XML 36 R10.htm IDEA: XBRL DOCUMENT
v3.20.2

ACQUISITION OF AK STEEL (Notes) | 6 Months Ended
--- | ---
Jun. 30, 2020
Business Combinations [Abstract] |
Business Combination Disclosure [Text Block] | Transaction Overview On March 13, 2020, pursuant to the Merger Agreement, we completed the acquisition of AK Steel, in which we were the acquirer. As a result of the Merger, each share of AK Steel common stock issued and outstanding immediately prior to the effective time of the 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. The acquisition combined Cliffs, North America’s largest producer of iron ore pellets, with AK Steel, a leading producer of innovative flat-rolled carbon, stainless and electrical steel products, to create a vertically integrated producer of value-added iron ore and steel products. The combination is expected to create significant opportunities to generate additional value from market trends across the entire steel value chain and enable more consistent, predictable performance through normal market cycles. Together, Cliffs and AK Steel have a presence across the entire manufacturing process, from mining to pelletizing to the development and production of finished high value steel products, including Next Generation Advanced High Strength Steels for automotive and other markets. We expect the combination will generate additional cost synergies, which we have identified and already set into motion savings of approximately $150 million, primarily from consolidating corporate functions, reducing duplicative overhead costs, and procurement and energy cost savings, as well as operational and supply chain efficiencies. The combined company is well positioned to provide high-value iron ore and steel solutions to customers primarily across North America. Total net revenues for AK Steel for the most recent pre-acquisition year ended December 31, 2019 were $6,359.4 million. Following the acquisition, the operating results of AK Steel are included in our unaudited condensed consolidated financial statements and are reported as part of our Steel and Manufacturing segment. For the three months ended June 30, 2020, AK Steel generated Revenues of $715.1 million and a loss of $206.5 million included within Net income (loss) attributable to Cliffs shareholders, which included $36.2 million and $15.1 million related to amortization of the fair value inventory step-up and severance costs, respectively. For the period subsequent to the acquisition (March 13, 2020 through June 30, 2020), AK Steel generated Revenues of $932.6 million and a loss of $261.6 million included within Net income (loss) attributable to Cliffs shareholders, which included $59.4 million and $32.7 million related to amortization of the fair value inventory step-up and severance costs, respectively. Additionally, we incurred acquisition-related costs excluding severance costs of $1.8 million and $25.0 million for the three and six months ended June 30, 2020, respectively, which were recorded in Acquisition-related costs on the Statements of Unaudited Condensed Consolidated Operations. Refer to NOTE 7 - DEBT AND CREDIT FACILITIES for information regarding debt transactions executed in connection with the Merger. The Merger was accounted for under the acquisition method of accounting for business combinations. The acquisition date fair value of the consideration transferred totaled $1.5 billion. The following tables summarize the consideration paid for AK Steel and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The fair value of the total purchase consideration was determined as follows:
| (In Millions)
Fair value of Cliffs common shares issued for AK Steel outstanding common stock | $ | 617.6 |
Fair value of replacement equity awards | 3.9 |
Fair value of AK Steel debt | 913.6 |
Total purchase consideration | $ | 1,535.1 |
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 Merger is calculated as follows:
| (In Millions, Except Per Share Amounts)
Number of shares of AK Steel common stock issued and outstanding | 316.9 |
Exchange ratio | 0.400 |
Shares of Cliffs common shares issued to AK Steel stockholders | 126.8 |
Price per share of Cliffs common shares | $ | 4.87 |
Fair value of Cliffs common shares issued for AK Steel outstanding common stock | $ | 617.6 |
The fair value of AK Steel's debt included in the consideration is calculated as follows:
| (In Millions)
Credit Facility | $ | 590.0 |
7.50% Senior Secured Notes due July 2023 | 323.6 |
Fair value of debt included in consideration | $ | 913.6 |
Valuation Assumption and Preliminary Purchase Price Allocation We estimated fair values at March 13, 2020 for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed. 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 acquisition, most notably, inventories, including manufacturing supplies and critical spares, personal and real property, leases, investments, deferred taxes, asset retirement obligations, pension and OPEB liabilities and intangible assets and liabilities, 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 Merger was:
| (In Millions)
| Initial Allocation of Consideration |  | Measurement Period Adjustments |  | June 30, 2020
Cash and cash equivalents | $ | 37.7 |  |  | $ | 2.0 |  |  | $ | 39.7 |
Accounts receivable | 666.0 |  |  | (3.2 | ) |  | 662.8 |
Inventories | 1,562.8 |  |  | (37.8 | ) |  | 1,525.0 |
Other current assets | 67.5 |  |  | (14.5 | ) |  | 53.0 |
Property, plant and equipment | 2,184.4 |  |  | 2.9 |  |  | 2,187.3 |
Intangible assets | 163.0 |  |  | (15.0 | ) |  | 148.0 |
Right of use asset, operating leases | 225.9 |  |  | (16.3 | ) |  | 209.6 |
Other non-current assets | 85.9 |  |  | 25.9 |  |  | 111.8 |
Accounts payable | (636.3 | ) |  | (2.9 | ) |  | (639.2 | )
Accrued liabilities | (222.5 | ) |  | (2.1 | ) |  | (224.6 | )
Other current liabilities | (181.8 | ) |  | 7.0 |  |  | (174.8 | )
Long-term debt | (1,179.4 | ) |  | — |  |  | (1,179.4 | )
Deferred income taxes | (19.7 | ) |  | (1.7 | ) |  | (21.4 | )
Operating lease liability, non-current | (188.1 | ) |  | — |  |  | (188.1 | )
Intangible liabilities | (140.0 | ) |  | 65.0 |  |  | (75.0 | )
Pension and OPEB liabilities | (873.0 | ) |  | — |  |  | (873.0 | )
Asset retirement obligations | (13.9 | ) |  | — |  |  | (13.9 | )
Other non-current liabilities | (144.2 | ) |  | (5.7 | ) |  | (149.9 | )
Net identifiable assets acquired | 1,394.3 |  |  | 3.6 |  |  | 1,397.9 |
Goodwill | 141.2 |  |  | (4.0 | ) |  | 137.2 |
Total net assets acquired | $ | 1,535.5 |  |  | $ | (0.4 | ) |  | $ | 1,535.1 |
During the second quarter of 2020, 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 Inventories measurement period adjustments of $37.8 million, resulted in a favorable impact of $7.8 million to Cost of goods sold for the three months ended June 30, 2020. The goodwill resulting from the acquisition of AK Steel was assigned to Precision Partners, our downstream tooling and stamping operations, and AK Tube, our tubing operations, that are reporting units included in the Steel and Manufacturing segment. Goodwill is calculated as the excess of the purchase price over the net identifiable assets recognized and primarily represents the growth opportunities in lightweighting solutions to automotive customers, as well as any synergistic benefits to be realized from the acquisition of AK Steel. None of the goodwill is expected be deductible for income tax purposes. The preliminary purchase price allocated to identifiable intangible assets and liabilities acquired was:
| (In Millions) |  | Weighted Average Life (In Years)
Intangible assets: |  |  |
Customer relationships | $ | 77.0 |  |  | 18
Developed technology | 60.0 |  |  | 17
Trade names and trademarks | 11.0 |  |  | 10
Total identifiable intangible assets | $ | 148.0 |  |  | 17
Intangible liabilities: |  |  |
Above-market supply contracts | $ | (75.0 | ) |  | 12
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 16 - VARIABLE INTEREST ENTITIES for further information. Pro Forma Results The following table provides unaudited pro forma financial information, prepared in accordance with Topic 805, for the three and six months ended June 30, 2020 and 2019, as if AK Steel had been acquired as of January 1, 2019:
| (In Millions)
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
Revenues | $ | 979.1 |  |  | $ | 2,233.8 |  |  | $ | 2,427.7 |  |  | $ | 4,021.1 |
Net income (loss) attributable to Cliffs shareholders | (125.3 | ) |  | 184.9 |  |  | (163.7 | ) |  | 128.3 |
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 acquisition occurred on January 1, 2019. Significant pro forma adjustments include the following:
1. | The elimination of intercompany revenues between Cliffs and AK Steel of $113.6 million and $259.2 million for the three and six months ended June 30, 2020, respectively, and $189.9 million and $257.3 million for the three and six months ended June 30, 2019, respectively.
2. | The 2020 pro forma net loss was adjusted to exclude $36.2 million and $59.4 million of non-recurring inventory acquisition accounting adjustments incurred during the three and six months ended June 30, 2020, respectively. The 2019 pro forma net income was adjusted to include $18.5 million and $74.2 million of non-recurring inventory acquisition accounting adjustments for the three and six months ended June 30, 2019, respectively.
3. | The elimination of nonrecurring transaction costs incurred by Cliffs and AK Steel in connection with the Merger of $1.8 million and $28.4 million for the three and six months ended June 30, 2020, respectively.
4. | Total other pro forma adjustments included expense of $12.3 million and $1.0 million for the three and six months ended June 30, 2020, respectively, and expense of $4.0 million and $6.9 million for the three and six months ended June 30, 2019, respectively, primarily due to reduced interest and amortization expense, offset partially by additional depreciation expense and pension and OPEB expense.
5. | 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 income tax benefit of $1.6 million and an income tax expense of $3.3 million for the three and six months ended June 30, 2020, respectively, and an income tax expense of $8.0 million and an income tax benefit of $2.8 million, for the three and six months ended June 30, 2019, respectively.
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 two companies. This unaudited pro forma financial information should not be considered indicative of the results that would have actually occurred if the acquisition had been consummated on January 1, 2019, nor are they indicative of future results.

X
- References No definition available. + Details
Name: | us-gaap_BusinessCombinationsAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=2122178 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
Name: | us-gaap_MergersAcquisitionsAndDispositionsDisclosuresTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration