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Annual report pursuant to Section 13 and 15(d)

ACQUISITIONS

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ACQUISITIONS
 12 Months Ended
Dec. 31, 2021
Business Combinations [Abstract] Ìý
Acquisitions
NOTE 3 - ACQUISITIONS
In 2020, we acquired two major steelmakers, AK Steel and ArcelorMittal USA, vertically integrating our legacy iron ore business with steel production. In 2021, we also entered into the scrap business with the FPT Acquisition. We are vertically integrated from mined raw materials, direct reduced iron and ferrous scrap to primary steelmaking and downstream finishing, stamping, tooling and tubing. We now have a presence across the entire steel manufacturing process, from mining to pelletizing to the development and production of finished high value steel products. The AK Steel Merger combined Cliffs, a historic producer of iron ore pellets, with AK Steel, a producer of flat-rolled carbon, stainless and electrical steel products, to create a vertically integrated producer of value-added iron ore and steel products. The AM USA Transaction transformed us into a fully-integrated steel enterprise with the size and scale to expand product offerings and improve through-the-cycle margins. The FPT Acquisition gives us a competitive advantage in sourcing prime scrap, a key raw material for our steelmaking facilities.
FPT Acquisition
Overview
On November 18, 2021, pursuant to the FPT Acquisition Agreement, we completed the FPT Acquisition, in which we were the acquirer. Following the FPT Acquisition, the operating results of FPT are included in our consolidated financial statements. For the period subsequent to the FPT Acquisition (November 18, 2021 through December 31, 2021), FPT generated Revenues of $153Ìýmillion and a loss of $18Ìýmillion included within Net income (loss) attributable to Cliffs shareholders, which included $22Ìýmillion related to amortization of the fair value inventory step-up.
Additionally, we incurred acquisition-related costs, excluding severance costs, of $1Ìýmillion for the year ended DecemberÌý31, 2021 in connection with the FPT Acquisition, which was recorded in Acquisition-related costs on the Statements of Consolidated Operations.
The fair value of the total purchase consideration was determined as follows:
(In Millions)
Cash consideration (subject to customary working capital adjustments) $ 775Ìý
Fair value of settlement of a pre-existing relationship (20)
Total purchase consideration $ 755Ìý
The cash portion of the purchase price is subject to customary working capital adjustments. Additionally, if the Company decides to make any elections under Section 338(h)(10) of the IRC with respect to entities acquired in connection with the FPT Acquisition, the final cash consideration could potentially change.
Valuation Assumption and Purchase Price Allocation
We estimated fair values at November 18, 2021 for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed in connection with the FPT Acquisition. During the measurement period, we will continue to obtain information to assist in finalizing the fair value of assets acquired and
liabilities assumed, which may differ materially from these preliminary estimates. If we determine any measurement period adjustments are material, we will apply those adjustments, including any related impacts to net income, in the reporting period in which the adjustments are determined. We are in the process of conducting a valuation of the assets acquired and liabilities assumed related to the FPT Acquisition, most notably, inventories, personal and real property, leases, investments, deferred taxes, environmental obligations and intangible assets, and the final allocation will be made when completed, including the result of any identified goodwill. Accordingly, the provisional measurements noted below are preliminary and subject to modification in the future.
The preliminary purchase price allocation to assets acquired and liabilities assumed in the FPT Acquisition was:
(In Millions)
Initial Allocation of Consideration
Cash and cash equivalents $ 9Ìý
Accounts receivable, net 233Ìý
Inventories 137Ìý
Other current assets 4Ìý
Property, plant and equipment 179Ìý
Other non-current assets 74Ìý
Accounts payable (122)
Accrued employment costs (8)
State and local taxes (1)
Other current liabilities (8)
Other non-current liabilities (21)
Net identifiable assets acquired 476Ìý
Goodwill 279Ìý
Total net assets acquired $ 755Ìý
The goodwill resulting from the FPT Acquisition primarily represents the incremental benefit of providing substantial access to prime scrap for our vertically integrated steelmaking business, as well as any synergistic benefits to be realized from the FPT Acquisition within our Steelmaking segment.
The preliminary purchase price allocated to identifiable intangible assets acquired was:
(In Millions) Weighted Average Life (In Years)
Customer relationships $ 18Ìý 15
Supplier relationships 18Ìý 18
Trade names and trademarks 7Ìý 15
Total identifiable intangible assets $ 43Ìý 16
Intangible assets are classified as Other non-current assets on the Statements of Consolidated Financial Position.
Acquisition of ArcelorMittal USA
Overview
On December 9, 2020, pursuant to the terms of the AM USA Transaction Agreement, we purchased ArcelorMittal USA from ArcelorMittal. In connection with the closing of the AM USA Transaction, as contemplated by the terms of the AM USA Transaction Agreement, ArcelorMittal’s former joint venture partner in Kote and Tek exercised its put right pursuant to the terms of the Kote and Tek joint venture agreements. As a result, we purchased all of such joint venture partner’s interests in Kote and Tek. Following the closing of the AM USA Transaction, we own 100% of the interests in Kote and Tek.
We incurred acquisition-related costs, excluding severance costs, of $3 million and $26 million for the years ended DecemberÌý31, 2021 and 2020, respectively, in connection with the AM USA Transaction, which were recorded in Acquisition-related costs on the Statements of Consolidated Operations.
The fair value of the total purchase consideration was determined as follows:
(In Millions)
Fair value of Cliffs common shares issued $ 990Ìý
Fair value of Cliffs Series B Participating Redeemable Preferred Stock issued 738Ìý
Fair value of settlement of a pre-existing relationship 237Ìý
Cash consideration 639Ìý
Total purchase consideration $ 2,604Ìý
The fair value of Cliffs common shares issued was calculated as follows:
Number of Cliffs common shares issued 78,186,671
Closing price of Cliffs common share as of December 9, 2020 $ 12.66Ìý
Fair value of Cliffs common shares issued (in millions) $ 990Ìý
The fair value of Cliffs Series B Participating Redeemable Preferred Stock issued was calculated as follows:
Number of Cliffs Series B Participating Redeemable Preferred Stock issued 583,273Ìý
Redemption price per share as of December 9, 2020 $ 1,266Ìý
Fair value of Cliffs Series B Participating Redeemable Preferred Stock issued (in millions) $ 738Ìý
The fair value of the cash consideration was comprised of the following:
(In Millions)
Cash consideration pursuant to the AM USA Transaction Agreement $ 505Ìý
Cash consideration for purchase of the remaining JV partner's interest of Kote and Tek 182Ìý
Total cash consideration receivable (48)
Total cash consideration $ 639Ìý
The cash portion of the purchase price was subject to customary working capital adjustments, and the working capital adjustments were finalized during the second quarter of 2021. We made certain elections under Section 338(h)(10) of the IRC with respect to entities acquired in connection with the AM USA Transaction, which did not change the final cash consideration.
The fair value of the settlement of a pre-existing relationship was comprised of the following:
(In Millions)
Accounts receivable $ 97Ìý
Freestanding derivative asset from customer supply agreement 140Ìý
Total fair value of settlement of a pre-existing relationship $ 237Ìý
Valuation Assumption and Purchase Price Allocation
The allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed in connection with the AM USA Transaction was based on estimated fair values at December 9, 2020, and was finalized during the quarter ended December 31, 2021. The following is a summary of the purchase price allocation to assets acquired and liabilities assumed in the AM USA Transaction:
(In Millions)
Initial Allocation of Consideration Measurement
Period Adjustments		 Final Allocation Consideration as of December 31, 2021
Cash and cash equivalents $ 35Ìý $ —Ìý $ 35Ìý
Accounts receivable, net 349Ìý (3) 346Ìý
Inventories 2,115Ìý 14Ìý 2,129Ìý
Other current assets 34Ìý 2Ìý 36Ìý
Property, plant and equipment 4,017Ìý 387Ìý 4,404Ìý
Deferred income taxes —Ìý 285Ìý 285Ìý
Other non-current assets 158Ìý 7Ìý 165Ìý
Accounts payable (736) 8Ìý (728)
Accrued employment costs (271) 5Ìý (266)
State and local taxes (76) —Ìý (76)
Other current liabilities (453) 23Ìý (430)
Pension liability, non-current (730) —Ìý (730)
OPEB liability, non-current (2,465) —Ìý (2,465)
Other non-current liabilities (598) (171) (769)
Noncontrolling interest (13) 21Ìý 8Ìý
Net identifiable assets acquired 1,366Ìý 578Ìý 1,944Ìý
Goodwill 1,230Ìý (570) 660Ìý
Total net assets acquired $ 2,596Ìý $ 8Ìý $ 2,604Ìý
During the period subsequent to the AM USA Transaction, we made certain measurement period adjustments to the acquired assets and liabilities assumed due to clarification of information utilized to determine fair value during the measurement period. The measurement period adjustments related to the revaluation of the Company's previously held equity method investment, which is now being consolidated post-acquisition, resulting in a loss of $31Ìýmillion, within Miscellaneous – net for the year ended December 31, 2021.
The goodwill resulting from the acquisition of ArcelorMittal USA primarily represents the growth opportunities in the automotive, construction, appliances, infrastructure and machinery and equipment markets, as well as any synergistic benefits to be realized from the AM USA Transaction, and was assigned to our flat steel operations within our Steelmaking segment.
Acquisition of AK Steel
Overview
On March 13, 2020, pursuant to the AK Steel Merger Agreement, we completed the acquisition of AK Steel, in which we were the acquirer. As a result of the AK Steel Merger, each share of AK Steel common stock issued and outstanding immediately prior to the effective time of the AK Steel Merger (other than excluded shares) was converted into the right to receive 0.400 Cliffs common shares and, if applicable, cash in lieu of any fractional Cliffs common shares.
We incurred acquisition-related costs, excluding severance costs, of $1Ìýmillion and $26Ìýmillion for the years ended DecemberÌý31, 2021 and 2020, respectively, in connection with the AK Steel Merger, which were recorded in Acquisition-related costs on the Statements of Consolidated Operations.
The fair value of the total purchase consideration was determined as follows:
(In Millions)
Fair value of AK Steel debt $ 914Ìý
Fair value of Cliffs common shares issued for AK Steel outstanding common stock 618Ìý
Other 3Ìý
Total purchase consideration $ 1,535Ìý
The fair value of Cliffs common shares issued for outstanding shares of AK Steel common stock and with respect to Cliffs common shares underlying converted AK Steel equity awards that vested upon completion of the AK Steel Merger was calculated as follows:
(In Millions,
Except Per Share Amounts)
Number of shares of AK Steel common stock issued and outstanding 317Ìý
Exchange ratio 0.400Ìý
Shares of Cliffs common shares issued to AK Steel stockholders 127Ìý
Price per share of Cliffs common shares $ 4.87Ìý
Fair value of Cliffs common shares issued for outstanding AK Steel common stock $ 618Ìý
The fair value of AK Steel's debt included in the consideration was calculated as follows:
(In Millions)
Credit Facility $ 590Ìý
7.500% Senior Secured Notes due July 2023 324Ìý
Fair value of debt included in consideration $ 914Ìý
Valuation Assumption and Purchase Price Allocation
The allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed in connection with the AK Steel Merger was based on estimated fair values at March 13, 2020, and was finalized during the quarter ended March 31, 2021. The following is a summary of the purchase price allocation to assets acquired and liabilities assumed in the AK Steel Merger:
(In Millions)
Initial Allocation of Consideration Measurement Period Adjustments Final Allocation of Consideration as of March 31, 2021
Cash and cash equivalents $ 38Ìý $ 1Ìý $ 39Ìý
Accounts receivable, net 666Ìý (2) 664Ìý
Inventories 1,563Ìý (243) 1,320Ìý
Other current assets 68Ìý (16) 52Ìý
Property, plant and equipment 2,184Ìý 90Ìý 2,274Ìý
Deferred income taxes —Ìý 69Ìý 69Ìý
Other non-current assets 475Ìý (4) 471Ìý
Accounts payable (636) (8) (644)
Accrued employment costs (94) 1Ìý (93)
State and local taxes (35) 4Ìý (31)
Other current liabilities (276) 2Ìý (274)
Long-term debt (1,179) —Ìý (1,179)
Pension liability, non-current (473) 10Ìý (463)
OPEB liability, non-current (400) (8) (408)
Other non-current liabilities (507) 72Ìý (435)
Noncontrolling interest —Ìý (1) (1)
Net identifiable assets acquired 1,394Ìý (33) 1,361Ìý
Goodwill 141Ìý 33Ìý 174Ìý
Total net assets acquired $ 1,535Ìý $ —Ìý $ 1,535Ìý
During the period subsequent to the AK Steel Merger, we made certain measurement period adjustments to the acquired assets and liabilities assumed due to clarification of information utilized to determine fair value during the measurement period.
The goodwill resulting from the acquisition of AK Steel was assigned to our downstream Tubular and Tooling and Stamping operating segments. Goodwill is calculated as the excess of the purchase price over the net identifiable assets recognized and primarily represents the growth opportunities in light weighting solutions to automotive customers, as well as any synergistic benefits to be realized. Goodwill from the AK Steel Merger is not expected to be deductible for income tax purposes.
The purchase price allocated to identifiable intangible assets and liabilities acquired was:
(In Millions) Weighted Average Life (In Years)
Intangible assets:
Customer relationships $ 77Ìý 18
Developed technology 60Ìý 17
Trade names and trademarks 11Ìý 10
Total identifiable intangible assets $ 148Ìý 17
Intangible liabilities:
Above-market supply contracts $ (71) 12
Intangible assets are classified as Other non-current assets on the Statements of Consolidated Financial Position. Intangible liabilities are classified as Other non-current liabilities on the Statements of Consolidated Financial Position.
The above-market supply contracts relate to the long-term coke and energy supply agreements with SunCoke Energy, which includes SunCoke Middletown, a consolidated VIE. Refer to NOTE 18 - VARIABLE INTEREST ENTITIES for further information.
Pro Forma Results
2020 Acquisitions
The following table provides unaudited pro forma financial information, prepared in accordance with Topic 805, as if ArcelorMittal USA and AK Steel had been acquired as of January 1, 2019:
(In Millions)
Year Ended December 31,
2020 2019
Revenues $ 12,837Ìý $ 17,163Ìý
Net income (loss) attributable to Cliffs shareholders (520) (11)
The unaudited pro forma financial information has been calculated after applying our accounting policies and adjusting the historical results with pro forma adjustments, net of tax, that assume the 2020 Acquisitions occurred on JanuaryÌý1, 2019. Significant pro forma adjustments include the following:
1.The elimination of intercompany revenues between Cliffs and ArcelorMittal USA and AK Steel of $844Ìýmillion and $1,499Ìýmillion for the years ended DecemberÌý31, 2020 and 2019, respectively.
2.The 2020 pro forma net loss was adjusted to exclude $96Ìýmillion of non-recurring inventory acquisition accounting adjustments incurred during the year ended DecemberÌý31, 2020. The 2019 pro forma net loss was adjusted to include $362Ìýmillion of non-recurring inventory acquisition accounting adjustments for the year ended DecemberÌý31, 2019.
3.The elimination of non-recurring transaction costs incurred by Cliffs, AK Steel and ArcelorMittal USA in connection with the 2020 Acquisitions were $93Ìýmillion for the year ended DecemberÌý31, 2020. The 2019 pro forma net loss was adjusted to include $93Ìýmillion of non-recurring transaction cost adjustments for the year ended DecemberÌý31, 2019.
4.The 2020 pro forma net loss was adjusted to exclude restructuring costs of $1,820Ìýmillion of non-recurring costs incurred by ArcelorMittal USA prior to the AM USA Transaction.
5.The 2020 and 2019 pro forma net losses were adjusted to exclude $140Ìýmillion and $129Ìýmillion for the years ended December 31, 2020 and 2019, respectively, for the impact of reversal of the fees charged for management, financial and legal services under the Industrial Franchise Agreement with the former parent.
6.Total other pro forma adjustments included reduced expenses of $32Ìýmillion for the year ended December 31, 2020, primarily due to decreased depreciation expense and pension and OPEB expense, offset partially by increased interest and amortization expense.
7.Total other pro forma adjustments included an expense of $76Ìýmillion for the year ended December 31, 2019, primarily due to increased interest, amortization and pension and OPEB expense, offset partially by decreased depreciation expense.
8.The income tax impact of pro forma transaction adjustments that affect Net income (loss) attributable to Cliffs shareholders at a statutory rate of 24.3% resulted in an increased benefit to Income tax benefit (expense) of $170Ìýmillion and $117Ìýmillion for the years ended December 31, 2020 and 2019, respectively.
FPT Acquisition
The following table provides unaudited pro forma financial information, prepared in accordance with Topic 805, as if FPT had been acquired as of January 1, 2020:
(In Millions)
Year Ended December 31,
2021 2020
Revenues $ 21,701Ìý $ 13,549Ìý
Net income (loss) attributable to Cliffs shareholders 3,074Ìý (526)
The unaudited pro forma financial information has been calculated after applying our accounting policies and adjusting the historical results with pro forma adjustments, net of tax, that assume the FPT Acquisition occurred on JanuaryÌý1, 2020. There were no significant pro forma adjustments for the FPT Acquisition.
The unaudited pro forma financial information does not reflect the potential realization of synergies or cost savings, nor does it reflect other costs relating to the integration of the acquired companies. This unaudited pro forma financial information should not be considered indicative of the results that would have actually occurred if the 2020 Acquisitions had been consummated on January 1, 2019, or if the FPT Acquisition had been consummated on January 1, 2020, nor are they indicative of future results.