CLEVELAND-CLIFFS INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and other factors that may affect our future results. We believe it is important to read our Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2020, as well as other publicly available information. Overview Founded in 1847, Cleveland-Cliffs is among the largest vertically integrated producers of differentiated iron ore and steel in North America. With an emphasis on non-commoditized products, we are uniquely positioned to supply both customized iron ore pellets and steel solutions to a quality-focused customer base. AK Steel, a wholly-owned subsidiary of Cleveland-Cliffs, is a leading producer of flat-rolled carbon, stainless and electrical steel products. The AK Tube and Precision Partners businesses provide customer solutions with carbon and stainless steel tubing products, die design and tooling, and hot- and cold-stamped components. In 2020, we expect to be the sole producer of HBI in the Great Lakes region. Headquartered in Cleveland, Ohio, we employ approximately 11,000 people across mining and steel manufacturing operations in the United States and Canada. During the second quarter of 2020, the COVID-19 pandemic negatively disrupted, to varying degrees, effectively all of the end markets that we serve. As a result, we saw decreased demand for our steel and raw material products from the industrial markets that were impacted, most notably the automotive industry. Conditions have since improved and automotive customers have resumed production in previously idled facilities, but we have not yet seen conditions fully normalize due to supply chain issues and other concerns related to the COVID-19 pandemic, and it remains unclear how long the economic impact of the COVID-19 pandemic will be felt. In response to the COVID-19 pandemic and the corresponding reduction in demand, we made several operational adjustments to keep both our employees and Company healthy for the long term. See " – COVID-19" below. 41 Table of Contents The largest market for our steel products is the automotive industry in North America, which makes light vehicle production a key driver of demand. In the first six months of 2020, North American light vehicle production was approximately 5.1 million units, a 40% reduction from the prior year’s comparable period. The reduction is a result of automotive plants shutting down throughout the United States in response to the COVID-19 pandemic, with second quarter of 2020 production falling by 69% from the prior year period. In our Steel and Manufacturing segment, we also sell our steel products to the infrastructure, manufacturing, electrical power, distributors and converters markets, which have all been challenged by the COVID-19 pandemic, though to a lesser extent than the automotive market. Similar to the automotive sector, our sales to these markets generally declined during the second quarter of 2020 and we expect them to increase during the second half of the year. For our Mining and Pelletizing segment, the key driver of our business is demand for raw materials from U.S. steelmakers. During the first six months of 2020, the U.S. produced approximately 36 million metric tons of crude steel, which is 18% lower than the same period in 2019, representing about 4% of total global crude steel production. U.S. total steel capacity utilization was approximately 67% in the first six months of 2020, which is an approximate 17% decrease from the same period in 2019. Due to the timing of the COVID-19 pandemic and the U.S. response, we expect production and utilization rates to remain below prior-year levels until economic conditions improve. The price for domestic hot-rolled coil steel, an important attribute in the pricing for our iron ore pellets and certain of our steel products, averaged $539 per net ton for the first six months of 2020, 18% lower than the same period last year. The price of hot-rolled coil steel has been negatively impacted by lower demand related to the COVID-19 pandemic; however, we are encouraged that there were numerous domestic steel capacity curtailments in response, which should help improve steel supply-demand dynamics in the United States. The two other important indices that impact pricing in our Mining and Pelletizing segment are the Platts 62% Price and the Atlantic Basin pellet premium. The Platts 62% Price averaged $91 per metric ton in the first six months of 2020 and 2019. The Platts 62% Price increased significantly during the second quarter of 2020, as Chinese demand for iron ore remained strong and other iron ore producing countries struggled to meet production targets due to the COVID-19 pandemic. The Atlantic Basin pellet premium averaged $30 per metric ton for the first six months of 2020, a 56% decrease compared to the same period in 2019, as weakness in the European steel market has driven reduced demand for higher quality raw materials. For the three and six months ended June 30, 2020 , our consolidated Revenues , including Realization of deferred revenue of $34.6 million for the six months ended June 30, 2020 , were $1,092.7 million and $1,451.8 million , respectively. For the three and six months ended June 30, 2019 , our consolidated Revenues were $743.2 million and $900.2 million , respectively. For the three and six months ended June 30, 2020 we had net loss from continuing operations attributable to Cliffs shareholders of $0.31 and $0.51 per diluted share, respectively, and negative consolidated Adjusted EBITDA of $82.0 million and $59.3 million , respectively. For the three and six months ended June 30, 2019 , we had net income from continuing operations attributable to Cliffs shareholders of $0.57 and $0.47 per diluted share, respectively, and consolidated Adjusted EBITDA of $248.4 million and $269.6 million , respectively. See "– Results of Operations – Segment Information" below for a reconciliation of our consolidated Net Income (loss) to Adjusted EBTIDA. Strategy Our key strategic initiatives include: Maximizing our Commercial Strengths With the acquisition of AK Steel, we now offer a full suite of products encompassing all steps of the iron ore and steel manufacturing process. From mining to pelletizing to the development and production of finished high-value steel products, we are uniquely positioned to supply both customized iron ore pellets and flat-rolled carbon, stainless and electrical steel products in the United States. We have an industry-leading market share in the automotive industry, where our portfolio of high-end products delivers a broad range of differentiated solutions for this highly sought after customer base. Our product offering is generally geared toward the high-quality end of the spectrum, compared to other suppliers of steel and iron ore in the domestic and global marketplace. Since 2015, our subsidiary AK Steel has de-emphasized the marketing of commodity-grade steel such as hot-rolled coil and focused on high-end applications and solutions, emphasizing niche products primarily for the automotive industry, which is well known for its extremely selective buying behavior. The AK Steel expertise, equipment capabilities and delivery reliability differentiate us from what most U.S.-based steelmakers are capable of offering. It also allows for the ability to minimize the pricing influence of volatile market indices with more focus on fixed-price agreements. 42 Table of Contents We also produce iron ore pellets, the most advanced and sophisticated iron ore product in the marketplace. The major global iron ore producers primarily sell iron ore fines, a commodity-grade product that makes up the vast majority of the seaborne iron ore trade. Our pellets are iron ore fines that have been further processed into homogenous feedstock that allow for enhanced efficiency within a blast furnace, offering steelmakers improved productivity and environmental performance. The sophisticated and tailor-made nature of our pellets allows us to charge a premium when compared to other iron ore products available in the marketplace. Our Toledo HBI production plant, when operational, will allow us to offer another unique, high-quality product to discerning raw material buyers. EAF steelmakers primarily use scrap for their iron feedstock, and our HBI will offer a sophisticated alternative with less impurities, allowing the steelmakers to increase the quality of their respective end steel products and reduce reliance on imported metallics. Expanding our Customer Base and Product Offering The acquisition of AK Steel allows us to benefit from a larger and more diverse base of customers, with less overall emphasis on commodity-linked contracts as part of our new Steel and Manufacturing business. This expansion of our customer base into the automotive industry, as well as other steel consuming manufacturers, is expected to generate more predictable earnings and cash flows due to the focus on value-added and non-commoditized products, and less exposure to volatile commodity indices. We will now generally supply more advanced steel products than EAF steelmakers, who have gained market share from other blast furnaces on less advanced commodity-grade steels. As currently configured, EAFs are largely unable to supply the highly-specified products that we primarily sell. We are also seeking to expand our customer base with the rapidly growing and attractive electric vehicle market. We believe, at this time, the North American automotive industry is approaching a monumental inflection point, with the adoption of electrical engines in passenger vehicles. As this market grows, it will require more advanced steel applications to meet the needs of electric vehicle producers and consumers. With AK Steel’s unique technical capabilities, we believe we are positioned better than any other North American steelmaker to supply the steel and parts necessary to fill these needs. Additionally, although we have a different customer base compared to other blast furnace steelmakers, we cannot ignore the ongoing shift of steelmaking share in the U.S. away from the blast furnace producers to the EAF steelmakers. Over the past 25 years, the market share of EAFs has nearly doubled. However, as EAFs have moved to higher-value steel products, they require more high-quality iron ore-based metallics instead of lower-grade scrap as raw material feedstock. As a result of this trend, one of our top strategic priorities will be to become a critical supplier of the EAF market by providing these specialized metallics. Once operational, we expect our HBI production plant to partially replace the over three million metric tons of ore-based metallics that are imported into the Great Lakes region every year from Russia, Ukraine, Brazil and Venezuela, as well as the nearly 20 million metric tons of scrap used in the Great Lakes area every year. The Toledo site is in close proximity to over 20 EAFs, giving us a natural competitive freight advantage over import competitors. Not only will this production plant create another outlet for our high-margin pellets, but it also presents an attractive economic opportunity for us. As the only producer of DR-grade pellets in the Great Lakes region and with access to abundant, low-cost natural gas, we will be in a unique position to serve clients in the area and grow our customer base. The acquisition of AK Steel provides another potential outlet for HBI as it can also be used in integrated steel operations to increase productivity and reduce carbon footprint, allowing for more cost efficient and environmentally friendly steelmaking. Protecting our Mining and Pelletizing Business We are the market-leading iron ore producer in the U.S., supplying differentiated iron ore pellets under long-term contracts to major North American blast furnace steel producers. We have the unique advantage of being a low-cost, high-quality, iron ore pellet producer with significant transportation and logistics advantages to serve the Great Lakes steel market. The pricing structure and long-term nature of our existing contracts, along with our cost-effective operating profile, position our Mining and Pelletizing segment as a strong cash flow generator in most commodity pricing environments. We recognize the importance of our current strong position in the North American blast furnace steel industry, and one of our top priorities is to protect and enhance the market position of our Mining and Pelletizing business. This involves continuing to deliver high-quality, custom-made pellets that allow our customers to remain competitive in the quality, production efficiency, and environmental friendliness of their steel products. Protecting this business also involves continually evaluating opportunities to preserve our customer base, expand our production capacity and increase ore 43 Table of Contents reserve life. In 2017, we achieved key accomplishments toward these goals by acquiring the remaining minority stake in our Tilden and Empire mines as well as additional real estate interests in Minnesota. In 2018, we began supplying pellets under two new customer supply agreements in the Great Lakes region. In 2019, we completed the upgrades at our Northshore mine to begin commercially producing DR-grade pellets. The acquisition of AK Steel is central to protecting our Mining and Pelletizing business, as sales to AK Steel accounted for 29% of our iron ore product revenue for the year ended December 31, 2019. The acquisition of AK Steel is expected to ensure pellet volume commitments for approximately six million long tons of pellets annually in a normalized environment, to complement our existing long-term minimum volume pellet offtake agreements with other key integrated steel producers and pellets to be eventually consumed at our Toledo HBI production plant. Second Quarter 2020 Recent Developments Financing Transactions On April 17, 2020, we issued $400.0 million aggregate principal amount of 9.875% 2025 Senior Secured Notes in an offering that was exempt from the registration requirements of the Securities Act. We used the net proceeds from this offering for general corporate purposes, including to strengthen our balance sheet and increase our liquidity. On April 24, 2020, we issued an additional $555.2 million aggregate principal amount of 9.875% 2025 Senior Secured Notes in an offering that was exempt from the registration requirements of the Securities Act. These additional notes are of the same class and series as, and otherwise identical to, the 9.875% 2025 Senior Secured Notes issued on April 17, 2020, other than with respect to the date of issuance and issue price. We used the net proceeds from the offering of these additional notes to repurchase $736.4 million aggregate principal amount of our outstanding senior notes of various series, which resulted in a net principal debt reduction of $181.2 million. On June 19, 2020, we issued an additional $120.0 million aggregate principal amount of 6.75% 2026 Senior Secured Notes in an offering that was exempt from the registration requirements of the Securities Act. These additional notes are of the same class and series as, and otherwise identical to, the 6.75% 2026 Senior Secured Notes issued on March 13, 2020, other than with respect to the date of issuance and issue price. We intend to use the net proceeds from this offering to finance the construction of our HBI production plant. Pending such use, the net proceeds were used to temporarily reduce the outstanding borrowings under our ABL Facility. COVID-19 In December 2019, COVID-19 surfaced in Wuhan, China, and has since spread to other countries, including the United States. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. Efforts to contain the spread of COVID-19 intensified throughout the first quarter and second quarter of 2020 and many countries, including the United States, took steps to restrict travel, temporarily close businesses and issue quarantine orders, and it remains unclear how long the economic impact of the COVID-19 pandemic will be felt. On March 27, 2020, President Trump signed into law the CARES Act. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, AMT credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We have evaluated the impact the CARES Act will have on our business and are receiving liquidity relief due to our ability to accelerate the receipt of approximately $60 million of AMT credit refunds, originally receivable in 2021 and 2022 but instead were collected in July 2020, and defer pension contributions and employer social security payments of approximately $90 million. The COVID-19 pandemic continued to disrupt our operations during the second quarter of 2020. Although we implemented stringent social distancing procedures in our operating facilities, including checking employees’ temperatures and symptoms before entering the workplace each day and deep cleaning our operational facilities throughout each day, the outbreak of COVID-19 has heightened the risk that a significant portion of our workforce will suffer illness or otherwise be unable to perform their ordinary work functions. Although steel and iron ore production have been considered “essential” by the states in which we operate, certain of our facilities and construction activities were temporarily idled during the second quarter. Nearly all of these temporarily idled facilities were restarted as of June 30, 2020, with the exception of the Dearborn hot-end operations and Mansfield operations, which restarted in July 2020, and the Northshore mine, which we plan to restart in early August 2020. We cannot predict whether our operations will experience additional disruptions in the future. We may also continue to experience supply chain disruptions or operational issues with our vendors, as our suppliers and contractors face similar challenges related to the COVID-19 pandemic. Because the impact of the COVID-19 pandemic continues to evolve, we cannot currently predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted. To mitigate the impact of the COVID-19 pandemic, we have taken a number of steps during the first six months of 2020 to solidify our liquidity position, including issuing $520 million aggregate principal amount of secured debt, adding a $150 million FILO tranche to our ABL facility, idling several facilities both temporarily and permanently, temporarily reducing our Chief Executive Officer’s compensation by 40%, temporarily reducing salaries by up to 20%, temporarily reducing other salaried employee benefits, and temporarily suspending capital expenditures. We have increased the synergy target associated with our acquisition of AK Steel by $30 million to $150 million. Lastly, our Board of Directors has suspended future dividends, which is a typical cash obligation of approximately $100 million on an annualized basis. In light of the sudden onset and unknown impact and duration of the COVID-19 pandemic, our previously released guidance for the fiscal year ending December 31, 2020, should not be relied upon. 44 Table of Contents Results of Operations - Consolidated The following is a summary of our consolidated results of operations for the three and six months ended June 30, 2020 and 2019 : Revenues The following table presents our sales volumes and Revenues by reportable segment: (In Millions, Except Sales Tons) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Sales volume (in thousands): Steel and Manufacturing (net tons) 619 — 818 — Mining and Pelletizing sales (long tons) 4,759 6,227 6,893 7,777 Less: Intercompany sales (long tons) (1,041 ) (38 ) (1,824 ) (38 ) Mining and Pelletizing consolidated sales (long tons) 3,718 6,189 5,069 7,739 Revenues: Steel and Manufacturing net sales to external customers $ 715.1 $ — $ 932.6 $ — Mining and Pelletizing net sales 1 489.0 747.2 718.4 904.2 Less: Intercompany sales (111.4 ) (4.0 ) (199.2 ) (4.0 ) Mining and Pelletizing net sales to external customers 377.6 743.2 519.2 900.2 — Total revenues $ 1,092.7 $ 743.2 $ 1,451.8 $ 900.2 1 Includes Realization of deferred revenue of $34.6 million for the six months ended June 30, 2020 . Revenues increased by $349.5 million , or 47.0% , for the three months ended June 30, 2020 , compared to the prior-year period. Revenues , including Realization of deferred revenue , increased by $551.6 million , or 61.3% , for the six months ended June 30, 2020 , compared to the prior-year period. The increases were due to the addition of revenues from our new Steel and Manufacturing segment as a result of the AK Steel acquisition, which was completed on March 13, 2020, and were partially offset by a decrease in the sales volumes and realized revenue rates within the Mining and Pelletizing segment. Refer to “– Results of Operations – Segment Information" for additional information regarding the specific factors that impacted revenue during the period. 45 Table of Contents Operating Costs The following is a summary of Total operating costs : (In Millions) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Variance Favorable/ (Unfavorable) 2020 2019 Variance Favorable/ (Unfavorable) Cost of goods sold $ (1,207.5 ) $ (480.2 ) $ (727.3 ) $ (1,563.5 ) $ (606.3 ) $ (957.2 ) Selling, general and administrative expenses (62.1 ) (29.4 ) (32.7 ) (89.6 ) (56.7 ) (32.9 ) Acquisition-related costs (18.4 ) — (18.4 ) (60.9 ) — (60.9 ) Miscellaneous – net: Empire idle costs (3.7 ) (5.3 ) 1.6 (7.0 ) (9.3 ) 2.3 HBI production plant startup costs (7.1 ) (1.1 ) (6.0 ) (15.0 ) (1.9 ) (13.1 ) Other (2.3 ) (0.4 ) (1.9 ) (3.0 ) — (3.0 ) Total Miscellaneous – net (13.1 ) (6.8 ) (6.3 ) (25.0 ) (11.2 ) (13.8 ) Total operating costs $ (1,301.1 ) $ (516.4 ) $ (784.7 ) $ (1,739.0 ) $ (674.2 ) $ (1,064.8 ) Cost of goods sold The increases for the three and six months ended June 30, 2020 , were primarily due to the addition of activity from the Steel and Manufacturing segment, including Cost of goods sold of $859.9 million and $1,106.5 million , respectively, which were unfavorably impacted by idle related costs of approximately $119 million, resulting from the COVID-19 pandemic. Cost of goods sold was partially offset by lower sales volume at the Mining and Pelletizing segment for a decrease of $55.4 million and $14.2 million for the three and six months ended June 30, 2020 , respectively, which were unfavorably impacted by idle related costs of approximately $50 million, in each case, resulting from the COVID-19 pandemic. Refer to “– Results of Operations – Segment Information” for additional information regarding the specific factors that impacted our operating results during the period. Selling, general and administrative expenses We had additional Selling, general and administrative expenses for the three and six months ended June 30, 2020 for costs incurred related to AK Steel, which were partially offset by lower incentive compensation costs. Acquisition-related costs The Acquisition-related costs for the three and six months ended June 30, 2020 , include severance of $16.6 million and $35.9 million , respectively. Refer to NOTE 3 - ACQUISITION OF AK STEEL for further information on the acquisition. 46 Table of Contents Other Income (Expense) The following is a summary of Total other income (expense) : (In Millions) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Variance Favorable/ (Unfavorable) 2020 2019 Variance Favorable/ (Unfavorable) Interest expense, net $ (68.7 ) $ (26.1 ) $ (42.6 ) $ (99.7 ) $ (51.2 ) $ (48.5 ) Other non-operating income (expense): Gain (loss) on extinguishment of debt 129.4 (17.9 ) 147.3 132.6 (18.2 ) 150.8 Net periodic benefit credits (costs) other than service costs component 15.1 (0.1 ) 15.2 20.6 (0.2 ) 20.8 Other 0.1 0.7 (0.6 ) 0.6 1.2 (0.6 ) Total other income (expense) $ 75.9 $ (43.4 ) $ 119.3 $ 54.1 $ (68.4 ) $ 122.5 The increases in Interest expense, net were primarily due to the incremental debt associated with the acquisition of AK Steel. These increases were offset partially by an increase in capitalized interest primarily related to construction of the HBI production plant. The gain on extinguishment of debt for the three months ended June 30, 2020 , resulted from the repurchase of $747.6 million aggregate principal amount of our outstanding senior notes of various series using the net proceeds from the additional $555.2 million 9.875% 2025 Senior Secured Notes issuance and other sources of cash. The six months ended June 30, 2020 were also impacted by the purchase of $56.5 million aggregate principal amount of 7.50% 2023 AK Senior Notes and $8.5 million aggregate principal amount of 7.625% 2021 AK Senior Notes pursuant to tender offers. Refer to NOTE 7 - DEBT AND CREDIT FACILITIES for further details. The increases in net periodic benefit credits other than service cost component were primarily due to expected return on assets due to the acquisition of AK Steel pension assets and increased asset values for the plans held in 2019. Refer to NOTE 9 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further detail on the components of net periodic benefit credits other than service cost component. Income Taxes Our effective tax rate is impacted by permanent items, primarily depletion. It also is affected by discrete items that may occur in any given period but are not consistent from period to period. The following represents a summary of our tax provision and corresponding effective rates: (In Millions, Except Percentages) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Variance 2020 2019 Variance Income tax benefit (expense) $ 24.7 $ (22.0 ) $ 46.7 $ 76.1 $ (18.3 ) $ 94.4 Effective tax rate 18.6 % 12.0 % 6.6 % 32.6 % 11.6 % 21.0 % The difference in the effective rate and income tax expense from the comparable prior-year periods primarily relates to the mix of income and certain non-deductible transaction related items, as well as discrete items recorded in each period. Our 2020 estimated annual effective tax rate before discrete items is 31.1% . This estimated annual effective tax rate differs from the U.S. statutory rate of 21% primarily due to the deduction for percentage depletion in excess of cost depletion related to our Mining and Pelletizing segment operations, as well as non-deductible transaction costs, executive officers' compensation, global intangible low-taxed income and income of noncontrolling interests for which no tax is recognized. The 2019 estimated annual effective tax rate before discrete items at June 30, 2019 was 12.1% . 47 Table of Contents The increase in the estimated effective tax rate before discrete items is driven by the change in the mix of income, as well as transaction costs and other acquisition-related charges that were incurred in 2020 but not in 2019. For the three and six months ended June 30, 2020 , we recorded discrete items that resulted in an income tax expense of $0.3 million and benefit of $3.7 million , respectively. The discrete adjustments are primarily related to interest on uncertain tax positions and the refund of amounts sequestered by the Internal Revenue Service on previously filed AMT credit refunds. For the three and six months ended June 30, 2019 , we recorded discrete items that resulted in an income tax benefit of $0.4 million and $0.8 million , respectively. Results of Operations - Segment Information Adjusted EBITDA We evaluate performance on a segment basis, as well as a consolidated basis, based on Adjusted EBITDA, which is a non-GAAP measure. This measure is used by management, investors, lenders and other external users of our financial statements to assess our operating performance and to compare operating performance to other companies in the steel and iron ore industries, although it is not necessarily comparable to similarly titled measures used by other companies. In addition, management believes Adjusted EBITDA is a useful measure to assess the earnings power of the business without the impact of capital structure and can be used to assess our ability to service debt and fund future capital expenditures in the business. The following table provides a reconciliation of our consolidated Net income (loss) to Adjusted EBITDA: (In Millions) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net income (loss) $ (108.1 ) $ 160.8 $ (156.7 ) $ 138.7 Less: Interest expense, net (68.6 ) (26.3 ) (99.7 ) (51.4 ) Income tax benefit (expense) 24.7 (22.0 ) 76.1 (18.3 ) Depreciation, depletion and amortization (77.1 ) (21.0 ) (111.5 ) (40.9 ) EBITDA $ 12.9 $ 230.1 $ (21.6 ) $ 249.3 Less: EBITDA of noncontrolling interests 1 $ 20.5 $ — $ 25.1 $ — Gain (loss) on extinguishment of debt 129.4 (17.9 ) 132.6 (18.2 ) Severance costs (16.6 ) — (35.9 ) (1.7 ) Acquisition-related costs excluding severance costs (1.8 ) — (25.0 ) — Amortization of inventory step-up (36.2 ) — (59.4 ) — Impact of discontinued operations (0.4 ) (0.4 ) 0.3 (0.4 ) Adjusted EBITDA $ (82.0 ) $ 248.4 $ (59.3 ) $ 269.6 1 EBITDA of noncontrolling interests includes $15.8 million and $19.3 million for income and $4.7 million and $5.8 million for depreciation, depletion and amortization for the three and six months ended June 30, 2020 , respectively. 48 Table of Contents The following table provides a summary of our Adjusted EBITDA by segment: (In Millions) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Change 2020 2019 Change Adjusted EBITDA: Steel and Manufacturing $ (104.0 ) $ (1.1 ) $ (102.9 ) $ (115.1 ) $ (1.9 ) $ (113.2 ) Mining and Pelletizing 82.4 280.5 (198.1 ) 164.2 328.0 (163.8 ) Corporate and eliminations (60.4 ) (31.0 ) (29.4 ) (108.4 ) (56.5 ) (51.9 ) Total Adjusted EBITDA $ (82.0 ) $ 248.4 $ (330.4 ) $ (59.3 ) $ 269.6 $ (328.9 ) Adjusted EBITDA from the Steel and Manufacturing segment for the three and six months ended June 30, 2020 , was unfavorably impacted by decreased customer demand resulting from the COVID-19 pandemic. As a result, we incurred idle related costs resulting from production curtailments of approximately $119 million. Additionally, Cost of goods sold as a percentage of Revenues was unfavorably impacted by product sales mix primarily due to the COVID-19 pandemic, which resulted in lower sales volumes to automotive customers. Adjusted EBITDA from the Mining and Pelletizing segment for the three months ended June 30, 2020 decreased $198.1 million , as compared to the three months ended June 30, 2019, primarily due to lower Revenues of $258.2 million , which was partially offset by lower Cost of goods sold of $55.4 million . The lower Revenues were driven primarily by a decrease in sales volume of 1.5 million long tons due to reduced customer demand associated with the COVID-19 pandemic and a decrease in the average year-to-date realized product revenue rate, predominantly due to lower pellet premiums. The lower Cost of goods sold was primarily driven by the decrease in sales volume, which was partially offset by idle costs of $40 million, excluding idle depreciation, depletion and amortization expense, as a result of the temporary idling of operations in response to reduced customer demand driven by the COVID-19 pandemic, that were incurred during the three months ended June 30, 2020 . Adjusted EBITDA from the Mining and Pelletizing segment for the six months ended June 30, 2020 decreased $163.8 million , as compared to the six months ended June 30, 2019, primarily due to lower Revenues of $185.8 million , which was partially offset by lower Cost of goods sold of $14.2 million . The lower Revenues were driven primarily by a decrease in sales volume of 0.9 million long tons and a decrease in the average year-to-date realized product revenue rate, predominantly due to lower pellet premiums. The lower Cost of goods sold was primarily driven by the decrease in sales volume, which was partially offset by idle costs of $40 million, excluding idle depreciation, depletion and amortization expense, as a result of the temporary idling of operations in response to reduced customer demand driven by the COVID-19 pandemic, that were incurred during the six months ended June 30, 2020 . Adjusted EBITDA from Corporate and eliminations for the three months ended June 30, 2020 and 2019 includes intercompany profit eliminations for iron ore sales from the Mining and Pelletizing segment to the Steel and Manufacturing segment of $31.8 million and $1.6 million, respectively. Additionally, Adjusted EBITDA from Corporate and eliminations for the three months ended June 30, 2020 and 2019 includes corporate Selling, general and administrative expenses , net of adjustments, of $17.8 million and $22.4 million, respectively, and corporate allocated Selling, general and administrative expenses of $9.8 million and $5.8 million, respectively. Adjusted EBITDA from Corporate and eliminations for the six months ended June 30, 2020 and 2019 includes intercompany profit eliminations for iron ore sales from the Mining and Pelletizing Segment to the Steel and Manufacturing segment of $61.7 million and $1.6 million, respectively. Additionally, Adjusted EBITDA from Corporate and eliminations for the six months ended June 30, 2020 and 2019 includes corporate Selling, general and administrative expenses , net of adjustments, of $26.7 million and $42.2 million, respectively, and corporate allocated Selling, general and administrative expenses of $18.0 million and $10.6 million, respectively. 49 Table of Contents Steel and Manufacturing The following is a summary of Steel and Manufacturing segment results included in our consolidated financial results for the three and six months ended June 30, 2020 . These results include the AK Steel operations within our Steel and Manufacturing segment subsequent to March 13, 2020. Flat-Rolled Steel Shipments by Product Category The following is a summary of the Steel and Manufacturing segment operating results: Three Months Ended Six Months Ended June 30, 2020 June 30, 2020 Volumes - In Thousands of Net Tons Flat-rolled steel shipments 619 818 Operating Results - In Millions Revenues $ 715.1 $ 932.6 Cost of goods sold $ (859.9 ) $ (1,106.5 ) Adjusted EBITDA 1 $ (104.0 ) $ (115.1 ) Selling Price - Per Net Ton Average net selling price per net ton of flat-rolled steel $ 1,056 $ 1,042 Revenues Attributable to International Customers Revenues to customers outside the United States (In Millions) $ 52.0 $ 70.9 Revenues to customers outside the United States as a percent of total revenues 7.3 % 7.6 % 1 We had negative Adjusted EBITDA for the three and six months ended June 30, 2019 , of $1.1 million and $1.9 million, respectively, for costs incurred at our HBI production plant. The following table presents the percentage of revenues to each of our Steel and Manufacturing markets: Three Months Ended Six Months Ended Market June 30, 2020 June 30, 2020 Automotive 51 % 52 % Infrastructure and Manufacturing 28 % 26 % Distributors and Converters 21 % 22 % 50 Table of Contents Operating Results Adjusted EBITDA for the three and six months ended June 30, 2020 was unfavorably impacted by decreased customer demand resulting from the COVID-19 pandemic. Cost of goods sold for the three and six months ended June 30, 2020 was unfavorably impacted by idle related costs of approximately $119 million, driven by the temporary idling of facilities in response to lower customer demand due to the COVID-19 pandemic. Additionally, Cost of goods sold as a percentage of Revenues was unfavorably impacted by product sales mix primarily due to the COVID-19 pandemic, which resulted in lower sales volumes to our automotive customers. Production Although steel production has been considered “essential” by the states in which we operate, certain of our facilities, including Dearborn Works, Mansfield Works, all Precision Partners stamping facilities and approximately 65% of AK Tube production were temporarily idled during the three months ended June 30, 2020 in response to the COVID-19 pandemic. Dearborn Works hot strip mill, anneal and temper operations and AK Coal were permanently idled as part of the permanent cost reduction efforts. Mining and Pelletizing The following is a summary of Mining and Pelletizing segment results for the three months ended June 30, 2020 and 2019 : (In Millions) Three Months Ended June 30, 2020 2019 Change Percent change Volumes - In Thousands of Long Tons 1,2 Sales tons 4,759 6,227 (1,468 ) (23.6 )% Production tons 2,038 5,177 (3,139 ) (60.6 )% Operating Results - In Millions 2 Revenues $ 489.0 $ 747.2 $ (258.2 ) (34.6 )% Cost of goods sold $ (427.2 ) $ (482.6 ) $ 55.4 (11.5 )% Adjusted EBITDA $ 82.4 $ 280.5 $ (198.1 ) (70.6 )% 1 Includes Cliffs' 23% share of the Hibbing mine production. 2 Includes intercompany sales to our Steel and Manufacturing segment of 1,041 thousand long tons, for the three months ended June 30, 2020 and 38 thousand long tons for the three months ended June 30, 2019. The following table presents certain operating results on a per ton basis: Three Months Ended June 30, Per Ton Information 2020 2019 Change Percent change Realized product revenue rate 1 $ 94.73 $ 112.64 $ (17.91 ) (15.9 )% Cash cost of goods sold rate 1,2 $ 77.71 $ 67.00 $ 10.71 16.0 % Depreciation, depletion & amortization 4.03 3.15 0.88 27.9 % Total cost of goods sold $ 81.74 $ 70.15 $ 11.59 16.5 % 1 Excludes revenues and expenses related to freight, which are offsetting. 2 Cash cost of goods sold rate is a non-GAAP financial measure. Refer to "–Non-GAAP Reconciliation" for a reconciliation of this non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA decreased by $198.1 million during the three months ended June 30, 2020 , compared to the prior-year period, primarily due to the decrease in revenues of $258.2 million , offset partially by the decrease in cost of goods sold of $55.4 million , as discussed below. Revenues decreased by $250.6 million during the three months ended June 30, 2020 , compared to the prior- 51 Table of Contents year period, excluding a decrease in domestic freight of $7.6 million , driven by: • Lower sales volume of 1.5 million long tons, primarily due to reduced demand as customers idled their blast furnaces in response to the COVID-19 pandemic, which resulted in decreased revenue of $165 million. • A decrease in the average year-to-date realized product revenue rate of $17.91 per long ton, or 15.9% , during the three months ended June 30, 2020 , compared to the prior-year period, which resulted in a decrease of $86 million, predominantly due to lower pellet premiums, which negatively affected the realized revenue rate by $16 per long ton or $76 million. Cost of goods sold decreased $47.8 million during the three months ended June 30, 2020 , excluding the domestic freight decrease of $7.6 million , compared to the same period in 2019. This is predominantly due to a decrease in sales volume, as discussed above, of 1.5 million long tons, which resulted in decreased costs of $103 million period-over-period. This was offset partially by idle costs of $50 million as a result of the temporary idling of operations in response to reduced customer demand driven by the COVID-19 pandemic, that were incurred during the three months ended June 30, 2020 . Production Production for the three months ended June 30, 2020 , decreased 60.6% compared to the same period in 2019 , predominantly due to the idling of the Tilden, Northshore and Hibbing mines in response to the COVID-19 pandemic and resulting decreased customer demand. Mining and Pelletizing The following is a summary of Mining and Pelletizing segment results for the six months ended June 30, 2020 and 2019 : (In Millions) Six Months Ended June 30, 2020 2019 Change Percent change Volumes - In Thousands of Long Tons 1,2 Sales tons 6,893 7,777 (884 ) (11.4 )% Production tons 6,870 9,578 (2,708 ) (28.3 )% Operating Results - In Millions 2 Revenues $ 718.4 $ 904.2 $ (185.8 ) (20.5 )% Cost of goods sold $ (594.5 ) $ (608.7 ) $ 14.2 (2.3 )% Adjusted EBITDA $ 164.2 $ 328.0 $ (163.8 ) (49.9 )% 1 Includes Cliffs' 23% share of the Hibbing mine production. 2 Includes intercompany sales to our Steel and Manufacturing segment of 1,824 thousand long tons, for the six months ended June 30, 2020 and 38 thousand long tons for the six months ended June 30, 2019. 52 Table of Contents The following table presents certain operating results on a per ton basis: Six Months Ended June 30, Per Ton Information 2020 2019 Change Percent change Realized product revenue rate 1,3 $ 96.21 $ 108.89 $ (12.68 ) (11.6 )% Cash cost of goods sold rate 1,2 $ 72.74 $ 65.99 $ 6.75 10.2 % Depreciation, depletion & amortization 5.50 4.90 0.60 12.2 % Total cost of goods sold $ 78.24 $ 70.89 $ 7.35 10.4 % 1 Excludes revenues and expenses related to freight, which are offsetting. 2 Cash cost of goods sold rate is a non-GAAP financial measure. Refer to "–Non-GAAP Reconciliation" for a reconciliation of this non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP. 3 Includes Realization of deferred revenue of $34.6 million for the six months ended June 30, 2020 . Adjusted EBITDA decreased by $163.8 million during the six months ended June 30, 2020 , compared to the prior-year period, primarily due to the decrease in revenues of $185.8 million , offset partially by the decrease in cost of goods sold of $14.2 million , as discussed below. Revenues decreased by $183.6 million during the six months ended June 30, 2020, compared to the prior-year period, excluding a decrease in domestic freight of $2.2 million , driven by: • Lower sales volume of 0.9 million long tons, primarily due to reduced demand as customers idled their blast furnaces in response to the COVID-19 pandemic, which resulted in decreased revenue of $96 million. • A decrease in the average year-to-date realized product revenue rate of $12.68 per long ton, or 11.6% , during the six months ended June 30, 2020 , compared to the prior-year period, which resulted in a decrease of $88 million, predominantly due to: ◦ Lower pellet premiums which negatively affected the realized revenue rate by $12 per long ton or $83 million; and ◦ A decrease in the hot-rolled coil steel price, which negatively affected the realized revenue rate by $5 per long ton, or $35 million, during the six months ended June 30, 2020 . ◦ These decreases were offset partially by the realization of deferred revenue of $35 million, or $5 per long ton, as a result of the termination of the AK Steel iron ore pellet sales agreement. Cost of goods sold decreased $12.0 million during the six months ended June 30, 2020 , excluding the domestic freight decrease of $2.2 million , compared to the same period in 2019. This is predominantly due to a decrease in sales volume, as discussed above, of 0.9 million long tons, which resulted in decreased costs of $62 million period-over-period. This was offset partially by idle costs of $50 million as a result of the temporary idling of operations in response to reduced customer demand driven by the COVID-19 pandemic, that were incurred during the six months ended June 30, 2020 . Production Production for the six months ended June 30, 2020 , decreased 28.3% compared to the same period in 2019 , predominantly due to the idling of the Tilden, Northshore and Hibbing mines in response to the COVID-19 pandemic and resulting decrease in customer demand. Liquidity, Cash Flows and Capital Resources Our primary sources of liquidity are Cash and cash equivalents and cash generated from our operations, availability under the ABL Facility and other financing activities. Our capital allocation decision-making process is focused on preserving healthy liquidity levels while maintaining the strength of our balance sheet and creating financial flexibility to manage through the inherent cyclical demand for our products and volatility in commodity prices. We are focused on maximizing the cash generation of our operations, reducing debt, and aligning capital investments with our strategic priorities and the requirements of our business plan, including regulatory and permission-to-operate related projects. 53 Table of Contents Since the onset of the COVID-19 pandemic in the United States, our primary focus has been on maintaining adequate levels of liquidity to manage through a potentially prolonged economic downturn. In alignment with this, we have made several operational adjustments, including facility closures, idles, and extended maintenance outages. Along with the cost savings achieved through these operational adjustments, we have reduced planned capital expenditures for the year, reduced overhead costs and suspended our quarterly dividend payment. Additionally, on April 17, 2020 and April 24, 2020, we issued $400.0 million aggregate principal amount and an additional $555.2 million aggregate principal amount, respectively, of 9.875% 2025 Senior Secured Notes to further bolster our liquidity position and reduce debt. We also issued an additional $120.0 million aggregate principal amount of 6.75% 2026 Senior Secured Notes on June 19, 2020, the net proceeds of which we intend to use to finance construction of our HBI production plant. Pending such use, the net proceeds were used to temporarily reduce the outstanding borrowings under our ABL Facility. We believe these measures will allow us to remain comfortable with our liquidity levels for an extended market downturn related to the COVID-19 pandemic. Based on our outlook for the next 12 months, which is subject to continued changing demand from customers and volatility in iron ore and domestic steel prices, we expect to have ample liquidity through cash generated from operations and availability under our ABL Facility sufficient to meet the needs of our operations and service our debt obligations. The following discussion summarizes the significant items impacting our cash flows during the six months ended June 30, 2020 and 2019 as well as expected impacts to our future cash flows over the next 12 months. Refer to the Statements of Unaudited Condensed Consolidated Cash Flows for additional information. Operating Activities Net cash used by operating activities was $299.2 million for the six months ended June 30, 2020 , compared to net cash provided by operating activities of $151.1 million for the comparable period in 2019 . The incremental increase in cash used by operating activities during the first six months of 2020, compared to 2019, was due primarily to the slowing economy in connection with the COVID-19 pandemic resulting in reduced customer demand and the need to temporary idle many of our operations, which had an adverse effect on our operating results. Our U.S. cash and cash equivalents balance at June 30, 2020 was $55.8 million , or 77% of our consolidated total cash and cash equivalents balance, excluding cash related to our VIE, of $72.7 million . Additionally, we had a cash balance at June 30, 2020 of $5.3 million classified as part of Other current assets in the Statements of Unaudited Condensed Consolidated Financial Position related to discontinued operations. Investing Activities Net cash used by investing activities was $1,152.4 million and $292.4 million for the six months ended June 30, 2020 and 2019, respectively. During the first six months of 2020, we had net cash outflows of $869.3 million for the acquisition of AK Steel, net of cash acquired. This includes $590.0 million to pay off AK Steel Corporation's former revolving credit facility and $323.6 million to purchase outstanding 7.50% 2023 AK Senior Notes. Additionally, we had capital expenditures including capitalized interest of $282.9 million and $300.9 million for the six months ended June 30, 2020 and 2019, respectively. During the six months ended June 30, 2020 , we had cash outflows, including deposits and capitalized interest, of approximately $210 million on development of the HBI production plant. This compares to net cash outflows, including deposits and capitalized interest, during the first six months of 2019 of approximately $230 million on development of the HBI production plant and approximately $40 million on the upgrades at Northshore. Additionally, we spent approximately $70 million and $30 million on sustaining capital expenditures during the six months ended June 30, 2020 and 2019, respectively. Sustaining capital spend includes infrastructure, mobile equipment, fixed equipment, product quality, environment, health and safety. In response to the COVID-19 pandemic, we temporarily limited our cash used for capital expenditures to critical sustaining capital, but have now resumed growth capital spending, including the restart of Toledo HBI production plant construction in June. The HBI production plant is expected to be completed during the fourth quarter of 2020. We anticipate total cash used for capital expenditures during the next 12 months to be approximately $450 million, including capitalized interest. Included within this estimate is approximately $220 million for sustaining capital, $190 million related to completion of the HBI production plant and $40 million for other growth capital. 54 Table of Contents Financing Activities Net cash provided by financing activities was $1,171.1 million for the six months ended June 30, 2020 , compared to net cash used by financing activities of $307.9 million for the comparable period in 2019 . Cash provided by financing activities for the six months ended June 30, 2020 , primarily related to the issuances of $845.0 million aggregate principal amount of 6.75% 2026 Senior Secured Notes, $955.2 million aggregate principal amount of 9.875% 2025 Senior Secured Notes and borrowings of $800.0 million under the ABL Facility. The net proceeds from the initial issuance of $725.0 million aggregate principal amount of the 6.75% 2026 Senior Secured Notes, along with cash on hand, were used to purchase $372.7 million aggregate principal amount of 7.625% 2021 AK Senior Notes and $367.2 million aggregate principal amount of 7.50% 2023 AK Senior Notes and to pay for the $44.4 million of debt issuance costs in the first quarter of 2020. The net proceeds from the additional issuance of $555.2 million aggregate principal amount of the 9.875% 2025 Senior Secured Notes were used to repurchase $736.4 million aggregate principal amount of our outstanding senior notes. Additionally, during the second quarter of 2020, we repaid $250.0 million under the ABL Facility. Net cash used by financing activities during the first six months of 2019 primarily related to the repurchase of 24.4 million common shares for $252.9 million in the aggregate under the $300.0 million share repurchase program. Additionally, we issued $750.0 million aggregate principal amount of 5.875% 2027 Senior Notes, which provided net proceeds of approximately $714 million. The net proceeds from the notes offering, along with cash on hand, were used to redeem in full all of our then-outstanding 4.875% 2021 Senior Notes and to purchase $600.0 million aggregate principal amount of our outstanding 5.75% 2025 Senior Notes pursuant to a tender offer. In total, during the first six months of 2019, we purchased $724.0 million aggregate principal amount of senior notes for $729.3 million in cash. Additional uses of cash from financing activities during the first six months of 2020 and 2019, included payments of cash dividends on our common shares of $40.8 million and $28.9 million, respectively. We have temporarily suspended future dividend distributions as a result of the COVID-19 pandemic in order to preserve cash during this time of economic uncertainty. We anticipate future uses of cash for financing activities during the next 12 months to include opportunistic debt transactions as part of our liability management strategy, such as the transactions that occurred during the second quarter of 2020. Capital Resources The following represents a summary of key liquidity measures: (In Millions) June 30, 2020 Cash and cash equivalents $ 73.7 Cash and cash equivalents from discontinued operations, included within Other current assets 5.3 Less: Cash and cash equivalents from variable interest entities (1.0 ) Total cash and cash equivalents $ 78.0 Available borrowing base on ABL Facility 1 $ 1,652.1 Borrowings (550.0 ) Letter of credit obligations (198.5 ) Borrowing capacity available $ 903.6 1 As of June 30, 2020 , the ABL Facility had a maximum borrowing base of $2.0 billion . The available borrowing base is determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment. Our primary sources of funding are cash on hand, which totaled $78.0 million as of June 30, 2020 , cash generated by our business, availability under the ABL Facility and other financing activities. The combination of cash and availability under the ABL Facility gives us $981.6 million in liquidity entering the third quarter of 2020, which is expected to be adequate to fund operations, letter of credit obligations, sustaining and expansion capital expenditures and other cash commitments for at least the next 12 months. As of June 30, 2020 , we were in compliance with the ABL Facility liquidity requirements and, therefore, the springing financial covenant requiring a minimum fixed charge coverage ratio of 1.0 to 1.0 was not applicable. 55 Table of Contents Off-Balance Sheet Arrangements In the normal course of business, we are a party to certain arrangements that are not reflected on our Statements of Unaudited Condensed Consolidated Financial Position . These arrangements include minimum "take or pay" purchase commitments, such as minimum electric power demand charges, minimum coal, diesel and natural gas purchase commitments and minimum railroad transportation commitments. We also have financial instruments with off-balance sheet risk, such as bank letters of credit and bank guarantees. Information about our Guarantors and the Issuer of our Guaranteed Securities The accompanying summarized financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered,” and Rule 13-01 "Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralized a Registrant's Securities." Certain of our subsidiaries (the "Guarantor subsidiaries") have fully and unconditionally, and jointly and severally, guaranteed the obligations under (a) the 5.75% 2025 Senior Notes, the 6.375% 2025 Senior Notes, the 5.875% 2027 Senior Notes and the 7.00% 2027 Senior Notes issued by Cleveland-Cliffs Inc. on a senior unsecured basis and (b) the 4.875% 2024 Senior Secured Notes, the 6.75% 2026 Senior Secured Notes and the 9.875% 2025 Senior Secured Notes on a senior secured basis. See NOTE 7 - DEBT AND CREDIT FACILITIES for further information. The following presents the summarized financial information on a combined basis for Cleveland-Cliffs Inc. (parent company and issuer of the guaranteed obligations) and the Guarantor subsidiaries, collectively referred to as the obligated group. Transactions between the obligated group have been eliminated. Information for the non-Guarantor subsidiaries was excluded from the combined summarized financial information of the obligated group. Each Guarantor subsidiary is consolidated by Cleveland-Cliffs Inc. as of June 30, 2020 . Refer to Exhibit 22.1, filed herewith, for the detailed list of entities included within the obligated group as of June 30, 2020 and December 31, 2019 . The guarantee of a Guarantor subsidiary with respect to Cliffs' 5.75% 2025 Senior Notes, 6.375% 2025 Senior Notes, 5.875% 2027 Senior Notes, 7.00% 2027 Senior Notes, 4.875% 2024 Senior Secured Notes, 6.75% 2026 Senior Secured Notes and 9.875% 2025 Senior Secured Notes will be automatically and unconditionally released and discharged, and such Guarantor subsidiary’s obligations under the guarantee and the related indentures (the “Indentures”) will be automatically and unconditionally released and discharged, upon the occurrence of any of the following, along with the delivery to the trustee of an officer’s certificate and an opinion of counsel, each stating that all conditions precedent provided for in the applicable Indenture relating to the release and discharge of such Guarantor subsidiary’s guarantee have been complied with: (a) any sale, exchange, transfer or disposition of such Guarantor subsidiary (by merger, consolidation, or the sale of) or the capital stock of such Guarantor subsidiary after which the applicable Guarantor subsidiary is no longer a subsidiary of the Company or the sale of all or substantially all of such Guarantor subsidiary’s assets (other than by lease), whether or not such Guarantor subsidiary is the surviving entity in such transaction, to a person which is not the Company or a subsidiary of the Company; provided that (i) such sale, exchange, transfer or disposition is made in compliance with the applicable Indenture, including the covenants regarding consolidation, merger and sale of assets and, as applicable, dispositions of assets that constitute notes collateral, and (ii) all the obligations of such Guarantor subsidiary under all debt of the Company or its subsidiaries terminate upon consummation of such transaction; (b) designation of any Guarantor subsidiary as an “excluded subsidiary” (as defined in the Indentures); or (c) defeasance or satisfaction and discharge of the Indentures. Each entity in the summarized combined financial information follows the same accounting policies as described in the consolidated financial statements. The accompanying summarized combined financial information does not reflect investments of the obligated group in non-Guarantor subsidiaries. The financial information of the obligated group is presented on a combined basis; intercompany balances and transactions within the obligated group have been eliminated. The obligated group's amounts due from, amounts due to, and transactions with, non-Guarantor subsidiaries and related parties have been presented in separate line items. 56 Table of Contents Summarized Combined Financial Information of the Issuer and Guarantor Subsidiaries: The following table is summarized combined financial information from the Statements of Unaudited Condensed Consolidated Financial Position of the obligated group: (In Millions) June 30, 2020 December 31, 2019 Current assets $ 2,464.5 $ 891.0 Non-current assets 5,104.5 2,381.8 Current liabilities 715.3 392.9 Non-current liabilities 6,344.6 2,791.7 The following table is summarized combined financial information from the Statements of Unaudited Condensed Consolidated Operations of the obligated group: (In Millions) Six Months Ended June 30, 2020 Revenues 1 $ 1,414.2 Cost of goods sold (1,546.0 ) Loss from continuing operations (168.0 ) Net loss (167.3 ) Net loss attributable to Cliffs shareholders (167.3 ) 1 Includes Realization of deferred revenue of $34.6 million for the six months ended June 30, 2020 . As of June 30, 2020 and December 31, 2019 , the obligated group had the following balances with non-Guarantor subsidiaries and other related parties: (In Millions) June 30, 2020 December 31, 2019 Balances with non-Guarantor subsidiaries: Accounts receivable, net $ 6.6 $ — Accounts payable (14.0 ) — Balances with other related parties: Accounts receivable, net $ 91.6 $ 31.1 Other current assets 35.3 44.5 Accounts payable (2.4 ) — Other current liabilities (2.0 ) (2.0 ) Additionally, for the six months ended June 30, 2020 , the obligated group had Revenues of $292.6 million and Cost of goods sold of $243.0 million in each case with other related parties. Market Risks We are subject to a variety of risks, including those caused by changes in commodity prices and interest rates. We have established policies and procedures to manage such risks; however, certain risks are beyond our control. 57 Table of Contents Pricing Risks Commodity Price Risk Our financial results can vary for our operations as a result of fluctuations in market prices. We attempt to mitigate commodity price risk by aligning fixed and variable components in our customer pricing contracts, supplier purchasing agreements and derivative financial instruments. Some customer contracts have fixed-pricing terms, which increase our exposure to fluctuations in raw material and energy costs. To reduce our exposure, we enter into annual, fixed-price agreements for certain raw materials. Some of our existing multi-year raw material supply agreements have required minimum purchase quantities. Under adverse economic conditions, those minimums may exceed our needs. Absent exceptions for force majeure and other circumstances affecting the legal enforceability of the agreements, these minimum purchase requirements may compel us to purchase quantities of raw materials that could significantly exceed our anticipated needs or pay damages to the supplier for shortfalls. In these circumstances, we would attempt to negotiate agreements for new purchase quantities. There is a risk, however, that we would not be successful in reducing purchase quantities, either through negotiation or litigation. If that occurred, we would likely be required to purchase more of a particular raw material in a particular year than we need, negatively affecting our results of operations and cash flows. Certain of our customer contracts include variable-pricing mechanisms that adjust selling prices in response to changes in the costs of certain raw materials and energy, while other of our customer contracts exclude such mechanisms. We may enter multi-year purchase agreements for certain raw materials with similar variable-price mechanisms, allowing us to achieve natural hedges between the customer pricing contracts and supplier purchasing agreements. Therefore, in some cases, price fluctuations for energy (particularly natural gas and electricity), raw materials (such as scrap, chrome, zinc and nickel) or other commodities may be, in part, passed on to customers rather than absorbed solely by us. There is a risk, however, that the variable-price mechanisms in the sales contracts may not necessarily change in tandem with the variable-price mechanisms in our purchase agreements, negatively affecting our results of operations and cash flows. Our strategy to address volatile natural gas rates, diesel rates and electricity rates includes improving efficiency in energy usage, identifying alternative providers and utilizing the lowest cost alternative fuels. If we are unable to align fixed and variable components between customer pricing contracts and supplier purchasing agreements, we use cash-settled commodity price swaps and options to hedge the market risk associated with the purchase of certain of our raw materials and energy requirements. Additionally, we routinely use these derivative instruments to hedge a portion of our natural gas, electricity and zinc requirements. Our hedging strategy is designed to protect us from excessive pricing volatility. However, since we do not typically hedge 100% of our exposure, abnormal price increases in any of these commodity markets might still negatively affect operating costs. The following table summarizes the impact of a 10% and 25% change in market price from the June 30, 2020 estimated price on our derivative instruments, thereby impacting our pre-tax income by the same amount. Positive or Negative Effect on Pre-tax Income (In Millions) Commodity Derivative 10% Increase or Decrease 25% Increase or Decrease Natural gas $ 9.0 $ 22.3 Electricity 3.4 8.6 Zinc 1.3 3.4 Other 1.3 1.3 Additionally, our iron ore pellet revenue is impacted by pricing of iron ore, hot-rolled coil steel and iron ore pellet premiums. World market prices for these commodities have fluctuated historically and are affected by numerous factors beyond our control. The world market price that is most commonly utilized in our iron ore sales contracts is the Platts 62% Price, which can fluctuate widely due to numerous factors, such as global economic growth or contraction, change in demand for steel or changes in availability of supply. 58 Table of Contents A supply agreement with one Mining and Pelletizing customer provides for supplemental revenue or refunds based on the hot-rolled coil steel price at the time the iron ore product is consumed in the customer’s blast furnaces. At June 30, 2020 , we had derivative assets of $27.3 million , representing the fair value of the pricing factors, based upon the amount of unconsumed long tons and an estimated average hot-rolled coil steel price for the period in which the iron ore is expected to be consumed in the customer's blast furnaces, subject to final pricing at a future date. We estimate that a $75 positive or negative change in the hot-rolled coil steel price realized from the June 30, 2020 estimates would cause the fair value of the derivative instrument to increase or decrease by $24.5 million, respectively, thereby impacting our consolidated revenues by the same amount. We have not entered into any hedging programs to mitigate the risk of adverse price fluctuations. Refer to NOTE 12 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information. Foreign Currency Exchange Rate Risk Exchange rate fluctuations affect a portion of Precision Partner's operating costs, reported within the Steel and Manufacturing segment, that are denominated in Canadian dollars, and we use forward currency contracts to reduce our exposure to certain of these currency price fluctuations. At June 30, 2020 , we had outstanding option and forward currency contracts with a total contract value of $35.9 million for the purchase of Canadian dollars. Based on the contracts outstanding at June 30, 2020 , a 10% change in the U.S. dollar-to-Canadian dollar exchange rate would result in a pre-tax impact of $1.8 million on the fair value of these contracts, which would offset the effect of a change in the exchange rate on the underlying operating costs. Refer to NOTE 12 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information. Valuation of Other Long-Lived Assets Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that would indicate that the carrying value of the assets may not be recoverable. Such indicators may include: a significant decline in expected future cash flows; a sustained, significant decline in market pricing; a significant adverse change in legal or environmental factors or in the business climate; changes in estimates of our recoverable reserves; and unanticipated competition. Any adverse change in these factors could have a significant impact on the recoverability of our long-lived assets and could have a material impact on our consolidated statements of operations and statement of financial position. A comparison of each asset group's carrying value to the estimated undiscounted net future cash flows expected to result from the use of the assets, including cost of disposition, is used to determine if an asset is recoverable. Projected future cash flows reflect management's best estimate of economic and market conditions over the projected period, including growth rates in revenues and costs, and estimates of future expected changes in operating margins and capital expenditures. If the carrying value of the asset group is higher than its undiscounted net future cash flows, the asset group is measured at fair value and the difference is recorded as a reduction to the long-lived assets. We estimate fair value using a market approach, an income approach or a cost approach. While we concluded that an event triggering the need for an impairment assessment did not occur during the six months ended June 30, 2020 , a prolonged COVID-19 pandemic could impact the results of operations due to changes to assumptions that would indicate that the carrying value of our asset groups may not be recoverable. Interest Rate Risk Interest payable on our senior notes is at fixed rates. Interest payable under our ABL Facility is at a variable rate based upon the applicable base rate plus the applicable base rate margin depending on the excess availability. Additionally, we have outstanding IRBs with fixed and variable rates. As of June 30, 2020 , we had $550.0 million outstanding under the ABL Facility. An increase in prevailing interest rates would increase interest expense and interest paid for any outstanding borrowings from the ABL Facility. For example, a 100 basis point change to interest rates under the ABL Facility at the current borrowing level would result in a change of $5.6 million to interest expense on an annual basis. Supply Concentration Risks Many of our operations and mines rely on one source each of electric power and natural gas. A significant interruption or change in service or rates from our energy suppliers could materially impact our production costs, margins and profitability. 59 Table of Contents Forward-Looking Statements This report contains statements that constitute "forward-looking statements" within the meaning of the federal securities laws. As a general matter, forward-looking statements relate to anticipated trends and expectations rather than historical matters. Forward-looking statements are subject to uncertainties and factors relating to our operations and business environment that are difficult to predict and may be beyond our control. Such uncertainties and factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements. These statements speak only as of the date of this report, and we undertake no ongoing obligation, other than that imposed by law, to update these statements. Uncertainties and risk factors that could affect our future performance and cause results to differ from the forward-looking statements in this report include, but are not limited to: • severe financial hardship, bankruptcy, temporary or permanent shutdowns or operational challenges, due to the ongoing COVID-19 pandemic or otherwise, of one or more of our major customers, including customers in the automotive market, key suppliers or contractors, which, among other adverse effects, could lead to reduced demand for our products, increased difficulty collecting receivables, and customers and/or suppliers asserting force majeure or other reasons for not performing their contractual obligations to us; • uncertainty and weaknesses in global economic conditions, including downward pressure on prices caused by the COVID-19 pandemic, oversupply of imported products, reduced market demand and risks related to U.S. government actions with respect to Section 232, the USMCA and/or other trade agreements, treaties or policies; • uncertainties associated with the highly competitive and highly cyclical steel industry and reliance on the demand for steel from the automotive industry; • continued volatility of steel and iron ore prices and other trends, which may impact the price-adjustment calculations under certain of our sales contracts; • our ability to successfully diversify our product mix and add new customers for our Mining and Pelletizing segment beyond our traditional blast furnace clientele; • our ability to cost-effectively achieve planned production rates or levels, including at our HBI production plant currently under construction, and to resume full operations at certain facilities that are or were temporarily idled due to the COVID-19 pandemic; • our ability to successfully identify and consummate any strategic investments or development projects, including our HBI production plant; • the impact of our steelmaking customers reducing their steel production due to the COVID-19 pandemic, or increased market share of steel produced using methods other than those used by our customers, or increased market share of lighter-weight steel alternatives, including aluminum; • our ability to maintain adequate liquidity, our level of indebtedness and the availability of capital could limit cash flow available to fund working capital, planned capital expenditures, acquisitions, and other general corporate purposes or ongoing needs of our business; • our actual economic iron ore reserves or reductions in current mineral estimates, including whether any mineralized material qualifies as a reserve; • the outcome of any contractual disputes with our customers, joint venture partners or significant energy, material or service providers or any other litigation or arbitration; • problems or uncertainties with sales volume or mix, productivity, transportation, environmental liabilities, employee-benefit costs and other risks of the steel and mining industries; • impacts of existing and increasing governmental regulation and related costs and liabilities, including failure to receive or maintain required operating and environmental permits, approvals, modifications or other authorization of, or from, any governmental or regulatory entity and costs related to implementing improvements to ensure compliance with regulatory changes; • our ability to maintain appropriate relations with unions and employees; • the ability of our customers, joint venture partners and third-party service providers to meet their obligations to us on a timely basis or at all; 60 Table of Contents • events or circumstances that could impair or adversely impact the viability of a production plant or mine and the carrying value of associated assets, as well as any resulting impairment charges; • uncertainties associated with natural disasters, weather conditions, unanticipated geological conditions, supply or price of energy, equipment failures, infectious disease outbreaks and other unexpected events; • adverse changes in interest rates, foreign currency rates and tax laws; • the potential existence of significant deficiencies or material weakness in our internal control over financial reporting; • our ability to realize the anticipated benefits of the Merger and to successfully integrate the businesses of AK Steel into our existing businesses, including uncertainties associated with maintaining relationships with customers, vendors and employees, as well as realizing additional future synergies; • additional debt we assumed or issued in connection with the Merger, as well as additional debt we incurred in connection with enhancing our liquidity during the COVID-19 pandemic, may negatively impact our credit profile and limit our financial flexibility; • changes in the cost of raw materials and supplies; • supply chain disruptions or poor quality of raw materials or supplies, including scrap, coal, coke and alloys; • disruptions in, or failures of, our information technology systems, including those related to cybersecurity; and • unanticipated costs associated with healthcare, pension and OPEB obligations. For additional factors affecting our business, refer to Part II – Item 1A. Risk Factors of this Quarterly Report on Form 10-Q . You are urged to carefully consider these risk factors. Non-GAAP Reconciliations We present cash cost of goods sold rate per long ton, which is a non-GAAP financial measure that management uses in evaluating operating performance. We believe our presentation of non-GAAP cash cost of goods sold is useful to investors because it excludes depreciation, depletion and amortization, which are non-cash, and freight, which has no impact on sales margin, thus providing a more accurate view of the cash outflows related to the sale of iron ore. The presentation of this measure is not intended to be considered in isolation from, as a substitute for, or as superior to, the financial information prepared and presented in accordance with GAAP. The presentation of this measure may be different from non-GAAP financial measures used by other companies. Below is a reconciliation in dollars of this non-GAAP financial measure to our Mining and Pelletizing segment cost of goods sold. (In Millions) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Cost of goods sold $ 427.2 $ 482.6 $ 594.5 $ 608.7 Less: Freight 38.2 45.8 55.2 57.4 Depreciation, depletion & amortization 19.2 19.6 37.9 38.1 Cash cost of goods sold $ 369.8 $ 417.2 $ 501.4 $ 513.2 Refer to " – Results of Operations – Segment Information" above for a reconciliation of the non–GAAP measure, Adjusted EBITDA.