, for the three and nine months ended September 30, 2011, and is recognized in Cost of goods sold and operating expenses on the Statements of Unaudited Condensed Consolidated Operations. Amortization expense relating to intangible assets was $5.6 million and $13.5 million, respectively, for the comparable periods in 2010. The estimated amortization expense relating to intangible assets for the remainder of 2011 and each of the five succeeding fiscal years is as follows:
| (In Millions) | ||||
| Amount | ||||
|
Year Ending December 31 |
||||
|
2011 (remaining three months) |
$ | 4.5 | ||
|
2012 |
18.0 | |||
|
2013 |
17.9 | |||
|
2014 |
17.9 | |||
|
2015 |
6.0 | |||
|
2016 |
6.0 | |||
|
|
|
|||
|
Total |
$ | 70.3 | ||
|
|
|
|||
The below-market sales contracts are classified as a liability and recognized over the remaining terms of the underlying contracts, which range from 3.5 to 8.5 years. For the three and nine months ended September 30, 2011, we recognized $16.7 million and $40.4 million, respectively, in Product revenues related to the below-market sales contracts, compared with $22.9 million and $34.7 million, respectively, for the three and nine months ended September 30, 2010. The following amounts will be recognized in earnings for the remainder of 2011 and each of the five succeeding fiscal years:
| (In Millions) | ||||
| Amount | ||||
|
Year Ending December 31 |
||||
|
2011 (remaining three months) |
$ | 17.9 | ||
|
2012 |
48.8 | |||
|
2013 |
45.3 | |||
|
2014 |
23.0 | |||
|
2015 |
23.0 | |||
|
2016 |
23.1 | |||
|
|
|
|||
|
Total |
$ | 181.1 | ||
|
|
|
|||
|
|||
NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The following represents the assets and liabilities of the Company measured at fair value at September 30, 2011 and December 31, 2010:
| (In Millions) | ||||||||||||||||
| September 30, 2011 | ||||||||||||||||
|
Description |
Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
|
Assets: |
||||||||||||||||
|
Cash equivalents |
$ | 368.6 | $ | - | $ | - | $ | 368.6 | ||||||||
|
Derivative assets |
- | 49.0 | (1) | 67.8 | 116.8 | |||||||||||
|
International marketable securities |
28.4 | - | - | 28.4 | ||||||||||||
|
Foreign exchange contracts |
- | 5.8 | - | 5.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 397.0 | $ | 54.8 | $ | 67.8 | $ | 519.6 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Liabilities: |
||||||||||||||||
|
Foreign exchange contracts |
$ | - | $ | 15.9 | $ | - | $ | 15.9 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | - | $ | 15.9 | $ | - | $ | 15.9 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) |
Derivative assets includes $49.0 million classifed as Accounts receivable on the Statement of Unaudited Condensed Consolidated Financial Position as of September 30, 2011. Refer to NOTE 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information. |
| (In Millions) | ||||||||||||||||
| December 31, 2010 | ||||||||||||||||
|
Description |
Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
|
Assets: |
||||||||||||||||
|
Cash equivalents |
$ | 1,307.2 | $ | - | $ | - | $ | 1,307.2 | ||||||||
|
Derivative assets |
- | - | 45.6 | 45.6 | ||||||||||||
|
U.S. marketable securities |
22.0 | - | - | 22.0 | ||||||||||||
|
International marketable securities |
63.9 | - | - | 63.9 | ||||||||||||
|
Foreign exchange contracts |
- | 39.0 | - | 39.0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 1,393.1 | $ | 39.0 | $ | 45.6 | $ | 1,477.7 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
We had no financial instruments measured at fair value that were in a liability position at December 31, 2010.
Financial assets classified in Level 1 at September 30, 2011 and December 31, 2010 include money market funds and available-for-sale marketable securities. The valuation of these instruments is determined using a market approach, taking into account current interest rates, creditworthiness, and liquidity risks in relation to current market conditions, and is based upon unadjusted quoted prices for identical assets in active markets.
The valuation of financial assets and liabilities classified in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for substantially the full term of the financial instrument. Level 2 securities primarily include derivative financial instruments valued using financial models that use as their basis readily observable market parameters. At September 30, 2011 and December 31, 2010, such derivative financial instruments included our existing foreign currency exchange contracts. The fair value of the foreign currency exchange contracts is based on forward market prices and represents the estimated amount we would receive or pay to terminate these agreements at the reporting date, taking into account creditworthiness, nonperformance risk, and liquidity risks associated with current market conditions.
The Level 2 derivative assets at September 30, 2011 also consist of freestanding derivatives related to certain supply agreements with our U.S. Iron Ore and Eastern Canadian Iron Ore customers. During the third quarter of 2011, we reached final pricing settlement with a majority of our U.S. Iron Ore customers. However, in some cases we are still in the process of revising the terms of our customer supply agreements to incorporate changes to historical pricing mechanisms and as a result, we have recorded certain shipments made during the first nine months of 2011 on a provisional basis until final settlement is reached. The pricing provisions are characterized as freestanding derivatives and are required to be accounted for separately once the product is shipped. The derivative instrument, which is settled and billed once final pricing settlement is reached, is marked to fair value as a revenue adjustment each reporting period. During the second quarter of 2011 and the third quarter of 2010, we revised the inputs used to determine the fair value of these derivatives to include 2011 published pricing indices and settlements realized by other companies in the industry. Prior to this change, the fair value was primarily determined based on significant unobservable inputs to develop the forward price expectation of the final price settlement for 2011. Based on these changes to the determination of the fair value, we transferred $20 million of derivative assets from a Level 3 classification to a Level 2 classification within the fair value hierarchy during the second quarter of 2011. A similar revision to the inputs used to determine the fair value of these derivatives was made during the third quarter of 2010, and based on the changes we transferred $161.8 million of derivative assets from a Level 3 classification to a Level 2 classification within the fair value hierarchy at that time. The derivative instrument was settled in the fourth quarter of 2010, upon settlement of the pricing provisions with some of our U.S. Iron Ore and Eastern Canadian Iron Ore customers, and is therefore not reflected in the Statement of Consolidated Financial Position at December 31, 2010. The fair value of our derivatives is determined using a market approach and takes into account current market conditions and other risks, including nonperformance risk.
The derivative financial assets classified within Level 3 at September 30, 2011 and December 31, 2010 include a freestanding derivative instrument related to certain supply agreements with one of our U.S. Iron Ore customers. The agreements include provisions for supplemental revenue or refunds based on the customer's annual steel pricing at the time the product is consumed in the customer's blast furnaces. We account for this provision as a derivative instrument at the time of sale and mark this provision to fair value as a revenue adjustment each reporting period until the product is consumed and the amounts are settled. The fair value of the instrument is determined using a market approach based on an estimate of the annual realized price of hot rolled steel at the steelmaker's facilities, and takes into consideration current market conditions and nonperformance risk.
Substantially all of the financial assets and liabilities are carried at fair value or contracted amounts that approximate fair value. We had no financial assets or liabilities measured at fair value on a non-recurring basis at September 30, 2011 or December 31, 2010.
We recognize any transfers between levels as of the beginning of the reporting period, including both transfers into and out of levels. There were no transfers between Level 1 and Level 2 of the fair value hierarchy as of September 30, 2011. As noted above, there was a transfer from Level 3 to Level 2 during the second quarter of 2011 and the third quarter of 2010, as reflected in the table below. The following represents a reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2011 and 2010.
| (In Millions) | ||||||||||||||||
| Derivative Assets | ||||||||||||||||
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Beginning balance |
$ | 64.0 | $ | 238.9 | $ | 45.6 | $ | 63.2 | ||||||||
|
Total gains |
||||||||||||||||
|
Included in earnings |
53.8 | 25.1 | 144.9 | 824.9 | ||||||||||||
|
Included in other comprehensive income |
- | - | - | - | ||||||||||||
|
Settlements |
(50.0) | (56.4) | (102.7) | (680.5) | ||||||||||||
|
Transfers out of Level 3 |
- | (161.8) | (20.0) | (161.8) | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Ending balance - September 30 |
$ | 67.8 | $ | 45.8 | $ | 67.8 | $ | 45.8 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date |
$ | 53.8 | $ | 25.1 | $ | 144.9 | $ | 93.4 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Gains and losses included in earnings are reported in Product revenues on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011 and 2010.
The carrying amount and fair value of our long-term receivables and long-term debt at September 30, 2011 and December 31, 2010 were as follows:
| (In Millions) | ||||||||||||||||
| September 30, 2011 | December 31, 2010 | |||||||||||||||
| Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
|||||||||||||
|
Long-term receivables: |
||||||||||||||||
|
Customer supplemental payments |
$ | 22.3 | $ | 20.5 | $ | 22.3 | $ | 19.5 | ||||||||
|
ArcelorMittal USA - Ispat receivable |
28.1 | 32.7 | 32.8 | 38.9 | ||||||||||||
|
Other |
8.8 | 8.8 | 8.1 | 8.1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total long-term receivables (1) |
$ | 59.2 | $ | 62.0 | $ | 63.2 | $ | 66.5 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Long-term debt: |
||||||||||||||||
|
Term loan - $1.25 billion |
$ | 922.1 | $ | 922.1 | $ | - | $ | - | ||||||||
|
Senior notes - $700 million |
699.3 | 705.7 | - | - | ||||||||||||
|
Senior notes - $1.3 billion |
1,289.1 | 1,382.8 | 990.3 | 972.5 | ||||||||||||
|
Senior notes - $400 million |
398.0 | 439.7 | 397.8 | 422.8 | ||||||||||||
|
Senior notes - $325 million |
325.0 | 351.7 | 325.0 | 355.6 | ||||||||||||
|
Revolving loan |
250.0 | 250.0 | - | - | ||||||||||||
|
Customer borrowings |
5.1 | 5.1 | 4.0 | 4.0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total long-term debt |
$ | 3,888.6 | $ | 4,057.1 | $ | 1,717.1 | $ | 1,754.9 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
(1) Includes current portion. |
||||||||||||||||
The terms of one of our U.S. Iron Ore pellet supply agreements require supplemental payments to be paid by the customer during the period 2009 through 2013, with the option to defer a portion of the 2009 monthly amount up to $22.3 million in exchange for interest payments until the deferred amount is repaid in 2013. Interest is payable by the customer quarterly, and payments began in September 2009 at the higher of 9 percent or the prime rate plus 350 basis points. As of September 30, 2011, we have a receivable of $22.3 million recorded in Other non-current assets on the Statements of Unaudited Condensed Consolidated Financial Position reflecting the terms of this deferred payment arrangement. This compares with a receivable of $22.3 million recorded as of December 31, 2010. The fair value of the receivable of $20.5 million and $19.5 million at September 30, 2011 and December 31, 2010, respectively, is based on a discount rate of 4.7 percent, which represents the estimated credit-adjusted risk-free interest rate for the period the receivable is outstanding.
In 2002, we entered into an agreement with Ispat that restructured the ownership of the Empire mine and increased our ownership from 46.7 percent to 79 percent in exchange for the assumption of all mine liabilities. Under the terms of the agreement, we indemnified Ispat from obligations of Empire in exchange for certain future payments to Empire and to us by Ispat of $120 million, recorded at a present value of $28.1 million and $32.8 million at September 30, 2011 and December 31, 2010, respectively. The fair value of the receivable of $32.7 million and $38.9 million at September 30, 2011 and December 31, 2010, respectively, is based on a discount rate of 3.1 percent, which represents the estimated credit-adjusted risk-free interest rate for the period the receivable is outstanding.
The fair value of long-term debt was determined using quoted market prices or discounted cash flows based upon current borrowing rates. The term loan and revolving loan are variable rate interest debt and approximate fair value. See NOTE 8 – DEBT AND CREDIT FACILITIES for further information.
|
|||
NOTE 8 – DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt as of September 30, 2011 and December 31, 2010:
|
($ in Millions) |
||||||||||||||||
|
September 30, 2011 |
||||||||||||||||
|
Debt Instrument |
Type | Average Annual Interest Rate |
Final Maturity |
Total Face Amount |
Total Long-term Debt |
|||||||||||
|
$1.25 Billion Term Loan |
Variable | 1.73 % | 2016 | $ | 984.4 | (6) | $ | 922.1 | (6) | |||||||
|
$700 Million 4.875% 2021 Senior Notes |
Fixed | 4.88 % | 2021 | 700.0 | 699.3 | (5) | ||||||||||
|
$1.3 Billion Senior Notes: |
||||||||||||||||
|
$500 Million 4.80% 2020 Senior Notes |
Fixed | 4.80 % | 2020 | 500.0 | 499.0 | (4) | ||||||||||
|
$800 Million 6.25% 2040 Senior Notes |
Fixed | 6.25 % | 2040 | 800.0 | 790.1 | (3) | ||||||||||
|
$400 Million 5.90% 2020 Senior Notes |
Fixed | 5.90 % | 2020 | 400.0 | 398.0 | (2) | ||||||||||
|
$325 Million Private Placement Senior Notes: |
||||||||||||||||
|
Series 2008A - Tranche A |
Fixed | 6.31 % | 2013 | 270.0 | 270.0 | |||||||||||
|
Series 2008A - Tranche B |
Fixed | 6.59 % | 2015 | 55.0 | 55.0 | |||||||||||
|
$1.75 Billion Credit Facility: |
||||||||||||||||
|
Revolving Loan |
Variable | 1.84 % | 2016 | 1,750.0 | 250.0 | (1) | ||||||||||
|
|
|
|
|
|||||||||||||
|
Total |
$ | 5,459.4 | $ | 3,883.5 | ||||||||||||
|
|
|
|
|
|||||||||||||
|
December 31, 2010 |
||||||||||||||||
|
Debt Instrument |
Type | Average Annual Interest Rate |
Final Maturity |
Total Face Amount |
Total Long-term Debt |
|||||||||||
|
$1 Billion Senior Notes: |
||||||||||||||||
|
$500 Million 4.80% 2020 Senior Notes |
Fixed | 4.80 % | 2020 | $ | 500.0 | $ | 499.0 | (4) | ||||||||
|
$500 Million 6.25% 2040 Senior Notes |
Fixed | 6.25 % | 2040 | 500.0 | 491.3 | (3) | ||||||||||
|
$400 Million 5.90% 2020 Senior Notes |
Fixed | 5.90 % | 2020 | 400.0 | 397.8 | (2) | ||||||||||
|
$325 Million Private Placement Senior Notes: |
||||||||||||||||
|
Series 2008A - Tranche A |
Fixed | 6.31 % | 2013 | 270.0 | 270.0 | |||||||||||
|
Series 2008A - Tranche B |
Fixed | 6.59 % | 2015 | 55.0 | 55.0 | |||||||||||
|
$600 Million Credit Facility: |
||||||||||||||||
|
Revolving Loan |
Variable | 0.0 % | 2012 | 600.0 | - | (1) | ||||||||||
|
|
|
|
|
|||||||||||||
|
Total |
$ | 2,325.0 | $ | 1,713.1 | ||||||||||||
|
|
|
|
|
|||||||||||||
(1) As of September 30, 2011 and December 31, 2010, $250 million and no revolving loans were drawn under the credit facility, respectively, and the principal amount of letter of credit obligations totaled $23.5 million and $64.7 million, respectively, thereby reducing available borrowing capacity to $1,476.5 million and $535.3 million, respectively.
(2) As of September 30, 2011 and December 31, 2010, the $400 million 5.90 percent senior notes were recorded at a par value of $400 million less unamortized discounts of $2.0 million and $2.2 million, respectively, based on an imputed interest rate of 5.98 percent.
(3) As of September 30, 2011 and December 31, 2010, the $800 million and $500 million 6.25 percent senior notes were recorded at par values of $800 million and $500 million, respectively, less unamortized discounts of $9.9 million and $8.7 million, respectively, based on an imputed interest rate of 6.38 percent.
(4) As of September 30, 2011 and December 31, 2010, the $500 million 4.80 percent senior notes were recorded at a par value of $500 million less unamortized discounts of $1.0 million and $1.0 million, respectively, based on an imputed interest rate of 4.83 percent.
(5) As of September 30, 2011, the $700 million 4.875 percent senior notes were recorded at a par value of $700 million less unamortized discounts of $0.7 million, based on an imputed interest rate of 4.89 percent.
(6) As of September 30, 2011, $265.6 million had been paid down on the orgininal $1.25 billion term loan and of the remaining term loan $62.3 million was classified as Current portion of term loan. The current classification is based upon the principal payment terms of the arrangement requiring principal payments on each three-month anniversary following the funding of the term loan.
The terms of the private placement senior notes and the credit facilities each contain customary covenants that require compliance with certain financial covenants based on: (1) debt to earnings ratio and (2) interest coverage ratio. As of September 30, 2011 and December 31, 2010, we were in compliance with the financial covenants related to both the private placement senior notes and the credit facilities. The terms of the senior notes due in 2020, 2021 and 2040 contain certain customary covenants; however, there are no financial covenants.
Credit Facility
On August 11, 2011, we entered into a five-year unsecured amended and restated multicurrency credit agreement with a syndicate of financial institutions in order to amend the terms of our existing $600 million multicurrency credit agreement. The credit agreement provides for, among other things, a $1.75 billion revolving credit facility and allows for the designation of certain foreign subsidiaries as borrowers under the agreement, if certain conditions are satisfied. Borrowings under the credit agreement bear interest at a floating rate based upon a base rate or the LIBOR rate plus a margin based upon our leverage ratio. Certain of our material domestic subsidiaries have guaranteed our obligations and the obligations of other borrowers under the credit agreement.
Proceeds from the credit agreement will be used to refinance existing indebtedness, to finance general working capital needs and for other general corporate purposes, including the funding of acquisitions. We have the ability to request an increase in available revolving credit borrowings under the credit agreement by an additional amount of up to $250 million by obtaining the agreement of the existing financial institutions to increase their lending commitments or by adding additional lenders.
As a condition of the credit agreement terms, $250 million was drawn against the revolving credit facility on August 11, 2011, in order to pay down a portion of the term loan. The $250 million payment was in addition to the scheduled August principal payment of $15.6 million, reducing the total outstanding amount to $984.4 million, of which $922.1 million is characterized as long-term debt as of September 30, 2011.
The credit agreement also provides for more flexible financial covenants and debt restrictions through the amendment of certain customary covenants, including the modification of the financial covenant that is based on our debt to earnings ratio. The amended debt to earnings ratio of Total Funded Debt to EBITDA, as those terms are defined in the agreement, as of the last day of each fiscal quarter cannot exceed (i) 3.5 to 1.0, if none of the $270 million private placement senior notes due 2013 remain outstanding, or otherwise (ii) the then applicable maximum multiple under the $270 million private placement senior notes due 2013.
$1 Billion Senior Notes Offering
On March 23, 2011 and April 1, 2011, respectively, we completed a $1 billion public offering of senior notes consisting of two tranches: a 10-year tranche of $700 million aggregate principal amount at 4.875 percent senior notes due April 1, 2021, and an additional issuance of $300 million aggregate principal amount of our 6.25 percent senior notes due October 1, 2040, of which $500 million aggregate principal amount was previously issued during September 2010. Interest is fixed and is payable on April 1 and October 1 of each year, beginning on October 1, 2011, for both series of senior notes until maturity. The senior notes are unsecured obligations and rank equally with all our other existing and future unsecured and unsubordinated indebtedness. The net proceeds from the senior notes offering were used to fund a portion of the acquisition of Consolidated Thompson and to pay the related fees and expenses.
The senior notes may be redeemed any time at our option at a redemption price equal to the greater of (1) 100 percent of the principal amount of the notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the redemption date on a semi-annual basis at the treasury rate plus 25 basis points with respect to the 2021 senior notes and 40 basis points with respect to the 2040 senior notes, plus, in each case, accrued and unpaid interest to the date of redemption. However, if the 2021 senior notes are redeemed on or after the date that is three months prior to their maturity date, the 2021 senior notes will be redeemed at a redemption price equal to 100 percent of the principal amount of the notes to be redeemed plus accrued and unpaid interest to the date of redemption.
In addition, if a change of control triggering event occurs with respect to the senior notes, as defined in the agreement, we will be required to offer to purchase the notes of the applicable series at a purchase price equal to 101 percent of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
Bridge Credit Agreement
On March 4, 2011, we entered into an unsecured bridge credit agreement with a syndicate of banks in order to provide a portion of the financing for the acquisition of Consolidated Thompson. The bridge credit agreement, referred to as the bridge credit facility, had an original maturity date of May 10, 2012. On May 10, 2011, we borrowed $750 million under the bridge credit facility to fund a portion of the cash required upon the consummation of the acquisition of Consolidated Thompson. The borrowings under the bridge credit facility were repaid using a portion of the net proceeds obtained from the public offering of our common shares that was completed on June 13, 2011, and the bridge credit facility was terminated. The borrowings under the bridge credit facility bore interest at a floating rate based upon a base rate or the LIBOR rate plus a margin determined by our credit rating and the length of time the borrowings were outstanding. The weighted average annual interest rate under the bridge credit facility during the time the borrowings were outstanding was 2.56 percent. Refer to NOTE 14 – CAPITAL STOCK for additional information on the public offering of our common shares.
Term Loan
On March 4, 2011, we also entered into an unsecured term loan agreement with a syndicate of banks in order to provide a portion of the financing for the acquisition of Consolidated Thompson. The term loan agreement provided for a $1,250 million term loan. The term loan has a maturity date of five years from the date of funding and requires principal payments on each three-month anniversary of the date following the funding. On May 10, 2011, we borrowed $1,250 million under the term credit facility to fund a portion of the cash required upon the consummation of the acquisition of Consolidated Thompson. Effective August 11, 2011, we amended the unsecured term loan agreement to modify certain definitions, representations and warranties and covenants, including the financial covenants to conform to certain provisions under the amended and restated multicurrency credit agreement. In addition, a portion of the $1,750 million revolving credit facility, provided for under the amended and restated agreement, was used to repay $250 million of the outstanding term loan, as discussed above. Borrowings under the term loan bear interest at a floating rate based upon a base rate or the LIBOR rate plus a margin depending on the leverage ratio.
Short-term Facilities
On March 31, 2010, Asia Pacific Iron Ore entered into a A$40 million ($38.7 million) bank contingent instrument facility and cash advance facility to replace the then existing A$40 million multi-option facility, which was extended through June 30, 2011 and subsequently renewed until June 30, 2012. The facility, which is renewable annually at the bank's discretion, provides A$40 million in credit for contingent instruments, such as performance bonds and the ability to request a cash advance facility to be provided at the discretion of the bank. As of September 30, 2011, the outstanding bank guarantees under this facility totaled A$24.4 million ($23.6 million), thereby reducing borrowing capacity to A$15.6 million ($15.1 million). We have provided a guarantee of the facility, along with certain of our Australian subsidiaries. The facility agreement contains customary covenants that require compliance with certain financial covenants: (1) debt to earnings ratio and (2) interest coverage ratio, both based on the financial performance of the Company. As of September 30, 2011, we were in compliance with these financial covenants.
Consolidated Thompson Senior Secured Notes
The Consolidated Thompson senior secured notes were included among the liabilities assumed in the acquisition of Consolidated Thompson. On April 13, 2011, we purchased the outstanding Consolidated Thompson senior secured notes directly from the note holders for $125 million, including accrued and unpaid interest. The senior secured notes had a face amount of $100 million, a stated interest rate of 8.5 percent and were scheduled to mature in 2017. The transaction was initially recorded as an investment in Consolidated Thompson senior secured notes during the second quarter of 2011; however, upon the completion of the acquisition of Consolidated Thompson, and consolidation into our financial statements the Consolidated Thompson senior secured notes and our investment in the notes were eliminated as intercompany transactions. During August 2011, Consolidated Thompson, our wholly-owned subsidiary, provided for the redemption and release of the Consolidated Thompson senior secured notes, resulting in the cancellation of the notes. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for additional information.
Consolidated Thompson Convertible Debentures
Included among the liabilities assumed in the acquisition of Consolidated Thompson were the Consolidated Thompson convertible debentures that as a result of the acquisition were able to be converted by their holders into cash in accordance with the cash change of control provision of the convertible debenture indenture. The convertible debentures allowed the debenture holders to convert at a premium conversion ratio beginning on the 10th trading day prior to the closing of the acquisition and ending on the 30th day subsequent to the mailing of an offer to purchase the convertible debentures, which was the cash change of control conversion period as defined by the convertible debenture indenture. On May 12, 2011, following the closing of the acquisition, Consolidated Thompson commenced the offer to purchase all of the outstanding convertible debentures in accordance with its obligations under the convertible debenture indenture by mailing to the debenture holders such offer to purchase. Additionally, on May 13, 2011, Consolidated Thompson gave notice that it was exercising its right to redeem any convertible debentures that remained outstanding on June 13, 2011, after giving effect to any conversions that occurred during the cash change of control conversion period. As previously disclosed, Consolidated Thompson received sufficient consents from the debenture holders, pursuant to a consent solicitation, to amend the convertible debenture indenture to give Consolidated Thompson such a redemption right. As a result of these events, no convertible debentures remain outstanding. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for additional information.
Letters of Credit
In conjunction with our acquisition of Consolidated Thompson, we issued standby letters of credit with certain financial institutions in order to support Consolidated Thompson and Bloom Lake general business obligations. In addition, we issued standby letters of credit with certain financial institutions during the third quarter of 2011 in order to support Wabush obligations. As of September 30, 2011, these letter of credit obligations totaled $98.2 million. All of these standby letters of credit are outside of the letters of credit provided for under the revolving credit facility.
Debt Maturities
Maturities of debt instruments based on the principal amounts outstanding at September 30, 2011, total approximately $13 million in 2011, $75 million in 2012, $370 million in 2013, $125 million in 2014, $429 million in 2015, $549 million in 2016 and $2.4 billion thereafter.
Refer to NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS for further information.
|
|||
NOTE 9 – LEASE OBLIGATIONS
We lease certain mining, production and other equipment under operating and capital leases. The leases are for varying lengths, generally at market interest rates and contain purchase and/or renewal options at the end of the terms. Our operating lease expense was $4.2 million and $17.9 million, respectively, for the three and nine months ended September 30, 2011, compared with $6.2 million and $18.1 million, respectively, for the same periods in 2010.
Future minimum payments under capital leases and non-cancellable operating leases at September 30, 2011 are as follows:
| (In Millions) | ||||||||
| Capital Leases |
Operating Leases |
|||||||
|
2011 (October 1 - December 31) |
$ | 16.8 | $ | 7.7 | ||||
|
2012 |
62.6 | 21.2 | ||||||
|
2013 |
55.0 | 20.8 | ||||||
|
2014 |
50.0 | 16.0 | ||||||
|
2015 |
38.8 | 9.1 | ||||||
|
2016 and thereafter |
99.0 | 25.0 | ||||||
|
|
|
|
|
|||||
|
Total minimum lease payments |
322.2 | $ | 99.8 | |||||
|
|
|
|||||||
|
Amounts representing interest |
68.6 | |||||||
|
|
|
|||||||
|
Present value of net minimum lease payments |
$ | 253.6 | (1) | |||||
|
|
|
|||||||
|
(1) The total is comprised of $47.8 million and $205.8 million classified as Other current liabilities and Other liabilities, respectively, on the Statements of Unaudited Condensed Consolidated Financial Position at September 30, 2011. |
| |||||||
|
|||
NOTE 10 – ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
We had environmental and mine closure liabilities of $225.2 million and $199.1 million at September 30, 2011 and December 31, 2010, respectively. The following is a summary of the obligations as of September 30, 2011 and December 31, 2010:
| (In Millions) | ||||||||
| September 30, 2011 |
December 31, 2010 |
|||||||
|
Environmental |
$ | 15.0 | $ | 13.7 | ||||
|
Mine closure |
||||||||
|
LTVSMC |
17.9 | 17.1 | ||||||
|
Operating mines: |
||||||||
|
U.S. Iron Ore |
67.5 | 62.7 | ||||||
|
Eastern Canadian Iron Ore |
67.8 | 49.3 | ||||||
|
North American Coal |
35.6 | 34.7 | ||||||
|
Asia Pacific Iron Ore |
15.2 | 15.4 | ||||||
|
Other |
6.2 | 6.2 | ||||||
|
|
|
|
|
|||||
|
Total mine closure |
210.2 | 185.4 | ||||||
|
|
|
|
|
|||||
|
Total environmental and mine closure obligations |
225.2 | 199.1 | ||||||
|
Less current portion |
14.7 | 14.2 | ||||||
|
|
|
|
|
|||||
|
Long-term environmental and mine closure obligations |
$ | 210.5 | $ | 184.9 | ||||
|
|
|
|
|
|||||
Mine Closure
Our mine closure obligations are for our four consolidated U.S. operating iron ore mines, our two Eastern Canadian operating iron ore mines, our six operating North American coal mines, our Asia Pacific operating iron ore mines, the coal mine at Sonoma and a closed operation formerly known as LTVSMC.
The accrued closure obligation for our active mining operations provides for contractual and legal obligations associated with the eventual closure of the mining operations. The accretion of the liability and amortization of the related asset is recognized over the estimated mine lives for each location. The following represents a rollforward of our asset retirement obligation liability related to our active mining locations for the nine months ended September 30, 2011 and the year ended December 31, 2010:
| (In Millions) | ||||||||
| September 30, 2011 |
December 31, 2010(1) |
|||||||
|
Asset retirement obligation at beginning of period |
$ | 168.3 | $ | 103.9 | ||||
|
Accretion expense |
11.8 | 13.1 | ||||||
|
Exchange rate changes |
(1.1) | 2.5 | ||||||
|
Revision in estimated cash flows |
- | 1.0 | ||||||
|
Payments |
(0.7) | (8.4) | ||||||
|
Acquired through business combinations |
14.0 | 56.2 | ||||||
|
|
|
|
|
|||||
|
Asset retirement obligation at end of period |
$ | 192.3 | $ | 168.3 | ||||
|
|
|
|
|
|||||
|
(1) Represents a 12-month rollforward of our asset retirement obligation at December 31, 2010. |
| |||||||
|
|||
NOTE 11 – PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The following are the components of defined benefit pension and OPEB expense for the three and nine months ended September 30, 2011 and 2010:
Defined Benefit Pension Expense
| (In Millions) | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Service cost |
$ | 6.6 | $ | 3.5 | $ | 17.6 | $ | 12.5 | ||||||||
|
Interest cost |
12.5 | 12.7 | 38.3 | 38.3 | ||||||||||||
|
Expected return on plan assets |
(16.3) | (13.2) | (45.5) | (39.3) | ||||||||||||
|
Amortization: |
||||||||||||||||
|
Prior service costs |
1.1 | 1.0 | 3.3 | 3.1 | ||||||||||||
|
Net actuarial losses |
4.7 | 5.1 | 14.7 | 17.0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net periodic benefit cost |
$ | 8.6 | $ | 9.1 | $ | 28.4 | $ | 31.6 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Other Postretirement Benefits Expense
| (In Millions) | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Service cost |
$ | 3.6 | $ | 2.2 | $ | 8.3 | $ | 5.4 | ||||||||
|
Interest cost |
5.5 | 5.4 | 16.7 | 16.1 | ||||||||||||
|
Expected return on plan assets |
(4.1) | (3.2) | (12.1) | (9.7) | ||||||||||||
|
Amortization: |
||||||||||||||||
|
Prior service costs |
2.0 | 0.4 | 2.8 | 1.3 | ||||||||||||
|
Net actuarial losses |
0.8 | 3.1 | 6.6 | 6.5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net periodic benefit cost |
$ | 7.8 | $ | 7.9 | $ | 22.3 | $ | 19.6 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
We made pension contributions of $55.4 million and $36.1 million for the nine months ended September 30, 2011 and 2010, respectively. OPEB contributions were $21.9 million and $17.4 million for the nine months ended September 30, 2011 and 2010, respectively.
|
|||
NOTE 12 – STOCK COMPENSATION PLANS
Employees' Plans
On March 8, 2011, the Compensation and Organization Committee ("Committee") of the Board of Directors approved a grant under our shareholder approved ICE Plan for the 2011 to 2013 performance period. A total of 256,100 shares were granted under the award, consisting of 188,480 performance shares and 67,620 restricted share units.
For the outstanding ICE Plan year agreements, each performance share, if earned, entitles the holder to receive a number of common shares within the range between a threshold and maximum number of our common shares, with the actual number of common shares earned dependent upon whether the Company achieves certain objectives and performance goals as established by the Committee. The performance share grants vest over a period of three years and are intended to be paid out in common shares. Performance is measured on the basis of two factors: 1) relative TSR for the period, as measured against a predetermined peer group of mining and metals companies, and 2) three-year cumulative free cash flow. The final payout for the 2011 to 2013 performance period varies from zero to 200 percent of the original grant compared to prior years where the maximum payout was 150 percent. The restricted share units are subject to continued employment, are retention based, will vest at the end of the performance period for the performance shares, and are payable in common shares at a time determined by the Committee at its discretion.
Upon the occurrence of a change in control, as defined in the agreement, all performance shares and restricted share units granted to a participant will vest and become nonforfeitable and will be paid out in cash.
Determination of Fair Value
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 historic and projected stock prices was developed for both the Company and its 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. We estimated 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 plans.
The following assumptions were utilized to estimate the fair value for the 2011 performance share grants:
|
Grant Date |
Grant Date |
Average Term (Years) |
Expected |
Risk-Free |
Dividend Yield |
Fair Value |
Fair Value | |||||||
|
March 8, 2011 |
$96.70 | 2.81 | 94.4% | 1.17% | 0.58% | $77.90 | 80.60% |
The fair value of the restricted share units is determined based on the closing price of the Company's common shares on the grant date. The restricted share units granted under the ICE Plan vest over a period of three years.
|
|||
NOTE 13 – INCOME TAXES
Our tax provision for the three and nine months ended September 30, 2011 was $17.8 million and $312.3 million, respectively. Our tax provision for the same periods ended September 30, 2010 was $116.1 million and $282.5 million, respectively. The effective tax rate for the first nine months of 2011 is approximately 16.2 percent, while the effective tax rate for the first nine months of 2010 was 31 percent. The difference in the effective rate from the prior year is primarily due to the impact of the 2010 tax law change that occurred in 2010, the impact of higher pre-tax book income in 2011 over 2010 with similar book to tax differences, and the remeasurement of foreign deferred tax liabilities and assets for which the functional currency is the U.S. dollar. Additionally, the effective tax rate decreased as a result of the recognition of uncertain tax positions due to audit closures and statute expiration. Our 2011 estimated annual effective tax rate before discrete items is approximately 22.7 percent. This estimated annual effective tax rate differs from the U.S. statutory rate of 35 percent primarily due to deductions for percentage depletion in excess of cost depletion related to U.S. operations, income not subject to tax, non-taxable hedging income, non-taxable income related to noncontrolling interests in partnerships and benefits derived from operations outside the U.S., which are taxed at rates lower than the U.S. statutory rate of 35 percent.
As of September 30, 2011, our valuation allowance against certain deferred tax assets increased by $25.9 million from December 31, 2010. This increase primarily relates to ordinary losses of certain foreign operations for which future utilization is currently uncertain.
As of September 30, 2011, cumulative undistributed earnings of foreign subsidiaries included in consolidated retained earnings continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practical to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.
As of January 1, 2011, we had $79.8 million of unrecognized tax benefits recorded in Other liabilities on the Statements of Consolidated Financial Position. During the third quarter of 2011, we recognized a tax benefit for the reduction in the amount of unrecognized tax benefits to reflect the closure of the U.S. federal audit for the years 2007 and 2008. Additionally, we recognized a tax benefit for previously recorded uncertain tax positions to reflect the expiration of the statute of limitations in a foreign jurisdiction. We do not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.
Tax years that remain subject to examination are years 2009 and forward for the United States, 1993 and forward for Canada, and 2007 and forward for Australia.
|
|||
NOTE 14 – CAPITAL STOCK
Share Repurchase Plan
On August 15, 2011, our Board of Directors approved a new share repurchase plan that authorizes us to purchase up to four million of our outstanding common shares. The new share repurchase plan replaces the previously existing share repurchase plan and allows for the purchase of common shares from time to time in open market purchases or privately negotiated transactions. During the third quarter, the number of common shares purchased was approximately three million shares at a cost of approximately $222 million, or an average price of approximately $74 per share. As of September 30, 2011, there were approximately one million shares yet to be repurchased. The new share repurchase plan expires on December 31, 2012.
Public Offering
On June 13, 2011, we completed a public offering of our common shares. The total number of shares sold was 10.35 million, comprised of the 9.0 million share offering and the exercise of an underwriters' over-allotment option to purchase an additional 1.35 million shares. The offering resulted in an increase in the number of our common shares issued and outstanding as of September 30, 2011. We received net proceeds of approximately $853.7 million at a closing price of $85.63 per share.
Dividends
On May 11, 2010, our Board of Directors increased our quarterly common share dividend from $0.0875 to $0.14 per share. The increased cash dividend was paid on June 1, 2010, September 1, 2010, and December 1, 2010 to shareholders on record as of May 14, 2010, August 13, 2010, and November 19, 2010, respectively. In addition, the increased cash dividend was paid on March 1, 2011 and June 1, 2011 to shareholders on record as of February 15, 2011 and April 29, 2011, respectively. On July 12, 2011, our Board of Directors increased the quarterly common share dividend by 100 percent to $0.28 per share. The increased cash dividend was paid on September 1, 2011 to shareholders on record as of the close of business on August 15, 2011.
Amendment to the Second Amended Articles of Incorporation
On May 25, 2011, our shareholders approved an amendment to our Second Amended Articles of Incorporation to increase the number of authorized Common Shares from 224,000,000 to 400,000,000, which resulted in an increase in the total number of authorized shares from 231,000,000 to 407,000,000. The total number of authorized shares includes 3,000,000 and 4,000,000 shares, respectively, of Class A and Class B preferred stock, none of which are issued and outstanding.
|
|||
NOTE 17 – COMMITMENTS AND CONTINGENCIES
Purchase Commitments
In May 2011, we incurred capital commitments related to the expansion of our Bloom Lake mine. As of September 30, 2011, the project has been approved for capital investments of approximately $615 million, of which $206 million has been committed. The expansion is part of ramping up production capacity by 8.0 million metric tons of iron ore concentrate per year. As of September 30, 2011, capital expenditures related to this commitment were approximately $65 million. Of the committed capital, expenditures of approximately $73 million and $68 million are expected to be made during the remainder of 2011 and 2012, respectively.
As a result of the significant tornado damage to the above-ground operations at our Oak Grove mine during the second quarter of 2011, we incurred capital commitments to repair the damage done to the preparation plant and the overland conveyor system. As of September 30, 2011, the project requires a capital investment of approximately $55 million, of which approximately $31 million has been committed. As of September 30, 2011, $26 million in capital expenditures had been expended related to this commitment. Of the committed capital, expenditures of $5 million are scheduled to be made during the remainder of 2011.
In March 2011, we incurred capital commitments related to bringing Lower War Eagle, a high volatile metallurgical coal mine in West Virginia, into production. As of September 30, 2011, the project has been approved for capital investments of approximately $49 million, all of which has been committed. As of September 30, 2011, capital expenditures related to this commitment were approximately $31 million. Of the committed capital, expenditures of approximately $10 million and $8 million are scheduled to be made during the remainder of 2011 and in 2012, respectively.
In 2010, our Board of Directors approved a capital project at our Koolyanobbing Operation in Western Australia. The project is expected to increase the production capacity at the Koolyanobbing Operation to approximately 11 million metric tons annually. The improvements consist of enhancements to the existing rail infrastructure and upgrades to various other existing operational constraints. The expansion project requires a capital investment of approximately $272 million, of which approximately $246 million has been committed, that will be required to meet the timing of the proposed expansion. As of September 30, 2011, $133 million in capital expenditures had been expended related to this commitment. Of the committed capital, expenditures of $67 million and $46 million are scheduled to be made during the remainder of 2011 and in 2012, respectively.
We incurred capital commitments related to an expansion project at our Empire and Tilden mines in Michigan's Upper Peninsula in 2010. The expansion project requires a capital investment of approximately $264 million, of which $178 million has been committed as of September 30, 2011, and is expected to allow the Empire mine to produce at three million tons annually through 2014 and increase Tilden mine production by an additional two million tons annually. As of September 30, 2011, capital expenditures related to this commitment were approximately $123 million. Of the committed capital, expenditures of approximately $31 million and $24 million are scheduled to be made during the remainder of 2011 and in 2012, respectively.
Contingencies
Litigation
We are currently a party to various claims and legal proceedings incidental to our operations. If management believes that a loss arising from these matters is probable and can reasonably be estimated, we record the amount of the loss, or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Based on currently available information, management believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a material effect on our financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or an injunction. If an unfavorable ruling were to occur, there exists the possibility of a material impact on the financial position and results of operations of the period in which the ruling occurs, or future periods. However, we believe
that any pending litigation will not result in a material liability in relation to our consolidated financial statements.
|
|||
NOTE 18 – CASH FLOW INFORMATION
A reconciliation of capital additions to cash paid for capital expenditures for the nine months ended September 30, 2011 and 2010 is as follows:
| (In Millions) | ||||||||
| Nine Months Ended September 30, | ||||||||
| 2011 | 2010 | |||||||
|
Capital additions |
$ | 553.3 | $ | 154.2 | ||||
|
Cash paid for capital expenditures |
478.9 | 150.1 | ||||||
|
|
|
|
|
|||||
|
Difference |
$ | 74.4 | $ | 4.1 | ||||
|
|
|
|
|
|||||
|
Non-cash accruals |
$ | 74.4 | $ | 4.1 | ||||
|
Capital leases |
- | - | ||||||
|
|
|
|
|
|||||
|
Total |
$ | 74.4 | $ | 4.1 | ||||
|
|
|
|
|
|||||
Non-cash investing activities for the nine months ended September 30, 2010 include the issuance of 4.2 million of our common shares valued at $173.1 million as part of the purchase consideration for the acquisition of the remaining interest in Freewest. Non-cash items for the nine months ended September 30, 2010 also include gains of $38.6 million related to the remeasurement of our previous ownership interest in Freewest and Wabush held prior to each business acquisition. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for further information.
|
|||
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and in the opinion of management, contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly, the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of results to be expected for the year ended December 31, 2011 or any other future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2010.
The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly-owned and majority-owned subsidiaries, including the following subsidiaries:
|
Name |
Location |
Ownership Interest |
Operation | |||
|
Northshore |
Minnesota | 100.0% | Iron Ore | |||
|
United Taconite |
Minnesota | 100.0% | Iron Ore | |||
|
Wabush |
Labrador/Quebec, Canada | 100.0% | Iron Ore | |||
|
Bloom Lake |
Quebec, Canada | 75.0% | Iron Ore | |||
|
Tilden |
Michigan | 85.0% | Iron Ore | |||
|
Empire |
Michigan | 79.0% | Iron Ore | |||
|
Asia Pacific Iron Ore |
Western Australia | 100.0% | Iron Ore | |||
|
Pinnacle |
West Virginia | 100.0% | Coal | |||
|
Oak Grove |
Alabama | 100.0% | Coal | |||
|
CLCC |
West Virginia | 100.0% | Coal | |||
|
renewaFUEL(1) |
Michigan | 95.0% | Biomass | |||
|
Freewest |
Ontario, Canada | 100.0% | Chromite | |||
|
Spider |
Ontario, Canada | 100.0% | Chromite |
| (1) |
On September 27, 2011, we announced our plans to cease the operations of renewaFUEL. See the Discontined Operations disclosure below for further details. |
Intercompany transactions and balances are eliminated upon consolidation.
The following table presents the detail of our investments in unconsolidated ventures and where those investments are classified on the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011 and December 31, 2010. Parentheses indicate a net liability.
|
Investment |
Classification |
Interest Percentage |
September 30, 2011 |
December 31, 2010 |
||||||||
|
Amapá |
Investments in ventures | 30 | $ | 489.0 | $ | 461.3 | ||||||
|
AusQuest |
Investments in ventures | 30 | 5.7 | 24.1 | ||||||||
|
Hibbing (1) |
Investments in ventures | 23 | 2.1 | (5.8) | ||||||||
|
Cockatoo (2) |
Other Liabilities | 50 | (4.5) | 10.5 | ||||||||
|
Other |
Investments in ventures | 19.0 | 18.9 | |||||||||
|
|
|
|
|
|||||||||
| $ | 511.3 | $ | 509.0 | |||||||||
|
|
|
|
|
|||||||||
| (1) |
Recorded as Other liabilities at December 31, 2010. |
| (2) |
Recorded as Investments in ventures at December 31, 2010. |
Discontinued Operations
On September 27, 2011, we announced our plans to cease and dispose of the operations at the renewaFUEL biomass production facility in Michigan. As we continue to successfully grow our core iron ore mining business, the decision to sell our interest in the renewaFUEL operations was made to allow our management focus and allocation of capital resources to be deployed where we believe we can have the most impact for our stakeholders. We are currently in the process of executing a plan to dispose of the renewaFUEL assets. The results of operations of the renewaFUEL operations are reflected as discontinued operations in the accompanying consolidated financial statements for all periods presented. We recorded $17.5 million, net of $7.3 million in tax benefits, and $18.7 million, net of $7.9 million in tax benefit, respectively, as Loss From Discontinued Operations on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. This compares to losses of $0.7 million, net of $0.4 million of tax benefits, and $2.0 million, net of $1.0 million in tax benefits, respectively, for each of the comparable prior year periods. The results recorded as Loss From Discontinued Operations on Statements of Unaudited Condensed Consolidated Operations for both the three and nine months ended September 30, 2011, include a $16.7 million impairment charge, net of $7.1 million in tax benefits, taken to write the renewaFUEL asset down to fair value.
The impairment charge was based on an internal assessment around the recovery of the renewaFUEL assets, primarily property, plant and equipment. The assessment considered several factors including the unique industry, the highly customized nature of the related property, plant and equipment and the fact that the plant had not performed up to design capacity. Given these points of consideration, it was determined that the expected recovery values on the renewaFUEL assets are low. The renewaFUEL total assets have been recorded at fair value on the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011, and are primarily comprised of property, plant and equipment. The renewaFUEL operations are included in our Alternative Energies operating segment.
Reportable Segments
As a result of the acquisition of Consolidated Thompson, we have revised the number of our operating and reportable segments as determined under ASC 280. Our company's primary operations are organized and managed according to product category and geographic location and now include: U.S. Iron Ore, Eastern Canadian Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal, Latin American Iron Ore, Alternative Energies, Ferroalloys and our Global Exploration Group. Our historical presentation of segment information consisted of three reportable segments: North American Iron Ore, North American Coal and Asia Pacific Iron Ore. Our restated presentation consists of four reportable segments: U.S. Iron Ore, Eastern Canadian Iron Ore, North American Coal and Asia Pacific Iron Ore. The amounts disclosed in NOTE 2 – SEGMENT REPORTING reflect this restatement.
Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the audited financial statements for the fiscal year ended December 31, 2010, included in our Annual Report on Form 10-K filed with the SEC. Due to the completion of our acquisition of Consolidated Thompson and the immaterial error identified around our accounting for the Empire partnership arrangement, there have been several changes in our significant accounting policies and estimates from those disclosed therein. The significant accounting policies requiring updates have been included within the disclosures below.
Inventories
U.S. Iron Ore
U.S. Iron Ore product inventories are stated at the lower of cost or market. Cost of iron ore inventories is determined using the LIFO method. We maintain ownership of the inventories until title has transferred to the customer, usually when payment is made. Maintaining ownership of the iron ore products at ports on the lower Great Lakes reduces risk of non-payment by customers, as we retain title to the product until payment is received from the customer. We track the movement of the inventory and verify the quantities on hand.
Eastern Canadian Iron Ore
Iron ore pellet inventories are stated at the lower of cost or market. Similar to U.S. Iron Ore product inventories, the cost is determined using the LIFO method. For the majority of these inventories, ownership is maintained until loading of the product at the port.
Iron ore concentrate inventories are stated at the lower of cost or market. The cost of iron ore concentrate inventories is determined using weighted average cost. For the majority of the iron ore concentrate inventories, we maintain ownership of the inventories until title passes on the bill of lading date, which is upon the loading of the product at the port.
Revenue Recognition and Cost of Goods Sold and Operating Expenses
U.S. Iron Ore
Revenue is recognized on the sale of products when title to the product has transferred to the customer in accordance with the specified provisions of each term supply agreement and all applicable criteria for revenue recognition have been satisfied. Most of our U.S. Iron Ore term supply agreements provide that title and risk of loss transfer to the customer when payment is received.
We recognize revenue based on the gross amount billed to a customer as we earn revenue from the sale of the goods or services. Revenue from product sales also includes reimbursement for freight charges paid on behalf of customers in Freight and Venture Partners' Cost Reimbursements separate from product revenue.
Costs of goods sold and operating expenses represents all direct and indirect costs and expenses applicable to the sales and revenues of our mining operations. Operating expenses within this line item primarily represent the portion of the Tilden mining venture costs for which we do not own; that is, the costs attributable to the share of the mine's production owned by the other joint venture partner in the Tilden mine. The mining venture functions as a captive cost company; it supplies product only to its owners effectively on a cost basis. Accordingly, the noncontrolling interests' revenue amounts are stated at cost of production and are offset in entirety by an equal amount included in cost of goods sold and operating expenses resulting in no sales margin reflected in the noncontrolling interest participant. As we are responsible for product fulfillment, we retain the risks and rewards of a principal in the transaction and accordingly record revenue under these arrangements on a gross basis.
As of September 30, 2011, Product Revenues and Costs of goods sold and operating expenses on the Statements of Unaudited Condensed Consolidated Operations reflect consolidation of the Empire mining venture and recognition of a noncontrolling interest. ArcelorMittal is a 21 percent partner in the Empire mining venture, resulting in a noncontrolling interest adjustment for ArcelorMittal's ownership percentage to Net income (loss) attributable to noncontrolling interest on the Statements of Unaudited Condensed Consolidated Operations. As result of ArcelorMittal's 21 percent ownership in the Empire mining venture, we recognized $157.1 million of related party revenues included in Product Revenue on the Statements of Unaudited Condensed Consolidated Operations for the nine months ended September 30, 2011. See the Immaterial Errors disclosure above for further details regarding these prospective changes.
Under certain term supply agreements, we ship the product to ports on the lower Great Lakes or to the customer's facilities prior to the transfer of title. Our rationale for shipping iron ore products to certain customers and retaining title until payment is received for these products is to minimize credit risk exposure. In addition, certain supply agreements with one customer include provisions for supplemental revenue or refunds based on the customer's annual steel pricing for the year the product is consumed in the customer's blast furnaces. We account for this provision as a derivative instrument at the time of sale and record this provision at fair value until the year the product is consumed and the amounts are settled as an adjustment to revenue.
Where we are joint venture participants in the ownership of a mine, our contracts entitle us to receive royalties and/or management fees, which we earn as the pellets are produced. Revenue is recognized on the sale of services when the services are performed.
Eastern Canadian Iron Ore
Revenue is recognized on the sale of products when title to the product has transferred to the customer in accordance with the specified provisions of each term supply agreement and all applicable criteria for revenue recognition have been satisfied. Most of our Eastern Canadian Iron Ore term supply agreements provide that title and risk of loss transfer to the customer upon loading of the product at the port.
Since the acquisition date of Consolidated Thompson, Product Revenues and Costs of goods sold and operating expenses on the Statements of Unaudited Condensed Consolidated Operations reflect our 100 percent ownership interest in Consolidated Thompson. WISCO is a 25 percent partner in Bloom Lake, resulting in a noncontrolling interest adjustment for WISCO's ownership percentage to Net income (loss) attributable to noncontrolling interest on the Statements of Unaudited Condensed Consolidated Operations. As WISCO is a 25 percent partner in Bloom Lake and also our customer, we recognized $224.9 million and $313.6 million, respectively, of related party revenues included in Product Revenue on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011, and $68.8 million of related party receivables included in Accounts receivable from associated companies on the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011.
Related Party Revenues
Total related party revenues were $837.8 million and $1.7 billion for the three and nine months ended September 30, 2011, respectively. Our joint venture partners are also our customers and account for the total related party revenues. This compares with total related party revenues of $379.4 million and $905.4 million for the three and nine months ended September 30, 2010, respectively.
Retrospective Adjustments
In accordance with the business combination guidance in ASC 805, we retrospectively recorded adjustments to the Wabush purchase price allocation that occurred during the second half of 2010 back to the date of acquisition that occurred during the first quarter of 2010. The adjustments were due to further refinements of the fair values of the assets acquired and liabilities assumed. Additionally, we continued to ensure our existing interest in Wabush was incorporating all of the book basis, including amounts recorded in Accumulated other comprehensive income (loss). Due to these adjustments, the financial statements for the three months ended March 31, 2010 have been retrospectively adjusted for these changes, resulting in a decrease to Income From Continuing Operations Before Income Taxes and Equity Income (Loss) from Ventures of $22.0 million and a decrease to Net Income Attributable to Cliffs Shareholders of $16.1 million, respectively, on the Statements of Unaudited Condensed Consolidated Operations. The adjustments resulted in a decrease to basic and diluted earnings per common share of $0.12 per common share, respectively. As a portion of the total adjustments were recorded during the third quarter of 2010, the financial statements for the nine months ended September 30, 2010 have been retrospectively adjusted, resulting in an increase to Income From Continuing Operations Before Income Taxes and Equity Income (Loss) from Ventures of $12.3 million and an increase to Net Income Attributable to Cliffs Shareholders of $8.9 million, respectively, on the Statements of Unaudited Condensed Consolidated Operations from the previously filed information. The adjustments resulted in an increase to basic and diluted earnings per common share of $0.07 per common share, respectively. In addition, Retained Earnings was decreased by $16.1 million and Accumulated other comprehensive income (loss) was increased by $25.3 million, respectively, on the Statements of Unaudited Condensed Consolidated Financial Position as of December 31, 2010 for the effect of these retrospective adjustments. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for further information.
Recent Accounting Pronouncements
In January 2010, the FASB amended the guidance on fair value to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The amendment also revises the guidance on employers' disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The amended guidance is effective for the first reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted the provisions of guidance required for the period beginning January 1, 2011; however, adoption of this amendment did not have a material impact on our consolidated financial statements.
In December 2010, the FASB issued amended guidance on business combinations in order to clarify the disclosure requirements around pro forma revenue and earnings. The update was issued in response to the diversity in practice about the interpretation of such requirements. The amendment specifies that pro forma revenue and earnings of the combined entity be presented as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The new guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We adopted the amended guidance upon our acquisition of Consolidated Thompson. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for further information.
In May 2011, the FASB amended the guidance on fair value as a result of the joint efforts by the FASB and the IASB to develop a single, converged fair value framework. The converged fair value framework provides converged guidance on how to measure fair value and on what disclosures to provide about fair value measurements. The significant amendments to the fair value measurement guidance and the new disclosure requirements include: (1) the highest and best use and valuation premise for nonfinancial assets; (2) the application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risks; (3) premiums or discounts in fair value measurement; (4) fair value of an instrument classified in a reporting entity's shareholders' equity; (5) for Level 3 measurements, a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation process in place, and a narrative description of the sensitivity of the fair value to changes in the unobservable inputs and interrelationships between those inputs; and (6) the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed. The new guidance is effective for interim and annual periods beginning after December 15, 2011. We are currently evaluating the impact that the adoption of this amendment will have on our consolidated financial statements.
In June 2011, the FASB issued amended guidance on the presentation of comprehensive income in order to improve comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in OCI. The update also facilitates the convergence of GAAP and IFRS. The amendment eliminates the presentation options under ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. In either presentation option, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statements where the components of net income and the components of OCI are presented. The amendment does not change the items that must be reported in other comprehensive income. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and the amendments are required to be applied retrospectively. We are currently evaluating the impact that the adoption of this amendment will have on our consolidated financial statements.
In September 2011, the FASB issued amended guidance in order to simplify how entities test goodwill for impairment under ASC 350. The revised guidance provides entities testing goodwill for impairment with the option of performing a qualitative assessment before calculating the fair value of the reporting unit as required in step 1 of the goodwill impairment test. If the qualitative assessment provides the basis that the fair value of the reporting unit is more likely than not less than the carrying amount, then step 1 of the impairment test is required. The amended guidance does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. In addition, the revised guidance does not amend the requirement to test goodwill for impairment between annual tests if certain events or circumstances warrant that such a test be performed. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We are currently evaluating the impact that the adoption of this amendment will have on our annual goodwill impairment test and do not expect that this amendment will have a material impact on our consolidated financial statements.
In September 2011, the FASB issued amended guidance to increase the quantitative and qualitative disclosures an employer is required to provide about its participation in significant multiemployer plans that offer pension and other post retirement benefits. The objective of the amended guidance is to enhance the transparency of disclosures about: (1) the significant multiemployer plans in which an employer participates, including the plan names and identifying numbers; (2) the level of the employer's participation in those plans; (3) the financial health of the plans; and (4) the nature of the employer's commitments to the plans. For plans for which additional public information outside of the employer's financial statements is not available, the amended guidance requires additional disclosures, including: (1) a description of the nature of the plan benefits; (2) a qualitative description of the extent to which the employer could be responsible for the obligation of the plan; and (3) other information to help users understand the financial information about the plan, to the extent available. The new guidance is effective for fiscal years ending after December 15, 2011, and the amendments are required to be applied retrospectively for all prior periods presented. We are currently evaluating the impact that the adoption of this amendment will have on our consolidated financial statements.
|
|||
Australian Dollar Foreign Exchange Contracts
We are subject to changes in foreign currency exchange rates as a result of our operations in Australia. Foreign exchange risk arises from our exposure to fluctuations in foreign currency exchange rates because the functional currency of our Asia Pacific operations is the Australian dollar. Our Asia Pacific operations receive funds in U.S. currency for their iron ore and coal sales. We use foreign currency exchange forward contracts, call options and collar options to hedge our foreign currency exposure for a portion of our sales receipts. U.S. currency is converted to Australian dollars at the currency exchange rate in effect at the time of the transaction. The primary objective for the use of these instruments is to reduce exposure to changes in Australian and U.S. currency exchange rates and to protect against undue adverse movement in these exchange rates. Effective October 1, 2010, we elected hedge accounting for certain types of our foreign exchange contracts entered into subsequent to September 30, 2010. These instruments are subject to formal documentation, intended to achieve qualifying hedge treatment, and are tested for effectiveness at inception and at least once each reporting period. During the third quarter of 2011, we implemented a global foreign exchange hedging policy to apply to all of our operating segments and our wholly-owned subsidiaries that engage in foreign exchange risk mitigation. The policy allows for no more than 75 percent, but not less than 40 percent for up to 12 months and not less than 10 percent for up to 15 months, of forecasted net currency exposures that are probable to occur. For our Asia Pacific operations, the forecasted net currency exposures are in relation to anticipated operating costs designated as cash flow hedges on future sales. Previously, our Asia Pacific operations had a policy in place that was specific to local operations and allowed for no more than 75 percent of anticipated operating costs for up to 12 months and no more than 50 percent of operating costs for up to 24 months to be designated as cash flow hedges of future sales. If and when these hedge contracts are determined not to be highly effective as hedges, the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, hedge accounting is discontinued.
|
|||
|
Name |
Location |
Ownership Interest |
Operation | |||
|
Northshore |
Minnesota | 100.0% | Iron Ore | |||
|
United Taconite |
Minnesota | 100.0% | Iron Ore | |||
|
Wabush |
Labrador/Quebec, Canada | 100.0% | Iron Ore | |||
|
Bloom Lake |
Quebec, Canada | 75.0% | Iron Ore | |||
|
Tilden |
Michigan | 85.0% | Iron Ore | |||
|
Empire |
Michigan | 79.0% | Iron Ore | |||
|
Asia Pacific Iron Ore |
Western Australia | 100.0% | Iron Ore | |||
|
Pinnacle |
West Virginia | 100.0% | Coal | |||
|
Oak Grove |
Alabama | 100.0% | Coal | |||
|
CLCC |
West Virginia | 100.0% | Coal | |||
|
renewaFUEL(1) |
Michigan | 95.0% | Biomass | |||
|
Freewest |
Ontario, Canada | 100.0% | Chromite | |||
|
Spider |
Ontario, Canada | 100.0% | Chromite |
| (1) |
On September 27, 2011, we announced our plans to cease the operations of renewaFUEL. See the Discontined Operations disclosure below for further details. |
|
Investment |
Classification |
Interest Percentage |
September 30, 2011 |
December 31, 2010 |
||||||||
|
Amapá |
Investments in ventures | 30 | $ | 489.0 | $ | 461.3 | ||||||
|
AusQuest |
Investments in ventures | 30 | 5.7 | 24.1 | ||||||||
|
Hibbing (1) |
Investments in ventures | 23 | 2.1 | (5.8) | ||||||||
|
Cockatoo (2) |
Other Liabilities | 50 | (4.5) | 10.5 | ||||||||
|
Other |
Investments in ventures | 19.0 | 18.9 | |||||||||
|
|
|
|
|
|||||||||
| $ | 511.3 | $ | 509.0 | |||||||||
|
|
|
|
|
|||||||||
| (1) |
Recorded as Other liabilities at December 31, 2010. |
| (2) |
Recorded as Investments in ventures at December 31, 2010. |
| (In Millions, Except Per Share Amounts) | ||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||
| March 31, | June 30, | June 30, | ||||||||||
| 2011 | 2011 | 2011 | ||||||||||
|
Revenues from Product Sales and Services |
||||||||||||
|
Product |
$ | 54.1 | $ | 46.0 | $ | 100.1 | ||||||
|
Freight and venture partners' cost reimbursements |
- | (46.0) | (46.0) | |||||||||
|
|
|
|
|
|
|
|||||||
| 54.1 | - | 54.1 | ||||||||||
|
Cost of Goods Sold and Operating Expenses |
(54.1) | - | (54.1) | |||||||||
|
Income from Continuing Operations |
8.4 | 7.7 | 16.1 | |||||||||
|
LESS: Income Attributable to Noncontrolling Interest |
45.9 | 38.1 | 84.0 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Net Income Attributable to Cliffs Shareholders |
$ | (37.5) | $ | (30.4) | $ | (67.9) | ||||||
|
Earnings per Common Share Attributable to Cliffs Shareholders - Basic and Diluted |
$ | (0.28) | $ | (0.22) | $ | (0.49) | ||||||
|
|||
| (In Millions) | ||||||||||||||||||||||||||||||||
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
|
Revenues from product sales and services: |
||||||||||||||||||||||||||||||||
|
U.S. Iron Ore |
$ | 1,106.7 | 52% | $ | 741.4 | 55% | $ | 2,502.0 | 49% | $ | 1,729.8 | 53% | ||||||||||||||||||||
|
Eastern Canadian Iron Ore |
517.3 | 24% | 124.4 | 9% | 942.2 | 18% | 308.1 | 9% | ||||||||||||||||||||||||
|
North American Coal |
64.0 | 3% | 126.1 | 9% | 388.7 | 8% | 323.4 | 10% | ||||||||||||||||||||||||
|
Asia Pacific Iron Ore |
400.1 | 19% | 298.2 | 22% | 1,127.1 | 22% | 767.1 | 24% | ||||||||||||||||||||||||
|
Other |
54.7 | 2% | 55.9 | 5% | 171.8 | 3% | 129.5 | 4% | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Total revenues from product sales and services for reportable segments |
$ | 2,142.8 | 100% | $ | 1,346.0 | 100% | $ | 5,131.8 | 100% | $ | 3,257.9 | 100% | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Sales margin: |
||||||||||||||||||||||||||||||||
|
U.S. Iron Ore |
$ | 481.3 | $ | 264.2 | $ | 1,283.7 | $ | 545.5 | ||||||||||||||||||||||||
|
Eastern Canadian Iron Ore |
193.0 | 39.6 | 296.0 | 76.3 | ||||||||||||||||||||||||||||
|
North American Coal |
(42.7) | (17.8) | (60.4) | (5.4) | ||||||||||||||||||||||||||||
|
Asia Pacific Iron Ore |
214.6 | 169.7 | 615.4 | 382.5 | ||||||||||||||||||||||||||||
|
Other |
17.1 | 21.5 | 60.2 | 43.7 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Sales margin |
863.3 | 477.2 | 2,194.9 | 1,042.6 | ||||||||||||||||||||||||||||
|
Other operating expense |
(43.0) | (86.8) | (214.2) | (170.9) | ||||||||||||||||||||||||||||
|
Other income (expense) |
(54.8) | 20.2 | (61.8) | 39.8 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Income from continuing operations before income taxes and equity income (loss) from ventures |
$ | 765.5 | $ | 410.6 | $ | 1,918.9 | $ | 911.5 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Depreciation, depletion and amortization: |
||||||||||||||||||||||||||||||||
|
U.S. Iron Ore |
$ | 23.0 | $ | 17.6 | $ | 62.5 | $ | 45.1 | ||||||||||||||||||||||||
|
Eastern Canadian Iron Ore |
41.2 | 10.6 | 81.1 | 36.2 | ||||||||||||||||||||||||||||
|
North American Coal |
19.7 | 19.6 | 62.1 | 42.6 | ||||||||||||||||||||||||||||
|
Asia Pacific Iron Ore |
25.4 | 31.0 | 74.3 | 97.2 | ||||||||||||||||||||||||||||
|
Other |
8.4 | 5.6 | 22.9 | 18.4 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Total depreciation, depletion and amortization |
$ | 117.7 | $ | 84.4 | $ | 302.9 | $ | 239.5 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Capital additions (1): |
||||||||||||||||||||||||||||||||
|
U.S. Iron Ore |
$ | 28.5 | $ | 32.7 | $ | 115.8 | $ | 59.9 | ||||||||||||||||||||||||
|
Eastern Canadian Iron Ore |
103.3 | 4.8 | 167.5 | 9.4 | ||||||||||||||||||||||||||||
|
North American Coal |
60.3 | 28.1 | 116.3 | 42.0 | ||||||||||||||||||||||||||||
|
Asia Pacific Iron Ore |
57.3 | 10.4 | 140.6 | 30.6 | ||||||||||||||||||||||||||||
|
Other |
6.5 | 7.5 | 13.1 | 12.3 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Total capital additions |
$ | 255.9 | $ | 83.5 | $ | 553.3 | $ | 154.2 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
(1) Includes capital lease additions and non-cash accruals.
| (In Millions) | ||||||||
| September 30, 2011 |
December 31, 2010 |
|||||||
|
Segment Assets: |
||||||||
|
U.S. Iron Ore |
$ | 1,772.2 | $ | 1,537.1 | ||||
|
Eastern Canadian Iron Ore |
7,712.6 | 629.6 | ||||||
|
North American Coal |
1,718.9 | 1,623.8 | ||||||
|
Asia Pacific Iron Ore |
1,343.1 | 1,195.3 | ||||||
|
Other |
1,165.6 | 1,257.8 | ||||||
|
|
|
|
|
|||||
|
Total segment assets |
13,712.4 | 6,243.6 | ||||||
|
Corporate |
232.9 | 1,534.6 | ||||||
|
|
|
|
|
|||||
|
Total assets |
$ | 13,945.3 | $ | 7,778.2 | ||||
|
|
|
|
|
|||||
|
|||
| (In Millions) | ||||||||||||||||||||||||
| Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||
| September 30, 2011 | December 31, 2010 | September 30, 2011 | December 31, 2010 | |||||||||||||||||||||
|
Derivative Instrument |
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
||||||||||||||||
|
Derivatives designated as hedging instruments under ASC 815: |
||||||||||||||||||||||||
|
Foreign Exchange Contracts |
Derivative assets (current) |
$ | 1.2 | Derivative assets (current) |
$ | 2.8 | Other current liabilities |
$ | 15.9 | $ | - | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total derivatives designated as hedging instruments under ASC 815 |
$ | 1.2 | $ | 2.8 | $ | 15.9 | $ | - | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Derivatives not designated as hedging instruments under ASC 815: |
||||||||||||||||||||||||
|
Foreign Exchange Contracts |
Derivative assets (current) |
$ | 4.6 | Derivative assets (current) |
$ | 34.2 | $ | - | $ | - | ||||||||||||||
| Deposits and miscellaneous |
- | Deposits and miscellaneous |
2.0 | - | - | |||||||||||||||||||
|
Customer Supply Agreements |
Derivative assets (current) |
67.8 | Derivative assets (current) |
45.6 | - | - | ||||||||||||||||||
|
Provisional Pricing Arrangements |
Accounts Receivable |
49.0 | - | - | - | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total derivatives not designated as hedging instruments under ASC 815 |
$ | 121.4 | $ | 81.8 | $ | - | $ | - | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total derivatives |
$ | 122.6 | $ | 84.6 | $ | 15.9 | $ | - | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| (In Millions) | ||||||||||||||||||
|
Derivatives in Cash Flow Hedging Relationships |
Amount of Gain/(Loss) Recognized in OCI on Derivative (Effective Portion) |
Location of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
|||||||||||||||
| Three months ended September 30, |
Three months ended September 30, |
|||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||
|
Australian Dollar Foreign Exchange Contracts (hedge designation) |
$ | (15.2) | $ | - | Product Revenue | $ | 1.5 | $ | - | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total |
$ | (15.2) | $ | - | $ | 1.5 | $ | - | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Nine months ended September 30, |
Nine months ended September 30, |
|||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||
|
Australian Dollar Foreign Exchange Contracts (hedge designation) |
$ | (10.3) | $ | - | Product Revenue | $ | 2.5 | $ | - | |||||||||
|
Australian Dollar Foreign Exchange Contracts (prior to de-designation) |
- | - | Product Revenue | 0.7 | 3.2 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total |
$ | (10.3) | $ | - | $ | 3.2 | $ | 3.2 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
|
(In Millions) |
||||||||||||||||||
|
Derivative Not Designated as Hedging Instruments |
Location of Gain/(Loss) Recognized in Income on Derivative |
Amount of Gain/(Loss) Recognized in Income on Derivative | ||||||||||||||||
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||
|
Foreign Exchange Contracts |
Product Revenues | $ | - | $ | 3.3 | $ | 1.0 | $ | 8.8 | |||||||||
|
Foreign Exchange Contracts |
Other Income (Expense) | (6.2) | 32.5 | 100.5 | 24.8 | |||||||||||||
|
Customer Supply Agreements |
Product Revenues | 53.8 | 25.1 | 124.9 | 93.4 | |||||||||||||
|
Provisional Pricing Arrangements |
Product Revenues | 193.0 | 229.2 | 623.5 | 960.7 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total |
$ | 240.6 | $ | 290.1 | $ | 849.9 | $ | 1,087.7 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
|
|||
| (In Millions) | ||||||||||||||||||||||||
| September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
|
Segment |
Finished Goods |
Work-in Process |
Total Inventory |
Finished Goods |
Work-in Process |
Total Inventory |
||||||||||||||||||
|
U.S. Iron Ore |
$ | 235.4 | $ | 21.5 | $ | 256.9 | $ | 101.1 | $ | 9.7 | $ | 110.8 | ||||||||||||
|
Eastern Canadian Iron Ore |
101.1 | 28.8 | 129.9 | 43.5 | 21.2 | 64.7 | ||||||||||||||||||
|
North American Coal |
7.1 | 65.9 | 73.0 | 16.1 | 19.8 | 35.9 | ||||||||||||||||||
|
Asia Pacific Iron Ore |
37.5 | 14.0 | 51.5 | 34.7 | 20.4 | 55.1 | ||||||||||||||||||
|
Other |
14.6 | 2.3 | 16.9 | 2.6 | 0.1 | 2.7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
$ | 395.7 | $ | 132.5 | $ | 528.2 | $ | 198.0 | $ | 71.2 | $ | 269.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
| (In Millions) | ||||||||||||
| Initial Allocation |
Final Allocation |
Change | ||||||||||
|
Consideration |
||||||||||||
|
Cash |
$ | 757.0 | $ | 757.0 | $ | - | ||||||
|
Working capital adjustments |
17.5 | 18.9 | 1.4 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Fair value of total consideration transferred |
$ | 774.5 | $ | 775.9 | $ | 1.4 | ||||||
|
|
|
|
|
|
|
|||||||
|
Recognized amounts of identifiable assets acquired and liabilities assumed |
||||||||||||
|
ASSETS: |
||||||||||||
|
Product inventories |
$ | 20.0 | $ | 20.0 | $ | - | ||||||
|
Other current assets |
11.8 | 11.8 | - | |||||||||
|
Land and mineral rights |
640.3 | 639.3 | (1.0) | |||||||||
|
Plant and equipment |
111.1 | 112.3 | 1.2 | |||||||||
|
Deferred taxes |
16.5 | 15.9 | (0.6) | |||||||||
|
Intangible assets |
7.5 | 7.5 | - | |||||||||
|
Other non-current assets |
0.8 | 0.8 | - | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total identifiable assets acquired |
808.0 | 807.6 | (0.4) | |||||||||
|
LIABILITIES: |
||||||||||||
|
Current liabilities |
(22.8) | (24.1) | (1.3) | |||||||||
|
Mine closure obligations |
(2.8) | (2.8) | - | |||||||||
|
Below-market sales contracts |
(32.6) | (32.6) | - | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total identifiable liabilities assumed |
(58.2) | (59.5) | (1.3) | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total identifiable net assets acquired |
749.8 | 748.1 | (1.7) | |||||||||
|
Goodwill |
24.7 | 27.8 | 3.1 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total net assets acquired |
$ | 774.5 | $ | 775.9 | $ | 1.4 | ||||||
|
|
|
|
|
|
|
|||||||
| (In Millions) | ||||||||||||
| Initial Allocation |
Revised 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 | 102.8 | - | |||||||||
|
Product inventories |
134.2 | 134.2 | - | |||||||||
|
Other current assets |
35.1 | 35.0 | (0.1) | |||||||||
|
Mineral rights |
4,450.0 | 4,450.0 | - | |||||||||
|
Property, plant and equipment |
1,193.4 | 1,193.4 | - | |||||||||
|
Intangible assets |
2.1 | 2.1 | - | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total identifiable assets acquired |
6,048.2 | 6,048.1 | (0.1) | |||||||||
|
LIABILITIES: |
||||||||||||
|
Accounts payable |
(13.6) | (13.6) | - | |||||||||
|
Accrued liabilities |
(130.0) | (123.6) | 6.4 | |||||||||
|
Convertible debentures |
(335.7) | (335.7) | - | |||||||||
|
Other current liabilities |
(41.8) | (41.8) | - | |||||||||
|
Long-term deferred tax liabilities |
(831.5) | (856.7) | (25.2) | |||||||||
|
Wabush Easement |
(11.1) | (11.2) | (0.1) | |||||||||
|
Senior secured notes |
(125.0) | (125.0) | - | |||||||||
|
Capital lease obligations |
(70.7) | (70.7) | - | |||||||||
|
Other long-term liabilities |
(14.0) | (14.0) | - | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total identifiable liabilities assumed |
(1,573.4) | (1,592.3) | (18.9) | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total identifiable net assets acquired |
4,474.8 | 4,455.8 | (19.0) | |||||||||
|
Noncontrolling interest in Bloom Lake |
(947.6) | (947.6) | - | |||||||||
|
Preliminary goodwill |
1,026.8 | 1,045.8 | 19.0 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total net assets acquired |
$ | 4,554.0 | $ | 4,554.0 | $ | - | ||||||
|
|
|
|
|
|
|
|||||||
| (In Millions, Except Per Common Share) |
||||||||||||||||
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Revenues from product sales and services |
$ | 2,142.8 | $ | 1,487.5 | $ | 5,340.2 | $ | 3,435.2 | ||||||||
|
Net income attributable to Cliffs shareholders |
$ | 595.6 | $ | 315.2 | $ | 1,426.2 | $ | 515.5 | ||||||||
|
Earnings per common share attributable to Cliffs shareholders - Basic |
$ | 4.13 | $ | 2.33 | $ | 10.22 | $ | 3.81 | ||||||||
|
Earnings per common share attributable to Cliffs shareholders - Diluted |
$ | 4.11 | $ | 2.31 | $ | 10.16 | $ | 3.79 | ||||||||
|
|||
| (In Millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2011 | December 31, 2010 (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Iron Ore |
Eastern Canadian Iron Ore |
North American Coal |
Asia Pacific Iron Ore |
Other | Total | U.S. Iron Ore |
Eastern Canadian Iron Ore |
North American Coal |
Asia Pacific Iron Ore |
Other | Total | |||||||||||||||||||||||||||||||||||||
|
Beginning Balance |
$ 2.0 | $ 3.1 | $ 27.9 | $ 82.6 | $ 80.9 | $ 196.5 | $ 2.0 | $ - | $ - | $ 72.6 | $ - | $ 74.6 | ||||||||||||||||||||||||||||||||||||
|
Arising in business combinations |
- | 1,045.8 | - | - | - | 1,045.8 | - | 3.1 | 27.9 | - | 80.9 | 111.9 | ||||||||||||||||||||||||||||||||||||
|
Impact of foreign currency translation |
- | - | - | (4.1) | - | (4.1) | - | - | - | 10.0 | - | 10.0 | ||||||||||||||||||||||||||||||||||||
|
Other |
- | (0.4) | (0.1) | - | - | (0.5) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Ending Balance |
$ 2.0 | $ 1,048.5 | $ 27.8 | $ 78.5 | $ 80.9 | $ 1,237.7 | $ 2.0 | $ 3.1 | $ 27.9 | $ 82.6 | $ 80.9 | $ 196.5 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
(1) Represents a 12-month rollforward of our goodwill by reportable unit at December 31, 2010.
The increase in the balance of Goodwill as of September 30, 2011 is due to the assignment of $1.0 billion to Goodwill in the first nine months of 2011 based on the preliminary purchase price allocation for the acquisition of Consolidated Thompson. The balance of $1.2 billion and $196.5 million at September 30, 2011 and December 31, 2010, respectively, is presented as Goodwill on the Statements of Unaudited Condensed Consolidated Financial Position. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for additional information.
| September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||
|
Classification |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||||||||||||
|
Definite lived intangible assets: |
||||||||||||||||||||||||||
|
Permits |
Intangible assets, net | $ | 131.4 | $ | (20.8) | $ | 110.6 | $ | 132.4 | $ | (16.3) | $ | 116.1 | |||||||||||||
|
Utility contracts |
Intangible assets, net | 54.7 | (18.6) | 36.1 | 54.7 | (10.2) | 44.5 | |||||||||||||||||||
|
Easements (1) |
Intangible assets, net | - | - | - | 11.7 | (0.4) | 11.3 | |||||||||||||||||||
|
Leases |
Intangible assets, net | 5.5 | (2.9) | 2.6 | 5.2 | (2.9) | 2.3 | |||||||||||||||||||
|
Unpatented technology (2) |
Intangible assets, net | - | - | - | 4.0 | (2.4) | 1.6 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Total intangible assets |
$ | 191.6 | $ | (42.3) | $ | 149.3 | $ | 208.0 | $ | (32.2) | $ | 175.8 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Below-market sales contracts |
Other current liabilities | $ | (77.0) | $ | 24.3 | $ | (52.7) | $ | (77.0) | $ | 19.9 | $ | (57.1) | |||||||||||||
|
Below-market sales contracts |
Below-Market Sales Contracts | (252.3) | 123.9 | (128.4) | (252.3) | 87.9 | (164.4) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Total below-market sales contracts |
$ | (329.3) | $ | 148.2 | $ | (181.1) | $ | (329.3) | $ | 107.8 | $ | (221.5) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| (1) |
Upon the acquistion of Consolidated Thompson this intangible asset is now eliminated through intercompany eliminations. The easement agreement is between Wabush and Consolidated Thompson. |
| (2) |
Upon recording the renewaFUEL operations as discontinued operations, this intangible asset was written down in the resulting impairment charge recorded during the third quarter of 2011. |
|
Intangible Asset |
Useful Life (years) | |
|
Permits |
15 - 28 | |
|
Utility contracts |
5 | |
|
Easements |
30 | |
|
Leases |
1.5 - 4.5 |
| (In Millions) | ||||
| Amount | ||||
|
Year Ending December 31 |
||||
|
2011 (remaining three months) |
$ | 4.5 | ||
|
2012 |
18.0 | |||
|
2013 |
17.9 | |||
|
2014 |
17.9 | |||
|
2015 |
6.0 | |||
|
2016 |
6.0 | |||
|
|
|
|||
|
Total |
$ | 70.3 | ||
|
|
|
|||
| (In Millions) | ||||
| Amount | ||||
|
Year Ending December 31 |
||||
|
2011 (remaining three months) |
$ | 17.9 | ||
|
2012 |
48.8 | |||
|
2013 |
45.3 | |||
|
2014 |
23.0 | |||
|
2015 |
23.0 | |||
|
2016 |
23.1 | |||
|
|
|
|||
|
Total |
$ | 181.1 | ||
|
|
|
|||
|
|||
| (In Millions) | ||||||||||||||||
| September 30, 2011 | ||||||||||||||||
|
Description |
Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
|
Assets: |
||||||||||||||||
|
Cash equivalents |
$ | 368.6 | $ | - | $ | - | $ | 368.6 | ||||||||
|
Derivative assets |
- | 49.0 | (1) | 67.8 | 116.8 | |||||||||||
|
International marketable securities |
28.4 | - | - | 28.4 | ||||||||||||
|
Foreign exchange contracts |
- | 5.8 | - | 5.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 397.0 | $ | 54.8 | $ | 67.8 | $ | 519.6 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Liabilities: |
||||||||||||||||
|
Foreign exchange contracts |
$ | - | $ | 15.9 | $ | - | $ | 15.9 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | - | $ | 15.9 | $ | - | $ | 15.9 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) |
Derivative assets includes $49.0 million classifed as Accounts receivable on the Statement of Unaudited Condensed Consolidated Financial Position as of September 30, 2011. Refer to NOTE 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information. |
| (In Millions) | ||||||||||||||||
| December 31, 2010 | ||||||||||||||||
|
Description |
Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
|
Assets: |
||||||||||||||||
|
Cash equivalents |
$ | 1,307.2 | $ | - | $ | - | $ | 1,307.2 | ||||||||
|
Derivative assets |
- | - | 45.6 | 45.6 | ||||||||||||
|
U.S. marketable securities |
22.0 | - | - | 22.0 | ||||||||||||
|
International marketable securities |
63.9 | - | - | 63.9 | ||||||||||||
|
Foreign exchange contracts |
- | 39.0 | - | 39.0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 1,393.1 | $ | 39.0 | $ | 45.6 | $ | 1,477.7 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (In Millions) | ||||||||||||||||
| Derivative Assets | ||||||||||||||||
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Beginning balance |
$ | 64.0 | $ | 238.9 | $ | 45.6 | $ | 63.2 | ||||||||
|
Total gains |
||||||||||||||||
|
Included in earnings |
53.8 | 25.1 | 144.9 | 824.9 | ||||||||||||
|
Included in other comprehensive income |
- | - | - | - | ||||||||||||
|
Settlements |
(50.0) | (56.4) | (102.7) | (680.5) | ||||||||||||
|
Transfers out of Level 3 |
- | (161.8) | (20.0) | (161.8) | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Ending balance - September 30 |
$ | 67.8 | $ | 45.8 | $ | 67.8 | $ | 45.8 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date |
$ | 53.8 | $ | 25.1 | $ | 144.9 | $ | 93.4 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (In Millions) | ||||||||||||||||
| September 30, 2011 | December 31, 2010 | |||||||||||||||
| Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
|||||||||||||
|
Long-term receivables: |
||||||||||||||||
|
Customer supplemental payments |
$ | 22.3 | $ | 20.5 | $ | 22.3 | $ | 19.5 | ||||||||
|
ArcelorMittal USA - Ispat receivable |
28.1 | 32.7 | 32.8 | 38.9 | ||||||||||||
|
Other |
8.8 | 8.8 | 8.1 | 8.1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total long-term receivables (1) |
$ | 59.2 | $ | 62.0 | $ | 63.2 | $ | 66.5 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Long-term debt: |
||||||||||||||||
|
Term loan - $1.25 billion |
$ | 922.1 | $ | 922.1 | $ | - | $ | - | ||||||||
|
Senior notes - $700 million |
699.3 | 705.7 | - | - | ||||||||||||
|
Senior notes - $1.3 billion |
1,289.1 | 1,382.8 | 990.3 | 972.5 | ||||||||||||
|
Senior notes - $400 million |
398.0 | 439.7 | 397.8 | 422.8 | ||||||||||||
|
Senior notes - $325 million |
325.0 | 351.7 | 325.0 | 355.6 | ||||||||||||
|
Revolving loan |
250.0 | 250.0 | - | - | ||||||||||||
|
Customer borrowings |
5.1 | 5.1 | 4.0 | 4.0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total long-term debt |
$ | 3,888.6 | $ | 4,057.1 | $ | 1,717.1 | $ | 1,754.9 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
(1) Includes current portion. |
||||||||||||||||
|
|||
|
($ in Millions) |
||||||||||||||||
|
September 30, 2011 |
||||||||||||||||
|
Debt Instrument |
Type | Average Annual Interest Rate |
Final Maturity |
Total Face Amount |
Total Long-term Debt |
|||||||||||
|
$1.25 Billion Term Loan |
Variable | 1.73 % | 2016 | $ | 984.4 | (6) | $ | 922.1 | (6) | |||||||
|
$700 Million 4.875% 2021 Senior Notes |
Fixed | 4.88 % | 2021 | 700.0 | 699.3 | (5) | ||||||||||
|
$1.3 Billion Senior Notes: |
||||||||||||||||
|
$500 Million 4.80% 2020 Senior Notes |
Fixed | 4.80 % | 2020 | 500.0 | 499.0 | (4) | ||||||||||
|
$800 Million 6.25% 2040 Senior Notes |
Fixed | 6.25 % | 2040 | 800.0 | 790.1 | (3) | ||||||||||
|
$400 Million 5.90% 2020 Senior Notes |
Fixed | 5.90 % | 2020 | 400.0 | 398.0 | (2) | ||||||||||
|
$325 Million Private Placement Senior Notes: |
||||||||||||||||
|
Series 2008A - Tranche A |
Fixed | 6.31 % | 2013 | 270.0 | 270.0 | |||||||||||
|
Series 2008A - Tranche B |
Fixed | 6.59 % | 2015 | 55.0 | 55.0 | |||||||||||
|
$1.75 Billion Credit Facility: |
||||||||||||||||
|
Revolving Loan |
Variable | 1.84 % | 2016 | 1,750.0 | 250.0 | (1) | ||||||||||
|
|
|
|
|
|||||||||||||
|
Total |
$ | 5,459.4 | $ | 3,883.5 | ||||||||||||
|
|
|
|
|
|||||||||||||
|
December 31, 2010 |
||||||||||||||||
|
Debt Instrument |
Type | Average Annual Interest Rate |
Final Maturity |
Total Face Amount |
Total Long-term Debt |
|||||||||||
|
$1 Billion Senior Notes: |
||||||||||||||||
|
$500 Million 4.80% 2020 Senior Notes |
Fixed | 4.80 % | 2020 | $ | 500.0 | $ | 499.0 | (4) | ||||||||
|
$500 Million 6.25% 2040 Senior Notes |
Fixed | 6.25 % | 2040 | 500.0 | 491.3 | (3) | ||||||||||
|
$400 Million 5.90% 2020 Senior Notes |
Fixed | 5.90 % | 2020 | 400.0 | 397.8 | (2) | ||||||||||
|
$325 Million Private Placement Senior Notes: |
||||||||||||||||
|
Series 2008A - Tranche A |
Fixed | 6.31 % | 2013 | 270.0 | 270.0 | |||||||||||
|
Series 2008A - Tranche B |
Fixed | 6.59 % | 2015 | 55.0 | 55.0 | |||||||||||
|
$600 Million Credit Facility: |
||||||||||||||||
|
Revolving Loan |
Variable | 0.0 % | 2012 | 600.0 | - | (1) | ||||||||||
|
|
|
|
|
|||||||||||||
|
Total |
$ | 2,325.0 | $ | 1,713.1 | ||||||||||||
|
|
|
|
|
|||||||||||||
(1) As of September 30, 2011 and December 31, 2010, $250 million and no revolving loans were drawn under the credit facility, respectively, and the principal amount of letter of credit obligations totaled $23.5 million and $64.7 million, respectively, thereby reducing available borrowing capacity to $1,476.5 million and $535.3 million, respectively.
(2) As of September 30, 2011 and December 31, 2010, the $400 million 5.90 percent senior notes were recorded at a par value of $400 million less unamortized discounts of $2.0 million and $2.2 million, respectively, based on an imputed interest rate of 5.98 percent.
(3) As of September 30, 2011 and December 31, 2010, the $800 million and $500 million 6.25 percent senior notes were recorded at par values of $800 million and $500 million, respectively, less unamortized discounts of $9.9 million and $8.7 million, respectively, based on an imputed interest rate of 6.38 percent.
(4) As of September 30, 2011 and December 31, 2010, the $500 million 4.80 percent senior notes were recorded at a par value of $500 million less unamortized discounts of $1.0 million and $1.0 million, respectively, based on an imputed interest rate of 4.83 percent.
(5) As of September 30, 2011, the $700 million 4.875 percent senior notes were recorded at a par value of $700 million less unamortized discounts of $0.7 million, based on an imputed interest rate of 4.89 percent.
(6) As of September 30, 2011, $265.6 million had been paid down on the orgininal $1.25 billion term loan and of the remaining term loan $62.3 million was classified as Current portion of term loan. The current classification is based upon the principal payment terms of the arrangement requiring principal payments on each three-month anniversary following the funding of the term loan.
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| (In Millions) | ||||||||
| Capital Leases |
Operating Leases |
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2011 (October 1 - December 31) |
$ | 16.8 | $ | 7.7 | ||||
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2012 |
62.6 | 21.2 | ||||||
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2013 |
55.0 | 20.8 | ||||||
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2014 |
50.0 | 16.0 | ||||||
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2015 |
38.8 | 9.1 | ||||||
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2016 and thereafter |
99.0 | 25.0 | ||||||
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Total minimum lease payments |
322.2 | $ | 99.8 | |||||
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Amounts representing interest |
68.6 | |||||||
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Present value of net minimum lease payments |
$ | 253.6 | (1) | |||||
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(1) The total is comprised of $47.8 million and $205.8 million classified as Other current liabilities and Other liabilities, respectively, on the Statements of Unaudited Condensed Consolidated Financial Position at September 30, 2011. |
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| September 30, 2011 |
December 31, 2010 |
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Environmental |
$ | 15.0 | $ | 13.7 | ||||
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Mine closure |
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LTVSMC |
17.9 | 17.1 | ||||||
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Operating mines: |
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U.S. Iron Ore |
67.5 | 62.7 | ||||||
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Eastern Canadian Iron Ore |
67.8 | 49.3 | ||||||
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North American Coal |
35.6 | 34.7 | ||||||
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Asia Pacific Iron Ore |
15.2 | 15.4 | ||||||
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Other |
6.2 | 6.2 | ||||||
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Total mine closure |
210.2 | 185.4 | ||||||
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Total environmental and mine closure obligations |
225.2 | 199.1 | ||||||
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Less current portion |
14.7 | 14.2 | ||||||
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Long-term environmental and mine closure obligations |
$ | 210.5 | $ | 184.9 | ||||
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| September 30, 2011 |
December 31, 2010(1) |
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Asset retirement obligation at beginning of period |
$ | 168.3 | $ | 103.9 | ||||
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Accretion expense |
11.8 | 13.1 | ||||||
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Exchange rate changes |
(1.1) | 2.5 | ||||||
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Revision in estimated cash flows |
- | 1.0 | ||||||
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Payments |
(0.7) | (8.4) | ||||||
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Acquired through business combinations |
14.0 | 56.2 | ||||||
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Asset retirement obligation at end of period |
$ | 192.3 | $ | 168.3 | ||||
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(1) Represents a 12-month rollforward of our asset retirement obligation at December 31, 2010. |
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| (In Millions) | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
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Service cost |
$ | 6.6 | $ | 3.5 | $ | 17.6 | $ | 12.5 | ||||||||
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Interest cost |
12.5 | 12.7 | 38.3 | 38.3 | ||||||||||||
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Expected return on plan assets |
(16.3) | (13.2) | (45.5) | (39.3) | ||||||||||||
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Amortization: |
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Prior service costs |
1.1 | 1.0 | 3.3 | 3.1 | ||||||||||||
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Net actuarial losses |
4.7 | 5.1 | 14.7 | 17.0 | ||||||||||||
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Net periodic benefit cost |
$ | 8.6 | $ | 9.1 | $ | 28.4 | $ | 31.6 | ||||||||
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| (In Millions) | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
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Service cost |
$ | 3.6 | $ | 2.2 | $ | 8.3 | $ | 5.4 | ||||||||
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Interest cost |
5.5 | 5.4 | 16.7 | 16.1 | ||||||||||||
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Expected return on plan assets |
(4.1) | (3.2) | (12.1) | (9.7) | ||||||||||||
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Amortization: |
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Prior service costs |
2.0 | 0.4 | 2.8 | 1.3 | ||||||||||||
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Net actuarial losses |
0.8 | 3.1 | 6.6 | 6.5 | ||||||||||||
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Net periodic benefit cost |
$ | 7.8 | $ | 7.9 | $ | 22.3 | $ | 19.6 | ||||||||
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Grant Date |
Grant Date |
Average Term (Years) |
Expected |
Risk-Free |
Dividend Yield |
Fair Value |
Fair Value | |||||||
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March 8, 2011 |
$96.70 | 2.81 | 94.4% | 1.17% | 0.58% | $77.90 | 80.60% |
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| (In Millions) | ||||||||
| Nine Months Ended September 30, | ||||||||
| 2011 | 2010 | |||||||
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Capital additions |
$ | 553.3 | $ | 154.2 | ||||
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Cash paid for capital expenditures |
478.9 | 150.1 | ||||||
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Difference |
$ | 74.4 | $ | 4.1 | ||||
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Non-cash accruals |
$ | 74.4 | $ | 4.1 | ||||
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Capital leases |
- | - | ||||||
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Total |
$ | 74.4 | $ | 4.1 | ||||
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CLCC is a producer of high-volatile metallurgical and thermal coal located in southern West Virginia. CLCC's operations include two underground continuous mining method metallurgical coal mines and one open surface thermal coal mine. The acquisition includes a metallurgical and thermal coal mining complex with a coal preparation and processing facility as well as a large, long-life reserve base with an estimated 59 million tons of metallurgical coal and 62 million tons of thermal coal. This reserve base increases our total global reserve base to over 166 million tons of metallurgical coal and over 67 million tons of thermal coal. This acquisition represents an opportunity for us to add complementary high-quality coal products and provides certain advantages, including among other things, long-life mine assets, operational flexibility, and new equipment.
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The credit agreement also provides for more flexible financial covenants and debt restrictions through the amendment of certain customary covenants, including the modification of the financial covenant that is based on our debt to earnings ratio. The amended debt to earnings ratio of Total Funded Debt to EBITDA, as those terms are defined in the agreement, as of the last day of each fiscal quarter cannot exceed (i) 3.5 to 1.0, if none of the $270 million private placement senior notes due 2013 remain outstanding, or otherwise (ii) the then applicable maximum multiple under the $270 million private placement senior notes due 2013.
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