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ACQUISITIONS | 12 Months Ended
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Dec. 31, 2020
Business Combinations [Abstract] |
Business Combination Disclosure | In 2020, we acquired two major steelmakers, AK Steel and ArcelorMittal USA, vertically integrating our legacy iron ore business with steel production. Our fully-integrated portfolio includes custom-made pellets and HBI; flat-rolled carbon steel, stainless, electrical, plate, tinplate and long steel products; as well as carbon and stainless steel tubing, hot and cold stamping and tooling. The AK Steel Merger combined Cliffs, a 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 achieve improved through-the-cycle margins. 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 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. 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. Following the acquisition, the operating results of ArcelorMittal USA are included in our consolidated financial statements. For the period subsequent to the acquisition (December 9, 2020 through December 31, 2020), ArcelorMittal USA generated Revenues of $446 million and a loss of $40 million included within Net income (loss) attributable to Cliffs shareholders, which included $21 million related to amortization of the fair value inventory step-up. Additionally, we incurred acquisition-related costs excluding severance costs of $26 million for the year ended December 31, 2020, which were recorded in Acquisition-related costs on the Statements of Consolidated Operations. The AM USA Transaction was accounted for under the acquisition method of accounting for business combinations. The fair value of the total purchase consideration was determined as follows:
| (In Millions)
Fair value of Cliffs common shares issued | $ | 990 |
Fair value of Series B Participating Redeemable Preferred Stock issued | 738 |
Fair value of settlement of a pre-existing relationship | 237 |
Cash consideration (subject to customary working capital adjustments) | 631 |
Total purchase consideration | $ | 2,596 |
The fair value of Cliffs common shares issued is calculated as follows:
Number of Cliffs common shares issued | 78,186,671
Closing price of Cliffs common share as of December 9, 2020 | $ | 12.66 |
Fair value of Cliffs common shares issued (in millions) | $ | 990 |
The fair value of Cliffs Series B Participating Redeemable Preferred Stock issued is calculated as follows:
Number of Cliffs Series B Participating Redeemable Preferred Stock issued | 583,273 |
Redemption price as of December 9, 2020 | $ | 1,266 |
Fair value of Cliffs Series B Participating Redeemable Preferred Stock issued (in millions) | $ | 738 |
The fair value of the estimated cash consideration is comprised of the following:
| (In Millions)
Cash consideration pursuant to the AM USA Transaction Agreement | $ | 505 |
Cash consideration for purchase of the remaining JV partners' interest of Kote and Tek | 182 |
Estimated total cash consideration receivable | (56) |
Total estimated cash consideration | $ | 631 |
The cash portion of the purchase price is subject to customary working capital adjustments. The fair value of the settlement of a pre-existing relationship is comprised of the following:
| (In Millions)
Accounts receivable | $ | 97 |
Freestanding derivative asset from customer supply agreement | 140 |
Total fair value of settlement of a pre-existing relationship | $ | 237 |
Valuation Assumption and Preliminary Purchase Price Allocation We estimated fair values at December 9, 2020 for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed in connection with the AM USA Transaction. 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 AM USA Transaction, most notably, inventories, personal and real property, mineral reserves, leases, investments, deferred taxes, asset retirement obligations, pension and OPEB 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 AM USA Transaction was:
| (In Millions)
Cash and cash equivalents | $ | 35 |
Accounts receivable, net | 349 |
Inventories | 2,115 |
Income tax receivable, current | 12 |
Other current assets | 22 |
Property, plant and equipment | 4,017 |
Other non-current assets | 158 |
Accounts payable | (758) |
Accrued employment costs | (271) |
State and local taxes | (76) |
Pension and OPEB liabilities, current | (109) |
Other current liabilities | (322) |
Pension and OPEB liabilities, non-current | (3,195) |
Other non-current liabilities | (598) |
Noncontrolling interest | (13) |
Net identifiable assets acquired | 1,366 |
Goodwill | 1,230 |
Total net assets acquired | $ | 2,596 |
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. Goodwill is expected to be deductible for U.S. federal income tax purposes. 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. Following the acquisition, the operating results of AK Steel are included in our consolidated financial statements. For the period subsequent to the acquisition (March 13, 2020 through December 31, 2020), AK Steel generated Revenues of $3,573 million and a loss of $302 million included within Net income (loss) attributable to Cliffs shareholders, which included $74 million and $35 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 $26 million for the year ended December 31, 2020, which were recorded in Acquisition-related costs on the Statements of Consolidated Operations. Refer to NOTE 8 - DEBT AND CREDIT FACILITIES for information regarding debt transactions executed in connection with the AK Steel Merger. The AK Steel Merger was accounted for under the acquisition method of accounting for business combinations. The acquisition date fair value of the consideration transferred totaled $1,535 million. 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 AK Steel debt | $ | 914 |
Fair value of Cliffs common shares issued for AK Steel outstanding common stock | 618 |
Other | 3 |
Total purchase consideration | $ | 1,535 |
The fair value of Cliffs common shares issued for outstanding shares of AK Steel common stock and with respect to Cliffs common shares underlying converted AK Steel equity awards that vested upon completion of the AK Steel Merger is calculated as follows:
| (In Millions, Except Per Share Amounts)
Number of shares of AK Steel common stock issued and outstanding | 317 |
Exchange ratio | 0.400 |
Shares of Cliffs common shares issued to AK Steel stockholders | 127 |
Price per share of Cliffs common shares | $ | 4.87 |
Fair value of Cliffs common shares issued for outstanding AK Steel common stock | $ | 618 |
The fair value of AK Steel's debt included in the consideration is calculated as follows:
| (In Millions)
Credit Facility | $ | 590 |
7.50% Senior Secured Notes due July 2023 | 324 |
Fair value of debt included in consideration | $ | 914 |
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 in connection with the AK Steel Merger. 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 AK Steel Merger, most notably, personal and real property, leases, deferred taxes, asset retirement obligations 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 AK Steel Merger was:
| (In Millions)
| Initial Allocation of Consideration |  | Measurement Period Adjustments |  | Updated Allocation
Cash and cash equivalents | $ | 38 |  |  | $ | 1 |  |  | $ | 39 |
Accounts receivable, net | 666 |  |  | (2) |  |  | 664 |
Inventories | 1,563 |  |  | (243) |  |  | 1,320 |
Income tax receivable, current | 3 |  |  | — |  |  | 3 |
Other current assets | 65 |  |  | (16) |  |  | 49 |
Property, plant and equipment | 2,184 |  |  | 128 |  |  | 2,312 |
Deferred income taxes | — |  |  | 30 |  |  | 30 |
Other non-current assets | 475 |  |  | (3) |  |  | 472 |
Accounts payable | (636) |  |  | (8) |  |  | (644) |
Accrued employment costs | (94) |  |  | 1 |  |  | (93) |
State and local taxes | (35) |  |  | 4 |  |  | (31) |
Pension and OPEB liabilities, current | (75) |  |  | (3) |  |  | (78) |
Other current liabilities | (201) |  |  | 5 |  |  | (196) |
Long-term debt | (1,179) |  |  | — |  |  | (1,179) |
Pension and OPEB liabilities, non-current | (873) |  |  | 2 |  |  | (871) |
Other non-current liabilities | (507) |  |  | 72 |  |  | (435) |
Noncontrolling interest | — |  |  | (1) |  |  | (1) |
Net identifiable assets acquired | 1,394 |  |  | (33) |  |  | 1,361 |
Goodwill | 141 |  |  | 33 |  |  | 174 |
Total net assets acquired | $ | 1,535 |  |  | $ | — |  |  | $ | 1,535 |
During the period subsequent to the AK Steel Merger, we made certain measurement period adjustments to the acquired assets and liabilities assumed due to clarification of information utilized to determine fair value during the measurement period. The Inventories measurement period adjustments of $243 million resulted in a favorable impact of $8 million to Cost of goods sold for the year ended December 31, 2020. 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 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 |  |  | 18
Developed technology | 60 |  |  | 17
Trade names and trademarks | 11 |  |  | 10
Total identifiable intangible assets | $ | 148 |  |  | 17
Intangible liabilities: |  |  |
Above-market supply contracts | $ | (71) |  |  | 12
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 19 - 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 years ended December 31, 2020 and 2019, as if ArcelorMittal USA and AK Steel had been acquired as of January 1, 2019:
| (In Millions)
| Year Ended December 31,
| 2020 |  | 2019
Revenues | $ | 12,837 |  |  | $ | 17,163 |
Net income (loss) attributable to Cliffs shareholders | (520) |  |  | (11) |
The unaudited pro forma financial information has been calculated after applying our accounting policies and adjusting the historical results with pro forma adjustments, net of tax, that assume the Acquisitions occurred on January 1, 2019. Significant pro forma adjustments include the following: 1.The elimination of intercompany revenues between Cliffs and ArcelorMittal USA and AK Steel of $844 million and $1,499 million for the years ended December 31, 2020 and 2019, respectively. 2.The 2020 pro forma net loss was adjusted to exclude $96 million of non-recurring inventory acquisition accounting adjustments incurred during the year ended December 31, 2020. The 2019 pro forma net loss was adjusted to include $362 million of non-recurring inventory acquisition accounting adjustments for the year ended December 31, 2019. 3.The elimination of non-recurring transaction costs incurred by Cliffs, AK Steel and ArcelorMittal USA in connection with the Acquisitions were $93 million for the year ended December 31, 2020. The 2019 pro forma net loss was adjusted to include $93 million of non-recurring transaction cost adjustments for the year ended December 31, 2019. 4.The 2020 pro forma net loss was adjusted to exclude restructuring costs of $1,820 million of non-recurring costs incurred by ArcelorMittal USA prior to the AM USA Transaction. 5.The 2020 and 2019 pro forma net losses were adjusted to exclude $140 million and $129 million for the years ended December 31, 2020 and 2019, respectively, for the impact of reversal of the fees charged for management, financial and legal services under the Industrial Franchise Agreement with the former parent. 6.Total other pro forma adjustments included reduced expenses of $32 million for the year ended December 31, 2020, primarily due to decreased depreciation expense and pension and OPEB expense, offset partially by increased interest and amortization expense. 7.Total other pro forma adjustments included an expense of $76 million for the year ended December 31, 2019, primarily due to increased interest, amortization and pension and OPEB expense, offset partially by decreased depreciation expense. 8.The income tax impact of pro forma transaction adjustments that affect Net income (loss) attributable to Cliffs shareholders at a statutory rate of 24.3% resulted in an increased benefit to Income tax benefit (expense) of $170 million and $117 million for the years ended December 31, 2020 and 2019, respectively. 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 Acquisitions had been consummated on January 1, 2019, nor are they indicative of future results.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: 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
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