UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(Dollars in millions, except per share amounts)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net sales:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,242
|
|
|
$
|
2,787
|
|
|
$
|
6,063
|
|
|
$
|
5,199
|
|
Net sales to related parties (Note 20)
|
|
367
|
|
|
357
|
|
|
695
|
|
|
670
|
|
Total (Note 5)
|
|
3,609
|
|
|
3,144
|
|
|
6,758
|
|
|
5,869
|
|
Operating expenses (income):
|
|
|
|
|
|
|
|
|
Cost of sales (excludes items shown below)
|
|
3,121
|
|
|
2,723
|
|
|
5,929
|
|
|
5,282
|
|
Selling, general and administrative expenses
|
|
92
|
|
|
67
|
|
|
170
|
|
|
148
|
|
Depreciation, depletion and amortization
|
|
130
|
|
|
121
|
|
|
258
|
|
|
258
|
|
Earnings from investees
|
|
(19
|
)
|
|
(16
|
)
|
|
(22
|
)
|
|
(20
|
)
|
Gain associated with retained interest in U. S. Steel Canada Inc. (Note 23)
|
|
—
|
|
|
(72
|
)
|
|
—
|
|
|
(72
|
)
|
Restructuring and other charges (Note 21)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
32
|
|
Net gain on disposal of assets
|
|
(17
|
)
|
|
—
|
|
|
(16
|
)
|
|
(1
|
)
|
Other expense (income), net
|
|
1
|
|
|
(5
|
)
|
|
1
|
|
|
(5
|
)
|
Total
|
|
3,308
|
|
|
2,817
|
|
|
6,320
|
|
|
5,622
|
|
Earnings before interest and income taxes
|
|
301
|
|
|
327
|
|
|
438
|
|
|
247
|
|
Interest expense
|
|
43
|
|
|
55
|
|
|
93
|
|
|
113
|
|
Interest income
|
|
(5
|
)
|
|
(4
|
)
|
|
(10
|
)
|
|
(8
|
)
|
Loss on debt extinguishment (Note 9)
|
|
28
|
|
|
1
|
|
|
74
|
|
|
1
|
|
Other financial (benefits) costs
|
|
(8
|
)
|
|
16
|
|
|
2
|
|
|
25
|
|
Net periodic benefit cost (other than service cost) (Note 3)
(a)
|
|
17
|
|
|
14
|
|
|
34
|
|
|
32
|
|
Net interest and other financial costs (Note 9)
|
|
75
|
|
|
82
|
|
|
193
|
|
|
163
|
|
Earnings before income taxes
|
|
226
|
|
|
245
|
|
|
245
|
|
|
84
|
|
Income tax provision (benefit) (Note 11)
|
|
12
|
|
|
(16
|
)
|
|
13
|
|
|
3
|
|
Net earnings
|
|
214
|
|
|
261
|
|
|
232
|
|
|
81
|
|
Less: Net earnings attributable to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net earnings attributable to United States Steel Corporation
|
|
$
|
214
|
|
|
$
|
261
|
|
|
$
|
232
|
|
|
$
|
81
|
|
Earnings per common share
(Note 12):
|
|
|
|
|
|
|
|
|
Earnings per share attributable to United States Steel Corporation stockholders:
|
|
|
|
|
|
|
|
|
-Basic
|
|
$
|
1.21
|
|
|
$
|
1.49
|
|
|
$
|
1.32
|
|
|
$
|
0.46
|
|
-Diluted
|
|
$
|
1.20
|
|
|
$
|
1.48
|
|
|
$
|
1.30
|
|
|
$
|
0.46
|
|
(a)
Represents postretirement benefit expense as a result of the adoption of Accounting Standards Update 2017-07,
Compensation - Retirement Benefits
on January 1, 2018.
The accompanying notes are an integral part of these consolidated financial statements.
UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(Dollars in millions)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net earnings
|
|
$
|
214
|
|
|
$
|
261
|
|
|
$
|
232
|
|
|
$
|
81
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
Changes in foreign currency translation adjustments
|
|
(87
|
)
|
|
82
|
|
|
(47
|
)
|
|
105
|
|
Changes in pension and other employee benefit accounts
|
|
47
|
|
|
46
|
|
|
93
|
|
|
92
|
|
Changes in derivative financial instruments
|
|
(3
|
)
|
|
(3
|
)
|
|
(19
|
)
|
|
(3
|
)
|
Total other comprehensive (loss) income, net of tax
|
|
(43
|
)
|
|
125
|
|
|
27
|
|
|
194
|
|
Comprehensive income including noncontrolling interest
|
|
171
|
|
|
386
|
|
|
259
|
|
|
275
|
|
Comprehensive income attributable to noncontrolling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Comprehensive income attributable to United States Steel
Corporation
|
|
$
|
171
|
|
|
$
|
386
|
|
|
$
|
259
|
|
|
$
|
275
|
|
The accompanying notes are an integral part of these consolidated financial statements.
UNITED STATES STEEL CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
June 30,
2018
|
|
December 31,
2017
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents (Note 6)
|
|
$
|
1,231
|
|
|
$
|
1,553
|
|
Receivables, less allowance of $28 and $28
|
|
1,430
|
|
|
1,173
|
|
Receivables from related parties (Note 20)
|
|
226
|
|
|
206
|
|
Inventories (Note 13)
|
|
1,848
|
|
|
1,738
|
|
Other current assets
|
|
77
|
|
|
85
|
|
Total current assets
|
|
4,812
|
|
|
4,755
|
|
Property, plant and equipment
|
|
15,378
|
|
|
15,086
|
|
Less accumulated depreciation and depletion
|
|
10,977
|
|
|
10,806
|
|
Total property, plant and equipment, net
|
|
4,401
|
|
|
4,280
|
|
Investments and long-term receivables, less allowance of $11 and $11
|
|
498
|
|
|
480
|
|
Intangibles – net (Note 7)
|
|
162
|
|
|
167
|
|
Deferred income tax benefits (Note 11)
|
|
56
|
|
|
56
|
|
Other noncurrent assets
|
|
129
|
|
|
124
|
|
Total assets
|
|
$
|
10,058
|
|
|
$
|
9,862
|
|
Liabilities
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable and other accrued liabilities
|
|
$
|
2,239
|
|
|
$
|
2,096
|
|
Accounts payable to related parties (Note 20)
|
|
92
|
|
|
74
|
|
Payroll and benefits payable
|
|
386
|
|
|
347
|
|
Accrued taxes
|
|
135
|
|
|
132
|
|
Accrued interest
|
|
46
|
|
|
69
|
|
Current portion of long-term debt (Note 15)
|
|
4
|
|
|
3
|
|
Total current liabilities
|
|
2,902
|
|
|
2,721
|
|
Long-term debt, less unamortized discount and debt issuance costs (Note 15)
|
|
2,541
|
|
|
2,700
|
|
Employee benefits
|
|
692
|
|
|
759
|
|
Deferred income tax liabilities (Note 11)
|
|
6
|
|
|
6
|
|
Deferred credits and other noncurrent liabilities
|
|
311
|
|
|
355
|
|
Total liabilities
|
|
6,452
|
|
|
6,541
|
|
Contingencies and commitments (Note 22)
|
|
|
|
|
Stockholders’ Equity (Note 18):
|
|
|
|
|
Common stock (177,179,937 and 176,424,554 shares issued) (Note 12)
|
|
177
|
|
|
176
|
|
Treasury stock, at cost (31,240 shares and 1,203,344 shares)
|
|
(1
|
)
|
|
(76
|
)
|
Additional paid-in capital
|
|
3,900
|
|
|
3,932
|
|
Retained earnings
|
|
347
|
|
|
133
|
|
Accumulated other comprehensive loss (Note 19)
|
|
(818
|
)
|
|
(845
|
)
|
Total United States Steel Corporation stockholders’ equity
|
|
3,605
|
|
|
3,320
|
|
Noncontrolling interests
|
|
1
|
|
|
1
|
|
Total liabilities and stockholders’ equity
|
|
$
|
10,058
|
|
|
$
|
9,862
|
|
The accompanying notes are an integral part of these consolidated financial statements.
UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
(Dollars in millions)
|
|
2018
|
|
2017
|
Increase (decrease) in cash, cash equivalents and restricted cash
|
|
|
|
|
Operating activities:
|
|
|
|
|
Net earnings
|
|
$
|
232
|
|
|
$
|
81
|
|
Adjustments to reconcile to net cash provided by operating activities:
|
|
|
|
|
Depreciation, depletion and amortization
|
|
258
|
|
|
258
|
|
Gain associated with retained interest in U. S. Steel Canada Inc. (Note 23)
|
|
—
|
|
|
(72
|
)
|
Restructuring and other charges (Note 21)
|
|
—
|
|
|
32
|
|
Loss on debt extinguishment (Note 9)
|
|
74
|
|
|
1
|
|
Provision for doubtful accounts
|
|
1
|
|
|
1
|
|
Pensions and other postretirement benefits
|
|
37
|
|
|
31
|
|
Deferred income taxes (Note 11)
|
|
(1
|
)
|
|
2
|
|
Net gain on disposal of assets
|
|
(16
|
)
|
|
(1
|
)
|
Equity investee earnings, net of distributions received
|
|
(19
|
)
|
|
(16
|
)
|
Changes in:
|
|
|
|
|
Current receivables
|
|
(294
|
)
|
|
(172
|
)
|
Inventories
|
|
(123
|
)
|
|
(125
|
)
|
Current accounts payable and accrued expenses
|
|
175
|
|
|
98
|
|
Income taxes receivable/payable
|
|
(3
|
)
|
|
20
|
|
Bank checks outstanding
|
|
8
|
|
|
7
|
|
All other, net
|
|
(36
|
)
|
|
98
|
|
Net cash provided by operating activities
|
|
293
|
|
|
243
|
|
Investing activities:
|
|
|
|
|
Capital expenditures
|
|
(381
|
)
|
|
(120
|
)
|
Disposal of assets
|
|
1
|
|
|
—
|
|
Investments, net
|
|
(1
|
)
|
|
—
|
|
Net cash used in investing activities
|
|
(381
|
)
|
|
(120
|
)
|
Financing activities:
|
|
|
|
|
Issuance of long-term debt, net of financing costs (Note 15)
|
|
640
|
|
|
—
|
|
Repayment of long-term debt (Note 15)
|
|
(874
|
)
|
|
(108
|
)
|
Dividends paid
|
|
(18
|
)
|
|
(18
|
)
|
Receipt from exercise of stock options
|
|
33
|
|
|
13
|
|
Taxes paid for equity compensation plans (Note 10)
|
|
(8
|
)
|
|
(10
|
)
|
Net cash used in financing activities
|
|
(227
|
)
|
|
(123
|
)
|
Effect of exchange rate changes on cash
|
|
(10
|
)
|
|
10
|
|
Net (decrease) increase in cash, cash equivalents and restricted cash
|
|
(325
|
)
|
|
10
|
|
Cash, cash equivalents and restricted cash at beginning of year (Note 6)
|
|
1,597
|
|
|
1,555
|
|
Cash, cash equivalents and restricted cash at end of period (Note 6)
|
|
$
|
1,272
|
|
|
$
|
1,565
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements (Unaudited)
1.
Basis of Presentation and Significant Accounting Policies
United States Steel Corporation (U. S. Steel or the Company) produces and sells steel products, including flat-rolled and tubular products, in North America and Europe. Operations in North America also include iron ore and coke production facilities, railroad services and real estate operations. Operations in Europe also include coke production facilities.
The year-end Consolidated Balance Sheet data was derived from audited statements but does not include all disclosures required for complete financial statements by accounting principles generally accepted in the United States of America (U.S. GAAP). The other information in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair statement of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. Additional information is contained in the United States Steel Corporation Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
, which should be read in conjunction with these financial statements.
2.
New Accounting Standards
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
(ASU 2018-02)
.
ASU 2018-02 allows a reclassification from Accumulated Other Comprehensive Income to Retained Earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and for interim periods therein. Early adoption of ASU 2018-02 is permitted. U. S. Steel is currently assessing the impact of the ASU, but does not believe this ASU will have a material impact on its overall Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(ASU 2016-13), which adds an impairment model that is based on expected losses rather than incurred losses. Under ASU 2016-13, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 is effective for public companies for fiscal years beginning after December 15, 2019 including interim reporting periods, with early adoption permitted. U. S. Steel is currently assessing the impact of the ASU, but does not believe this ASU will have a material impact on its overall Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
(ASU 2016-02). ASU 2016-02 supersedes prior lease accounting guidance. Under ASU 2016-02, for operating leases, a lessee should recognize in its statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term; recognize a single lease cost, which is allocated over the lease term, generally on a straight line basis, and classify all cash payments within operating activities in the statement of cash flows. For financing leases, a lessee is required to recognize a right-of-use asset and a lease liability; recognize interest on the lease liability separately from amortization of the right-of-use asset, and classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. In addition, at the inception of a contract, an entity should determine whether the contract is or contains a lease. ASU 2016-02 is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, using a modified retrospective approach. U. S. Steel is completing its inventory of leases and developing an estimated impact of the financial statement implications of adopting ASU 2016-02, which will include recognizing the lease liability and related right-of-use asset on our balance sheet.
3.
Recently Adopted Accounting Standards
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
(ASU 2017-12), which amends and simplifies hedge accounting guidance so that companies could more accurately present the economic effects of risk management activities in the
financial statements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. U. S. Steel adopted the provisions of ASU 2017-12 on January 1, 2018. The adoption did not result in a material impact to our financial results; however, we expanded our use of hedge accounting effective January 1, 2018 as well as our disclosures of derivative activity. See Note 14 for further details.
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation: Scope of Modification Accounting
(ASU 2017-09). The amendments included in ASU 2017-09 provide guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. On January 1, 2018, U. S. Steel adopted the provisions of ASU 2017-09 and the adoption did not have an impact on its Consolidated Financial Statements.
In March 2017, the FASB issued ASU 2017-07,
Compensation - Retirement Benefits
(ASU 2017-07). ASU 2017-07 requires an employer who offers defined benefit and postretirement benefit plans to report the service cost component of the net periodic benefit cost in the same line item or items as other compensation cost arising from services rendered by employees during the period. The other components of net periodic benefit costs are required to be presented on a retrospective basis in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The ASU also allows for the service cost component of net periodic benefit cost to be eligible for capitalization into inventory when applicable. ASU 2017-07 was effective for periods beginning after December 15, 2017, including interim periods within those annual periods; early adoption was permitted. U. S. Steel adopted ASU 2017-07 on January 1, 2018. U. S. Steel has historically capitalized the service cost component of net periodic benefit cost into inventory, when applicable, and will continue to do so prospectively.
The effect of the retrospective presentation change related to the net periodic benefit cost of our defined benefit pension and other post-employment benefits (OPEB) plans on our consolidated statement of operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
Statement of Operations
(In millions)
|
|
As Revised
|
|
Previously Reported
|
|
Effect of Change Higher/(Lower)
|
Cost of Sales
|
|
$
|
2,723
|
|
|
$
|
2,725
|
|
|
$
|
(2
|
)
|
Selling, general and administrative expenses
|
|
67
|
|
|
79
|
|
|
(12
|
)
|
Net periodic benefit cost (other than service cost)
|
|
14
|
|
|
—
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
Statement of Operations
(In millions)
|
|
As Revised
|
|
Previously Reported
|
|
Effect of Change Higher/(Lower)
|
Cost of Sales
|
|
$
|
5,282
|
|
|
$
|
5,286
|
|
|
$
|
(4
|
)
|
Selling, general and administrative expenses
|
|
148
|
|
|
176
|
|
|
(28
|
)
|
Net periodic benefit cost (other than service cost)
|
|
32
|
|
|
—
|
|
|
32
|
|
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(ASU 2016-18). The ASU reduced diversity in practice in the classification and presentation of changes in restricted cash on the statement of cash flows by including restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. On January 1, 2018, U. S. Steel adopted the provisions of ASU 2016-18 using a retrospective transition method. As a result, the Change in Restricted Cash, Net line that was included in the Investing Activities section of the Consolidated Statement of Cash Flows has been eliminated as changes in restricted cash are now included in the beginning-of-period and end-of-period total cash, cash equivalents and restricted cash amounts. Expanded disclosures have been included, which describe the components of cash shown on the Company's Consolidated Statements of Cash Flows. See Note 6 for further details.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
(ASU 2016-15). ASU 2016-15 reduced diversity in practice in how certain transactions are classified in the statement of cash flows by addressing eight specific cash receipt and cash payment issues. On January 1, 2018, U. S. Steel adopted the provisions of ASU 2016-15 using a retrospective transition method. As a result, all payments to extinguish debt will now be presented as cash outflows from financing activities on our Consolidated Statement of Cash Flows in accordance with ASU 2016-15. U. S. Steel has historically presented make-whole premiums as cash outflows from operating activities. The other cash receipt and cash payment items addressed in ASU 2016-15 did not have an impact on the Company’s Consolidated Statement of Cash Flows. Since payments to extinguish debt during the six months ended June 30, 2017 were immaterial, there was no retrospective adjustment to our Consolidated Statement of Cash Flows. Additionally, the Company has elected to use the cumulative earnings approach as defined in ASU 2016-15 to classify distributions received from equity method investees.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09). ASU 2014-09 and its related amendments (Revenue Recognition Standard) outline a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded most previous revenue recognition guidance.
On January 1, 2018, U. S. Steel adopted the Revenue Recognition Standard using the full retrospective method. Generally, U. S. Steel’s performance obligations are satisfied, control of our products is transferred, and revenue is recognized at a single point in time.
The adoption did not have a financial statement impact to U. S. Steel but did result in expanded disclosures. See Note 5 for further details.
4.
Segment Information
U. S. Steel has
three
reportable segments: (1) Flat-Rolled Products (Flat-Rolled), which consists of the following
three
commercial entities that directly interact with our customers and service their needs: (i) automotive solutions, (ii) consumer solutions, and (iii) industrial, service center and mining solutions; (2) U. S. Steel Europe (USSE); and (3) Tubular Products (Tubular). The results of our railroad and real estate businesses that do not constitute reportable segments are combined and disclosed in the Other Businesses category.
The chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being earnings (loss) before interest and income taxes. Earnings (loss) before interest and income taxes for reportable segments and Other Businesses does not include net interest and other financial costs (income), income taxes, and certain other items that management believes are not indicative of future results.
The accounting principles applied at the operating segment level in determining earnings (loss) before interest and income taxes are generally the same as those applied at the consolidated financial statement level. Intersegment sales and transfers are accounted for at market-based prices and are eliminated at the corporate consolidation level. Corporate-level selling, general and administrative expenses and costs related to certain former businesses are allocated to the reportable segments and Other Businesses based on measures of activity that management believes are reasonable.
The results of segment operations for the
three months ended June 30, 2018
and
2017
are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
Three Months Ended June 30, 2018
|
|
Customer
Sales
|
|
Intersegment
Sales
|
|
Net
Sales
|
|
Earnings
from
investees
|
|
Earnings (loss) before interest and income taxes
|
Flat-Rolled
|
|
$
|
2,435
|
|
|
$
|
59
|
|
|
$
|
2,494
|
|
|
$
|
17
|
|
|
$
|
224
|
|
USSE
|
|
848
|
|
|
15
|
|
|
863
|
|
|
—
|
|
|
115
|
|
Tubular
|
|
309
|
|
|
2
|
|
|
311
|
|
|
2
|
|
|
(35
|
)
|
Total reportable segments
|
|
3,592
|
|
|
76
|
|
|
3,668
|
|
|
19
|
|
|
304
|
|
Other Businesses
|
|
17
|
|
|
32
|
|
|
49
|
|
|
—
|
|
|
17
|
|
Reconciling Items and Eliminations
|
|
—
|
|
|
(108
|
)
|
|
(108
|
)
|
|
—
|
|
|
(20
|
)
|
Total
|
|
$
|
3,609
|
|
|
$
|
—
|
|
|
$
|
3,609
|
|
|
$
|
19
|
|
|
$
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Flat-Rolled
|
|
$
|
2,151
|
|
|
$
|
92
|
|
|
$
|
2,243
|
|
|
$
|
14
|
|
|
$
|
220
|
|
USSE
|
|
740
|
|
|
12
|
|
|
752
|
|
|
—
|
|
|
55
|
|
Tubular
|
|
234
|
|
|
—
|
|
|
234
|
|
|
2
|
|
|
(29
|
)
|
Total reportable segments
|
|
3,125
|
|
|
104
|
|
|
3,229
|
|
|
16
|
|
|
246
|
|
Other Businesses
|
|
19
|
|
|
29
|
|
|
48
|
|
|
—
|
|
|
9
|
|
Reconciling Items and Eliminations
|
|
—
|
|
|
(133
|
)
|
|
(133
|
)
|
|
—
|
|
|
72
|
|
Total
|
|
$
|
3,144
|
|
|
$
|
—
|
|
|
$
|
3,144
|
|
|
$
|
16
|
|
|
$
|
327
|
|
The results of segment operations for the
six months ended June 30, 2018
and
2017
are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
Six Months Ended June 30, 2018
|
|
Customer
Sales
|
|
Intersegment
Sales
|
|
Net
Sales
|
|
Earnings
from
investees
|
|
Earnings (loss) before interest and income taxes
|
Flat-Rolled
|
|
$
|
4,482
|
|
|
$
|
116
|
|
|
$
|
4,598
|
|
|
$
|
19
|
|
|
$
|
257
|
|
USSE
|
|
1,671
|
|
|
16
|
|
|
1,687
|
|
|
—
|
|
|
225
|
|
Tubular
|
|
575
|
|
|
2
|
|
|
577
|
|
|
3
|
|
|
(62
|
)
|
Total reportable segments
|
|
6,728
|
|
|
134
|
|
|
6,862
|
|
|
22
|
|
|
420
|
|
Other Businesses
|
|
30
|
|
|
63
|
|
|
93
|
|
|
—
|
|
|
28
|
|
Reconciling Items and Eliminations
|
|
—
|
|
|
(197
|
)
|
|
(197
|
)
|
|
—
|
|
|
(10
|
)
|
Total
|
|
$
|
6,758
|
|
|
$
|
—
|
|
|
$
|
6,758
|
|
|
$
|
22
|
|
|
$
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Flat-Rolled
|
|
$
|
4,016
|
|
|
$
|
113
|
|
|
$
|
4,129
|
|
|
$
|
17
|
|
|
$
|
132
|
|
USSE
|
|
1,413
|
|
|
24
|
|
|
1,437
|
|
|
—
|
|
|
142
|
|
Tubular
|
|
405
|
|
|
1
|
|
|
406
|
|
|
3
|
|
|
(86
|
)
|
Total reportable segments
|
|
5,834
|
|
|
138
|
|
|
5,972
|
|
|
20
|
|
|
188
|
|
Other Businesses
|
|
35
|
|
|
60
|
|
|
95
|
|
|
—
|
|
|
22
|
|
Reconciling Items and Eliminations
|
|
—
|
|
|
(198
|
)
|
|
(198
|
)
|
|
—
|
|
|
37
|
|
Total
|
|
$
|
5,869
|
|
|
$
|
—
|
|
|
$
|
5,869
|
|
|
$
|
20
|
|
|
$
|
247
|
|
The following is a schedule of reconciling items to consolidated earnings (loss) before interest and income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In millions)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Items not allocated to segments:
|
|
|
|
|
|
|
|
|
Gain on equity investee transactions
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
—
|
|
Granite City Works restart costs
|
|
(36
|
)
|
|
—
|
|
|
(36
|
)
|
|
—
|
|
Granite City Works adjustment to temporary idling charges
|
|
(2
|
)
|
|
—
|
|
|
8
|
|
|
—
|
|
Loss on shutdown of certain tubular assets
(a)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(35
|
)
|
Gain associated with retained interest in U. S. Steel Canada Inc. (Note 23)
|
|
—
|
|
|
72
|
|
|
—
|
|
|
72
|
|
Total reconciling items
|
|
$
|
(20
|
)
|
|
$
|
72
|
|
|
$
|
(10
|
)
|
|
$
|
37
|
|
(a)
Included in Restructuring and other charges in the Consolidated Statement of Operations. See Note 21 to the Consolidated Financial Statements.
5.
Revenue
Revenue is generated primarily from contracts to produce, ship and deliver steel products, and to a lesser extent, to deliver raw materials such as iron ore pellets, to deliver coke by-products
and for railroad services and real estate sales. Generally, U. S. Steel’s performance obligations are satisfied, control of our products is transferred, and revenue is recognized at a single point in time, when title transfers to our customer for product shipped or when services are provided. Revenues are recorded net of any sales incentives. Shipping and other transportation costs charged to customers are treated as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. Costs related to obtaining sales contracts are incidental and are expensed when incurred. Because customers are invoiced at the time title transfers and U. S. Steel’s right to consideration is unconditional at that time, U. S. Steel does not maintain contract asset balances. Additionally, U. S. Steel does not maintain contract liability balances, as performance obligations are satisfied prior to customer payment for product. U. S. Steel offers industry standard payment terms.
U. S. Steel has
three
reportable segments: Flat-Rolled, USSE and Tubular. Flat-Rolled primarily generates revenue from sheet and coated product sales to North American customers. Flat-Rolled also sells iron ore pellets and coke making by-products. USSE sells slabs, sheet, strip mill plate, coated products and spiral welded pipe to customers primarily in the Eastern European market. Tubular sells seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as oil country tubular goods or OCTG), standard and line pipe and mechanical tubing and primarily serves customers in the oil, gas and petrochemical markets. Revenue from our railroad and real estate businesses is reported in the Other Businesses category in our segment reporting structure. The following tables disaggregate our revenue by product for each of our reportable business segments for the three and six months ended June 30, 2018 and
2017
, respectively:
Net Sales by Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
Three Months Ended June 30, 2018
|
|
Flat-Rolled
|
USSE
|
Tubular
|
Other Businesses
|
Total
|
Semi-finished
|
|
$
|
1
|
|
$
|
52
|
|
$
|
—
|
|
$
|
—
|
|
$
|
53
|
|
Hot-rolled sheets
|
|
640
|
|
339
|
|
—
|
|
—
|
|
979
|
|
Cold-rolled sheets
|
|
735
|
|
104
|
|
—
|
|
—
|
|
839
|
|
Coated sheets
|
|
797
|
|
310
|
|
—
|
|
—
|
|
1,107
|
|
Tubular products
|
|
—
|
|
13
|
|
299
|
|
—
|
|
312
|
|
All Other
(a)
|
|
262
|
|
30
|
|
10
|
|
17
|
|
319
|
|
Total
|
|
$
|
2,435
|
|
$
|
848
|
|
$
|
309
|
|
$
|
17
|
|
$
|
3,609
|
|
(a)
Consists primarily of sales of raw materials and coke making by-products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
Three Months Ended June 30, 2017
|
|
Flat-Rolled
|
USSE
|
Tubular
|
Other Businesses
|
Total
|
Semi-finished
|
|
$
|
—
|
|
$
|
77
|
|
$
|
—
|
|
$
|
—
|
|
$
|
77
|
|
Hot-rolled sheets
|
|
562
|
|
280
|
|
—
|
|
—
|
|
842
|
|
Cold-rolled sheets
|
|
579
|
|
77
|
|
—
|
|
—
|
|
656
|
|
Coated sheets
|
|
756
|
|
272
|
|
—
|
|
—
|
|
1,028
|
|
Tubular products
|
|
—
|
|
10
|
|
226
|
|
—
|
|
236
|
|
All Other
(a)
|
|
254
|
|
24
|
|
8
|
|
19
|
|
305
|
|
Total
|
|
$
|
2,151
|
|
$
|
740
|
|
$
|
234
|
|
$
|
19
|
|
$
|
3,144
|
|
(a)
Consists primarily of sales of raw materials and coke making by-products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
Six Months Ended June 30, 2018
|
|
Flat-Rolled
|
USSE
|
Tubular
|
Other Businesses
|
Total
|
Semi-finished
|
|
$
|
10
|
|
$
|
89
|
|
$
|
—
|
|
$
|
—
|
|
$
|
99
|
|
Hot-rolled sheets
|
|
1,212
|
|
692
|
|
—
|
|
—
|
|
1,904
|
|
Cold-rolled sheets
|
|
1,374
|
|
202
|
|
—
|
|
—
|
|
1,576
|
|
Coated sheets
|
|
1,503
|
|
607
|
|
—
|
|
—
|
|
2,110
|
|
Tubular products
|
|
—
|
|
25
|
|
558
|
|
—
|
|
583
|
|
All Other
(a)
|
|
383
|
|
56
|
|
17
|
|
30
|
|
486
|
|
Total
|
|
$
|
4,482
|
|
$
|
1,671
|
|
$
|
575
|
|
$
|
30
|
|
$
|
6,758
|
|
(a)
Consists primarily of sales of raw materials and coke making by-products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
Six Months Ended June 30, 2017
|
|
Flat-Rolled
|
USSE
|
Tubular
|
Other Businesses
|
Total
|
Semi-finished
|
|
$
|
1
|
|
$
|
104
|
|
$
|
—
|
|
$
|
—
|
|
$
|
105
|
|
Hot-rolled sheets
|
|
982
|
|
589
|
|
—
|
|
—
|
|
1,571
|
|
Cold-rolled sheets
|
|
1,185
|
|
156
|
|
—
|
|
—
|
|
1,341
|
|
Coated sheets
|
|
1,504
|
|
507
|
|
—
|
|
—
|
|
2,011
|
|
Tubular products
|
|
—
|
|
19
|
|
388
|
|
—
|
|
407
|
|
All Other
(a)
|
|
344
|
|
38
|
|
17
|
|
35
|
|
434
|
|
Total
|
|
$
|
4,016
|
|
$
|
1,413
|
|
$
|
405
|
|
$
|
35
|
|
$
|
5,869
|
|
(a)
Consists primarily of sales of raw materials and coke making by-products.
6.
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within U. S. Steel's Consolidated Balance Sheets that sum to the total of the same amounts shown in the Consolidated Statement of Cash Flows:
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
June 30, 2018
|
|
June 30, 2017
|
Cash and cash equivalents
|
|
$
|
1,231
|
|
|
$
|
1,522
|
|
Restricted cash in other current assets
|
|
5
|
|
|
1
|
|
Restricted cash in other noncurrent assets
|
|
36
|
|
|
42
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
1,272
|
|
|
$
|
1,565
|
|
Amounts included in restricted cash represent cash balances which are legally or contractually restricted, primarily for environmental capital expenditure projects and insurance purposes.
7.
Intangible Assets
Intangible assets that are being amortized on a straight-line basis over their estimated useful lives are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018
|
|
As of December 31, 2017
|
(In millions)
|
|
Useful
Lives
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Amount
|
Customer relationships
|
|
22 Years
|
|
$
|
132
|
|
|
$
|
67
|
|
|
$
|
65
|
|
|
$
|
132
|
|
|
$
|
64
|
|
|
$
|
68
|
|
Patents
|
|
10-15 Years
|
|
22
|
|
|
6
|
|
|
16
|
|
|
22
|
|
|
5
|
|
|
17
|
|
Other
|
|
4-20 Years
|
|
14
|
|
|
8
|
|
|
6
|
|
|
15
|
|
|
8
|
|
|
7
|
|
Total amortizable intangible assets
|
|
|
|
$
|
168
|
|
|
$
|
81
|
|
|
$
|
87
|
|
|
$
|
169
|
|
|
$
|
77
|
|
|
$
|
92
|
|
Identifiable intangible assets with finite lives are reviewed for impairment whenever events or circumstances indicate that the carrying values may not be recoverable.
Amortization expense was
$2 million
in both the
three months ended June 30, 2018
and
2017
. Amortization expense was
$4 million
in both the
six months ended June 30, 2018
and
2017
. The estimated future amortization expense of identifiable intangible assets during the next five years is
$4 million
for the remaining portion of
2018
,
$9 million
in each year from
2019
to
2021
, and
$8 million
in
2022
.
In addition, the carrying amount of acquired water rights with indefinite lives as of
June 30, 2018
and
December 31, 2017
totaled
$75 million
. The acquired water rights are tested for impairment annually in the third quarter, or whenever events or circumstances indicate the carrying value may not be recoverable. U. S. Steel performed a quantitative impairment evaluation of its acquired water rights during the third quarter of 2017. Based on the results of the evaluation, the water rights were not impaired.
8.
Pensions and Other Benefits
The following table reflects the components of net periodic benefit cost for the
three months ended June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Other
Benefits
|
(In millions)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
12
|
|
|
$
|
12
|
|
|
$
|
4
|
|
|
$
|
5
|
|
Interest cost
|
|
58
|
|
|
59
|
|
|
23
|
|
|
24
|
|
Expected return on plan assets
|
|
(90
|
)
|
|
(97
|
)
|
|
(21
|
)
|
|
(17
|
)
|
Amortization of prior service cost
|
|
—
|
|
|
—
|
|
|
8
|
|
|
7
|
|
Amortization of actuarial net loss
|
|
38
|
|
|
37
|
|
|
1
|
|
|
1
|
|
Net periodic benefit cost, excluding below
|
|
18
|
|
|
11
|
|
|
15
|
|
|
20
|
|
Multiemployer plans
|
|
15
|
|
|
14
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
33
|
|
|
$
|
25
|
|
|
$
|
15
|
|
|
$
|
20
|
|
The following table reflects the components of net periodic benefit cost for the
six months ended June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Other
Benefits
|
(In millions)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
25
|
|
|
$
|
24
|
|
|
$
|
8
|
|
|
$
|
9
|
|
Interest cost
|
|
116
|
|
|
118
|
|
|
46
|
|
|
47
|
|
Expected return on plan assets
|
|
(180
|
)
|
|
(194
|
)
|
|
(41
|
)
|
|
(33
|
)
|
Amortization of prior service cost
|
|
—
|
|
|
—
|
|
|
15
|
|
|
14
|
|
Amortization of actuarial net loss
|
|
76
|
|
|
74
|
|
|
2
|
|
|
2
|
|
Net periodic benefit cost, excluding below
|
|
37
|
|
|
22
|
|
|
30
|
|
|
39
|
|
Multiemployer plans
|
|
29
|
|
|
29
|
|
|
—
|
|
|
—
|
|
Settlement, termination and curtailment losses
(a)
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
66
|
|
|
$
|
55
|
|
|
$
|
30
|
|
|
$
|
39
|
|
(a)
During the first
six
months of
2017
, the non-qualified pension plan incurred settlement charges of approximately
$4 million
due to lump sum payments for certain individuals.
Employer Contributions
During the first
six
months of
2018
, U. S. Steel made cash payments of $
29 million
to the Steelworkers’ Pension Trust and $
3 million
of pension payments not funded by trusts.
During the first
six
months of
2018
, cash payments of $
26 million
were made for other postretirement benefit payments not funded by trusts.
Company contributions to defined contribution plans totaled
$11 million
and
$10 million
for the
three months ended June 30, 2018
and
2017
, respectively. Company contributions to defined contribution plans totaled
$22 million
and
$19 million
for the
six months ended June 30, 2018
and
2017
, respectively.
9.
Net Interest and Other Financial Costs
Net interest and other financial costs includes interest expense (net of capitalized interest), interest income, financing costs, net periodic benefit costs (other than service costs) related to pension and other post-employment benefits (OPEB) plans, and foreign currency derivative and remeasurement gains and losses. During the
three months ended June 30, 2018
and
2017
, net foreign currency gains of
$12 million
and losses of
$11 million
, respectively were recorded in other financial costs. During the
six months ended June 30, 2018
and
2017
, net foreign currency gains of
$8 million
and losses of
$16 million
, respectively were recorded in other
financial costs. Additionally, during the
six months ended June 30, 2018
, there was a loss on debt extinguishment recognized of
$74 million
.
See Note 14 for additional information on U. S. Steel’s use of derivatives to mitigate its foreign currency exchange rate exposure.
10.
Stock-Based Compensation Plans
U. S. Steel has outstanding stock-based compensation awards that were granted by the Compensation & Organization Committee of the Board of Directors (the Committee) under the 2005 Stock Incentive Plan (the 2005 Plan) and the 2016 Omnibus Incentive Compensation Plan (the Omnibus Plan), which are more fully described in Note 14 of the United States Steel Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2017. On April 26, 2016, the Company's stockholders approved the Omnibus Plan and authorized the Company to issue up to
7,200,000
shares of U. S. Steel common stock under the Omnibus Plan. The Company's stockholders authorized the issuance of an additional
6,300,000
shares under the Omnibus Plan on April 25, 2017. While awards that were previously granted under the 2005 Plan remain outstanding, all future awards will be granted under the Omnibus Plan. As of
June 30, 2018
, there were
10,938,212
shares available for future grants under the Omnibus Plan.
Recent grants of stock-based compensation consist of stock options, restricted stock units, total shareholder return (TSR) performance awards and return on capital employed (ROCE) performance awards. Stock options are generally issued at the market price of the underlying stock on the date of the grant. Upon exercise of stock options, shares of U. S. Steel common stock were issued from treasury stock. Beginning in 2018, shares of common stock are issued from authorized, but unissued stock. The following table is a general summary of the awards made under the Omnibus Plan during the first six months of
2018
and
2017
. There were no stock options granted during the first six months of 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Grant Details
|
|
Shares
(a)
|
Fair Value
(b)
|
|
Shares
(a)
|
Fair Value
(b)
|
Stock Options
|
|
—
|
|
$
|
—
|
|
|
632,050
|
|
$
|
17.43
|
|
Restricted Stock Units
|
|
728,945
|
|
$
|
41.52
|
|
|
336,120
|
|
$
|
36.59
|
|
Performance Awards
(c)
|
|
|
|
|
|
|
TSR
|
|
79,190
|
|
$
|
61.57
|
|
|
156,770
|
|
$
|
42.45
|
|
ROCE
(d)
|
|
247,510
|
|
$
|
43.50
|
|
|
—
|
|
$
|
—
|
|
(a)
The share amounts shown in this table do not reflect an adjustment for estimated forfeitures.
(b)
Represents the per share weighted-average for all grants during the period.
(c)
The number of performance awards shown represents the target value of the award.
(d)
The ROCE awards granted in 2017 are not shown in the table above because they were granted in cash.
U. S. Steel recognized pretax stock-based compensation expense in the amount of
$10 million
and
$5 million
in the three-month periods ended
June 30, 2018
and
2017
, respectively, and
$17 million
and
$15 million
in the first six months of
2018
and
2017
, respectively.
As of
June 30, 2018
, total future compensation expense related to nonvested stock-based compensation arrangements was
$38 million
, and the weighted average period over which this expense is expected to be recognized is approximately
1 year
.
Compensation expense for stock options is recorded over the vesting period based on the fair value on the date of grant, as calculated by U. S. Steel using the Black-Scholes model. The stock options generally vest ratably over a
three
-year service period and have a term of
ten
years.
The expected annual dividends per share are based on the latest annualized dividend rate at the date of grant; the expected life in years is determined primarily from historical stock option exercise data; the expected volatility is based on the historical volatility of U. S. Steel stock; and the risk-free interest rate is based on the U.S. Treasury strip rate for the expected life of the option.
Restricted stock units awarded as part of annual grants generally vest ratably over
three
years. Their fair value is the market price of the underlying common stock on the date of grant. Restricted stock units granted in connection with new-hire or retention grants generally cliff vest
three
years from the date of the grant.
TSR performance awards may vest at the end of a
three
-year performance period if U. S. Steel's total shareholder return compared to the total shareholder return of a peer group of companies over the
three
-year performance period meets performance criteria established by the Committee at the beginning of the performance period. Performance awards can vest at between
zero
and
200 percent
of the target award. The fair value of the TSR performance awards is calculated using a Monte-Carlo simulation.
ROCE performance awards vest at the end of a
three
-year performance period contingent upon meeting the specified ROCE metric established by the Committee at the beginning of the performance period. ROCE performance awards can vest at between
zero
and
200 percent
of the target award. The fair value of the ROCE performance awards is the average market price of the underlying common stock on the date of grant.
11.
Income Taxes
Tax provision
For the
six months ended
June 30, 2018
and
2017
, we recorded a tax provision of
$13 million
on our pretax earnings of
$245 million
and a tax provision of
$3 million
on our pretax earnings of
$84 million
, respectively. Included in the tax provision in the first six months of 2018 is a benefit for the release of a portion of the domestic valuation allowance due to pretax income. Included in the tax provision in the first six months of 2017 is a benefit of
$13 million
related to the carryback of certain losses to prior years.
The tax provision for the
first six months of 2018
is based on an estimated annual effective rate, which requires management to make its best estimate of annual pretax income or loss.
During the year, management regularly updates forecasted annual pretax results for the various countries in which we operate based on changes in factors such as prices, shipments, product mix, plant operating performance and cost estimates. To the extent that actual
2018
pretax results for U.S. and foreign income or loss vary from estimates applied herein, the actual tax provision or benefit recognized in
2018
could be materially different from the forecasted amount used to estimate the tax provision for the
six months ended
June 30, 2018
.
Deferred taxes
Each quarter U. S. Steel analyzes the likelihood that our deferred tax assets will be realized. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not that some portion, or all, of the deferred tax asset may not be realized.
At
June 30, 2018
, U. S. Steel reviewed all available positive and negative evidence and determined that it is more likely than not that all of its net domestic deferred tax assets may not be realized.
U. S. Steel will continue to monitor the realizability of its deferred tax assets on a quarterly basis taking into consideration, among other items, the uncertainty regarding the Company's continued ability to generate domestic income in the near term. In the future, if we determine that realization is more likely than not for deferred tax assets with a valuation allowance, the related valuation allowance will be reduced, and we will record a non-cash benefit to earnings.
Unrecognized tax benefits
Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken, in a tax return and the benefit recognized for accounting purposes pursuant to the guidance in ASC Topic 740 on income taxes. As of
June 30, 2018
, and
December 31, 2017
, the total amount of gross unrecognized tax benefits was
$41 million
and
$42 million
, respectively. The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was
$7 million
as of
June 30, 2018
and
$6 million
as of
December 31, 2017
.
U. S. Steel records interest related to uncertain tax positions as a part of net interest and other financial costs in the Consolidated Statement of Operations. Any penalties are recognized as part of selling, general and administrative expenses. As of both
June 30, 2018
and
December 31, 2017
, U. S. Steel had accrued liabilities of
$6 million
for interest and penalties related to uncertain tax positions.
12.
Earnings and Dividends Per Common Share
Earnings Per Share Attributable to United States Steel Corporation Stockholders
Basic earnings per common share is based on the weighted average number of common shares outstanding during the period.
Diluted earnings per common share assumes the exercise of stock options, the vesting of restricted stock units and performance awards, provided in each case the effect is dilutive.
The computations for basic and diluted earnings per common share from continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(Dollars in millions, except per share amounts)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Earnings attributable to United States Steel Corporation stockholders
|
|
$
|
214
|
|
|
$
|
261
|
|
|
$
|
232
|
|
|
$
|
81
|
|
Weighted-average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
Basic
|
|
177,027
|
|
|
174,797
|
|
|
176,594
|
|
|
174,521
|
|
Effect of stock options, restricted stock units and performance awards
|
|
1,876
|
|
|
1,231
|
|
|
1,891
|
|
|
1,798
|
|
Adjusted weighted-average shares outstanding, diluted
|
|
178,903
|
|
|
176,028
|
|
|
178,485
|
|
|
176,319
|
|
Basic earnings per common share
|
|
$
|
1.21
|
|
|
$
|
1.49
|
|
|
$
|
1.32
|
|
|
$
|
0.46
|
|
Diluted earnings per common share
|
|
$
|
1.20
|
|
|
$
|
1.48
|
|
|
$
|
1.30
|
|
|
$
|
0.46
|
|
The following table summarizes the securities that were antidilutive, and therefore, were not included in the computations of diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Securities granted under the 2016 Omnibus Incentive Compensation Plan, as amended
|
|
1,832
|
|
|
3,538
|
|
|
1,572
|
|
|
1,669
|
|
Dividends Paid Per Share
The dividend for each of the first and second quarters of
2018
and
2017
was
five cents
per common share.
13.
Inventories
Inventories are carried at the lower of cost or market for last-in, first-out (LIFO) inventories and lower of cost and net realizable value for first-in, first-out (FIFO) method inventories. The LIFO method is the predominant method of inventory costing in the United States. The FIFO method is the predominant inventory costing method in Europe. At
June 30, 2018
and
December 31, 2017
, the LIFO method accounted for
73 percent
and
75 percent
of total inventory values, respectively.
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
June 30, 2018
|
|
December 31, 2017
|
Raw materials
|
|
$
|
556
|
|
|
$
|
527
|
|
Semi-finished products
|
|
832
|
|
|
796
|
|
Finished products
|
|
404
|
|
|
356
|
|
Supplies and sundry items
|
|
56
|
|
|
59
|
|
Total
|
|
$
|
1,848
|
|
|
$
|
1,738
|
|
Current acquisition costs were estimated to exceed the above inventory values by
$846 million
and
$802 million
at
June 30, 2018
and
December 31, 2017
, respectively. As a result of the liquidation of LIFO inventories, cost
of sales decreased and earnings (loss) before interest and income taxes increased by
$2 million
and less than
$1 million
for the three and six months ended
June 30, 2018
, respectively. Cost of sales decreased and earnings (loss) before interest and income taxes increased by
$7 million
and
$1 million
for the three months and six months ended
June 30, 2017
, respectively, as a result of liquidation of LIFO inventories.
Inventory includes
$40 million
and
$42 million
of land held for residential/commercial development as of
June 30, 2018
and
December 31, 2017
, respectively.
14.
Derivative Instruments
U. S. Steel is exposed to foreign currency exchange rate risks in our European operations. USSE’s revenues are primarily in euros and costs are primarily in euros and U.S. dollars. U. S. Steel uses foreign exchange forward sales contracts (foreign exchange forwards) with maturities no longer than
12 months
to exchange euros for U.S. dollars to manage our currency requirements and exposure to foreign currency exchange rate fluctuations. Derivative instruments are required to be recognized at fair value in the Consolidated Balance Sheet. U. S. Steel has not elected to designate these contracts as hedges. Therefore, changes in their fair value are recognized immediately in the Consolidated Statements of Operations. We mitigate the risk of concentration of counterparty credit risk by purchasing our forwards from several counterparties.
From time to time U. S. Steel may use fixed-price forward physical purchase contracts to partially manage our exposure to price risk related to the purchases of natural gas, zinc and tin used in the production process. Generally, forward physical purchase contracts qualify for the normal purchase and normal sales exceptions described in ASC Topic 815 and are not subject to mark-to-market accounting. U. S. Steel also uses financial swaps to protect from the commodity price risk associated with purchases of natural gas, zinc and tin (commodity purchase swaps). Commodity purchase swaps did not have a significant impact on the Company's financial results and were classified as cash flow hedges in prior periods (their impacts are included in our expanded tabular disclosure below). Effective January 1, 2018, U. S. Steel adopted the provisions of ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
. The cumulative effect of the adoption of ASU 2017-12 was not material to U. S. Steel's financial results. See Note 3 for additional information on the recently adopted accounting standard.
Financial swaps are also used to partially manage the sales price of certain hot-rolled coil sales (sales swaps). In prior periods, we did not elect hedge accounting for these financial swaps and changes in their fair value were immediately recognized in earnings. Effective January 1, 2018, U. S. Steel elected to designate its hot-rolled coil sales swaps as cash flow hedges. See the tabular disclosure below for further details.
In accordance with the guidance in ASC Topic 820 on fair value measurements and disclosures, the fair value of our foreign exchange forwards, commodity purchase swaps and sales swaps was determined using Level 2 inputs, which are defined as "significant other observable" inputs. The inputs used are from market sources that aggregate data based upon market transactions.
The table below shows the outstanding swap quantities used to hedge forecasted purchases and sales as of
June 30, 2018
and
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
Hedge Contracts
|
Classification
|
|
June 30, 2018
|
|
June 30, 2017
|
Natural gas (in mmbtus)
|
Commodity purchase swaps
|
|
13,845,000
|
|
|
7,756,000
|
|
Tin (in metric tons)
|
Commodity purchase swaps
|
|
705
|
|
|
480
|
|
Zinc (in metric tons)
|
Commodity purchase swaps
|
|
13,468
|
|
|
41,790
|
|
Hot-rolled coils (in tons)
|
Sales swaps
|
|
60,000
|
|
|
138,000
|
|
Foreign currency (in thousands of dollars)
|
Foreign exchange forwards
|
|
$
|
324,000
|
|
|
$
|
216,000
|
|
The following summarizes the fair value amounts included in our Consolidated Balance Sheets as of
June 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
(In millions) Designated as Hedging Instruments
|
Balance Sheet Location
|
|
June 30, 2018
|
|
December 31, 2017
|
Sales swaps
|
Accounts payable
|
|
$
|
12
|
|
|
$
|
—
|
|
Commodity purchase swaps
|
Accounts receivable
|
|
1
|
|
|
4
|
|
Commodity purchase swaps
|
Accounts payable
|
|
8
|
|
|
2
|
|
Commodity purchase swaps
|
Investments and long-term receivables
|
|
—
|
|
|
1
|
|
Commodity purchase swaps
|
Other long-term liabilities
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
Not Designated as Hedging Instruments
|
|
|
|
|
|
Sales swaps
|
Accounts payable
|
|
—
|
|
|
2
|
|
Commodity purchase swaps
|
Accounts payable
|
|
—
|
|
|
1
|
|
Foreign exchange forwards
|
Accounts receivable
|
|
11
|
|
|
—
|
|
Foreign exchange forwards
|
Accounts payable
|
|
—
|
|
|
11
|
|
The table below summarizes the effect of hedge accounting on Accumulated Other Comprehensive Income (AOCI) and amounts reclassified from AOCI into earnings for the three and six months ended
June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Derivatives in AOCI
|
|
|
|
Amount of Gain (Loss) Recognized in Income
|
(In millions)
|
|
Three Months Ended June 30, 2018
|
|
Three Months Ended June 30, 2017
|
|
Location of Reclassification from AOCI
(a)
|
|
Three Months Ended June 30, 2018
|
|
Three Months Ended June 30, 2017
|
Sales swaps
(b)
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
Net sales
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
Commodity purchase swaps
|
|
—
|
|
|
(3
|
)
|
|
Cost of sales
(c)
|
|
(2
|
)
|
|
(4
|
)
|
(a)
The earnings impact of our hedging instruments substantially offsets the earnings impact of the related hedged items since ineffectiveness is less than
$1 million
.
(b)
U. S. Steel has elected hedge accounting for hot-rolled coil sales swaps prospectively on January 1, 2018.
(c)
Costs for commodity purchase swaps are recognized in cost of sales as products are sold.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Derivatives in AOCI
|
|
|
|
Amount of Gain (Loss) Recognized in Income
|
(In millions)
|
|
Six Months Ended June 30, 2018
|
|
Six Months Ended June 30, 2017
|
|
Location of Reclassification from AOCI
(a)
|
|
Six Months Ended June 30, 2018
|
|
Six Months Ended June 30, 2017
|
Sales swaps
(b)
|
|
$
|
(12
|
)
|
|
$
|
—
|
|
|
Net sales
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
Commodity purchase swaps
|
|
(7
|
)
|
|
(3
|
)
|
|
Cost of sales
(c)
|
|
1
|
|
|
(3
|
)
|
(a)
The earnings impact of our hedging instruments substantially offsets the earnings impact of the related hedged items since ineffectiveness is less than
$1 million
.
(b)
U. S. Steel has elected hedge accounting for hot-rolled coil sales swaps prospectively on January 1, 2018.
(c)
Costs for commodity purchase swaps are recognized in cost of sales as products are sold.
The table below summarizes the impact of derivative activity where hedge accounting has not been elected on our Consolidated Statements of Operations for the three and six months ended
June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in Income
|
(In millions)
|
Consolidated Statement of Operations Location
|
|
Three Months Ended June 30, 2018
|
|
Three Months Ended June 30, 2017
|
Sales swaps
(a)
|
Net sales
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
Foreign exchange forwards
|
Other financial costs
|
|
19
|
|
|
(11
|
)
|
(a)
U. S. Steel has elected hedge accounting for hot-rolled coil sales swaps prospectively on January 1, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in Income
|
(In millions)
|
Consolidated Statement of Operations Location
|
|
Six Months Ended June 30, 2018
|
|
Six Months Ended June 30, 2017
|
Sales swaps
(a)
|
Net sales
|
|
$
|
—
|
|
|
$
|
2
|
|
Commodity purchase swaps
|
Cost of sales
|
|
—
|
|
|
3
|
|
Foreign exchange forwards
|
Other financial costs
|
|
13
|
|
|
(13
|
)
|
(a)
U. S. Steel has elected hedge accounting for hot-rolled coil sales swaps prospectively on January 1, 2018.
At current contract values,
$7 million
and
$12 million
currently in AOCI as of
June 30, 2018
will be recognized as an increase in cost of sales and a decrease in net sales, respectively, over the next year as related hedged items are recognized in earnings. The maximum derivative contract duration for commodity purchase swaps is
two
years and the maximum duration for sales swaps is
one
year.
15.
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Interest
Rates %
|
|
Maturity
|
|
June 30, 2018
|
|
December 31, 2017
|
2037 Senior Notes
|
|
6.650
|
|
2037
|
|
$
|
350
|
|
|
$
|
350
|
|
2026 Senior Notes
|
|
6.250
|
|
2026
|
|
650
|
|
|
—
|
|
2025 Senior Notes
|
|
6.875
|
|
2025
|
|
750
|
|
|
750
|
|
2021 Senior Secured Notes
|
|
8.375
|
|
2021
|
|
—
|
|
|
780
|
|
2020 Senior Notes
|
|
7.375
|
|
2020
|
|
401
|
|
|
432
|
|
Environmental Revenue Bonds
|
|
5.750 - 6.875
|
|
2019 - 2042
|
|
400
|
|
|
400
|
|
Fairfield Caster Lease
|
|
|
|
2022
|
|
23
|
|
|
24
|
|
Other capital leases and all other obligations
|
|
|
|
2019
|
|
1
|
|
|
1
|
|
Fourth Amended and Restated Credit Agreement
|
|
Variable
|
|
2023
|
|
—
|
|
|
—
|
|
Third Amended and Restated Credit Agreement
|
|
Variable
|
|
2020
|
|
—
|
|
|
—
|
|
USSK Credit Agreement
|
|
Variable
|
|
2021
|
|
—
|
|
|
—
|
|
USSK credit facilities
|
|
Variable
|
|
2018
|
|
—
|
|
|
—
|
|
Total Debt
|
|
|
|
|
|
2,575
|
|
|
2,737
|
|
Less unamortized discount and debt issuance costs
|
|
|
|
|
|
30
|
|
|
34
|
|
Less short-term debt and long-term debt due within one year
|
|
|
|
|
|
4
|
|
|
3
|
|
Long-term debt
|
|
|
|
|
|
$
|
2,541
|
|
|
$
|
2,700
|
|
To the extent not otherwise discussed below, information concerning the senior notes and other listed obligations can be found in Note 16 of the audited financial statements in the United States Steel Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Senior Note Repurchases
During the three months ended June 30, 2018, U. S. Steel repurchased approximately
$31 million
of its
7.375%
Senior Notes due 2020 (2020 Senior Notes) at a weighted average price of
106.946 percent
of par through a series of open market purchases. Additionally, in July 2018, U. S. Steel repurchased an additional
$44 million
of its 2020 Senior Notes at a weighted average price of
107.234 percent
of par.
Senior Secured Note Tender and Redemption
In March 2018, pursuant to a cash tender offer, U. S. Steel repurchased approximately
$499 million
aggregate principal amount of its outstanding
8.375%
Senior Secured Notes due 2021 (2021 Senior Secured Notes). The aggregate cash outflow from the tender was approximately
$538 million
, which included
$39 million
in premiums. The remaining approximately
$281 million
aggregate principal amount of 2021 Senior Secured Notes were redeemed on April 12, 2018. The aggregate cash flow from the redemption was
$302 million
, which included
$21 million
in premiums.
Issuance of Senior Notes due 2026
In March 2018, U. S. Steel issued
$650 million
aggregate principal amount of
6.250%
Senior Notes due March 15, 2026 (2026 Senior Notes). U. S. Steel received net proceeds from the offering of approximately
$640 million
after fees of approximately
$10 million
related to the underwriting and third-party expenses. The net proceeds from the issuance of the 2026 Senior Notes, together with cash on hand, were used to tender or otherwise redeem all of our 2021 Senior Secured Notes as discussed above.
The 2026 Senior Notes are senior and unsecured obligations that rank equally in right of payment with all of our other existing and future senior and unsecured indebtedness. U. S. Steel will pay interest on the notes semi-annually in arrears on March 15th and September 15th of each year, commencing on September 15, 2018.
Similar to our other senior notes, the indenture governing the 2026 Senior Notes restricts our ability to create certain liens, to enter into sale leaseback transactions and to consolidate, merge, transfer or sell all, or substantially all of our assets. It also contains provisions requiring the purchase of the 2026 Senior Notes upon a change of control under certain specified circumstances, as well as other customary provisions.
U. S. Steel may redeem the 2026 Senior Notes, in whole or in part, at our option at any time, or from time to time, on or after March 15, 2021 at the redemption price for such notes set forth below as a percentage of the principal amount, plus accrued and unpaid interest, if any, to, but excluding the redemption date, if redeemed during the twelve-month period beginning March 15 of the years indicated below:
|
|
|
|
Year
|
Redemption Price
|
2021
|
103.125
|
%
|
2022
|
101.563
|
%
|
2023 and thereafter
|
100.000
|
%
|
At any time prior to March 15, 2021, U. S. Steel may also redeem up to
35%
of the original aggregate principal amount of the 2026 Senior Notes at
106.25%
, plus accrued and unpaid interest, if any, but excluding the applicable date of redemption, with proceeds from equity offerings.
Fourth Amended and Restated Credit Agreement
On February 26, 2018, U. S. Steel entered into the Fourth Amended and Restated Credit Agreement (Credit Facility Agreement), replacing the Company's Third Amended and Restated Credit Agreement. The Credit Facility Agreement maintains the facility size of
$1.5 billion
and extends the maturity date to 2023.
As of
June 30, 2018
, there were
no
amounts drawn under the
$1.5 billion
Credit Facility Agreement. U. S. Steel must maintain a fixed charge coverage ratio of at least
1.00
to
1.00
for the most recent four consecutive quarters when availability under the Credit Facility Agreement is less than the greater of
10 percent
of the total aggregate commitments and
$150 million
. Based on the most recent four quarters as of
June 30, 2018
, we would have
met this covenant. If we are unable to meet this covenant in future periods, the amount available to the Company under this facility would be reduced by
$150 million
.
The Credit Facility Agreement provides for borrowings at interest rates based on defined, short-term market rates plus a spread based on availability and includes other customary terms and conditions including restrictions on our ability to create certain liens and to consolidate, merge or transfer all, or substantially all, of our assets. The Credit Facility Agreement expires in February 2023. Maturity may be accelerated
91
days prior to the stated maturity of any outstanding senior debt if excess cash and credit facility availability do not meet the liquidity conditions set forth in the Credit Facility Agreement. Borrowings are secured by liens on certain North American inventory and trade accounts receivable.
The Credit Facility Agreement permits incurrence of additional secured debt up to
17.5%
of Consolidated Net Tangible Assets.
U. S. Steel Košice
(
USSK) credit facilities
At
June 30, 2018
, USSK had
no
borrowings under its
€200 million
(approximately
$233 million
) unsecured revolving credit facility (the USSK Credit Agreement). The USSK Credit Agreement contains certain USSK financial covenants, including maximum Leverage, maximum Net Debt to Tangible Net Worth, and minimum Interest Coverage ratios as defined in the USSK Credit Agreement. The covenants are measured semi-annually for the period covering the last twelve calendar months. USSK may not draw on the USSK Credit Agreement if it does not comply with any of the financial covenants until the next measurement date. At
June 30, 2018
, USSK had full availability under the USSK Credit Agreement. The USSK Credit Agreement expires in July 2021.
At
June 30, 2018
, USSK had
no
borrowings under its
€40 million
and
€10 million
unsecured credit facilities (collectively, approximately
$58 million
) and the availability was approximately
$57 million
due to approximately
$1 million
of customs and other guarantees outstanding. The
€40 million
credit facility expires in December 2018. Currently, the
€10 million
credit facility also expires in December 2018, but can be extended
one
additional year to the final maturity date at the mutual consent of USSK and its lender.
Each of these facilities bear interest at the applicable inter-bank offer rate plus a margin and contain customary terms and conditions.
Change in control event
If there is a change in control of U. S. Steel, the following may occur: (a) debt obligations totaling
$2,151 million
as of
June 30, 2018
may be declared due and payable; (b) the Credit Facility Agreement and the USSK credit facilities may be terminated and any amounts outstanding declared due and payable; and (c) U. S. Steel may be required to either purchase the leased Fairfield Works slab caster for approximately
$24 million
or provide a letter of credit to secure the remaining obligation.
16.
Asset Retirement Obligations
U. S. Steel’s asset retirement obligations (AROs) primarily relate to mine, landfill closure and post-closure costs. The following table reflects changes in the carrying values of AROs:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Balance at beginning of year
|
|
$
|
69
|
|
|
$
|
79
|
|
|
Obligations settled
|
|
(2
|
)
|
|
(8
|
)
|
|
Change in estimate of obligations
|
|
—
|
|
|
(6
|
)
|
|
Foreign currency translation effects
|
|
—
|
|
|
2
|
|
|
Accretion expense
|
|
1
|
|
|
2
|
|
|
Balance at end of period
|
|
$
|
68
|
|
|
$
|
69
|
|
|
Certain AROs related to disposal costs of the majority of fixed assets at our integrated steel facilities have not been recorded because they have an indeterminate settlement date. These AROs will be initially recognized in the period in which sufficient information exists to estimate their fair value.
17.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, current accounts and notes receivable, accounts payable, bank checks outstanding, and accrued interest included in the Consolidated Balance Sheet approximate fair value. See Note 14 for disclosure of U. S. Steel’s derivative instruments, which are accounted for at fair value on a recurring basis.
The following table summarizes U. S. Steel’s financial liabilities that were not carried at fair value at
June 30, 2018
and
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
(In millions)
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
(a)
|
|
$
|
2,567
|
|
|
$
|
2,517
|
|
|
$
|
2,851
|
|
|
$
|
2,678
|
|
(a)
Excludes capital lease obligations.
The following methods and assumptions were used to estimate the fair value of financial instruments included in the table above:
Long-term debt
: Fair value was determined using Level 2 inputs which were derived from quoted market prices and is based on the yield on public debt where available or current borrowing rates available for financings with similar terms and maturities.
Fair value of the financial liabilities disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.
Financial guarantees are U. S. Steel’s only unrecognized financial instrument. For details relating to financial guarantees see Note 22.
18.
Statement of Changes in Stockholders’ Equity
The following table reflects the first
six
months of
2018
and
2017
reconciliation of the carrying amount of total equity, equity attributable to U. S. Steel and equity attributable to noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018 (In millions)
|
|
Total
|
|
Retained Earnings
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
Common
Stock
|
|
Treasury
Stock
|
|
Paid-in
Capital
|
|
Non-
Controlling
Interest
|
Balance at beginning of year
|
|
$
|
3,321
|
|
|
$
|
133
|
|
|
$
|
(845
|
)
|
|
$
|
176
|
|
|
$
|
(76
|
)
|
|
$
|
3,932
|
|
|
$
|
1
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
232
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other benefit adjustments
|
|
93
|
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
(47
|
)
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
(19
|
)
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
Employee stock plans
|
|
44
|
|
|
|
|
|
|
1
|
|
|
75
|
|
|
(32
|
)
|
|
|
Dividends paid on common stock
|
|
(18
|
)
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
|
$
|
3,606
|
|
|
$
|
347
|
|
|
$
|
(818
|
)
|
|
$
|
177
|
|
|
$
|
(1
|
)
|
|
$
|
3,900
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017 (In millions)
|
|
Total
|
|
Accumulated Deficit
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
Common
Stock
|
|
Treasury
Stock
|
|
Paid-in
Capital
|
|
Non-
Controlling
Interest
|
Balance at beginning of year
|
|
$
|
2,275
|
|
|
$
|
(250
|
)
|
|
$
|
(1,497
|
)
|
|
$
|
176
|
|
|
$
|
(182
|
)
|
|
$
|
4,027
|
|
|
$
|
1
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
81
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other benefit adjustments
|
|
92
|
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
105
|
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
(3
|
)
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
Employee stock plans
|
|
19
|
|
|
|
|
|
|
|
|
86
|
|
|
(67
|
)
|
|
|
Dividends paid on common stock
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
Other
|
|
4
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017
|
|
$
|
2,555
|
|
|
$
|
(165
|
)
|
|
$
|
(1,303
|
)
|
|
$
|
176
|
|
|
$
|
(96
|
)
|
|
$
|
3,942
|
|
|
$
|
1
|
|
19.
Reclassifications from Accumulated Other Comprehensive Income (AOCI)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
(a)
|
|
Pension and
Other Benefit
Items
|
|
Foreign
Currency
Items
|
|
Unrealized Gain (Loss) on Derivatives
|
|
Total
|
Balance at December 31, 2017
|
|
$
|
(1,309
|
)
|
|
$
|
463
|
|
|
$
|
1
|
|
|
$
|
(845
|
)
|
Other comprehensive income before reclassifications
|
|
186
|
|
|
(47
|
)
|
|
(18
|
)
|
|
121
|
|
Amounts reclassified from AOCI
(b)
|
|
(93
|
)
|
|
—
|
|
|
(1
|
)
|
|
(94
|
)
|
Net current-period other comprehensive income
|
|
93
|
|
|
(47
|
)
|
|
(19
|
)
|
|
27
|
|
Balance at June 30, 2018
|
|
$
|
(1,216
|
)
|
|
$
|
416
|
|
|
$
|
(18
|
)
|
|
$
|
(818
|
)
|
(a)
Amounts do not reflect a tax benefit as a result of a full valuation allowance on our domestic deferred tax assets.
(b)
See table below for further details.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from AOCI
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In millions)
(a)
|
Details about AOCI components
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Amortization of pension and other benefit items
|
|
|
|
|
|
|
|
|
|
Prior service costs
(b)
|
|
$
|
(8
|
)
|
|
$
|
(7
|
)
|
|
$
|
(15
|
)
|
|
$
|
(14
|
)
|
|
Actuarial losses
(b)
|
|
(39
|
)
|
|
(38
|
)
|
|
(78
|
)
|
|
(76
|
)
|
|
Settlement, termination and curtailment losses
(b)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
Total pensions and other benefits items
|
|
(47
|
)
|
|
(45
|
)
|
|
(93
|
)
|
|
(94
|
)
|
|
Derivative reclassifications to Consolidated Statements of Operations
|
|
2
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
Total before tax
|
|
(45
|
)
|
|
(45
|
)
|
|
(94
|
)
|
|
(94
|
)
|
|
Tax benefit
(c)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net of tax
|
|
$
|
(45
|
)
|
|
$
|
(45
|
)
|
|
$
|
(94
|
)
|
|
$
|
(94
|
)
|
(a)
Amounts in parentheses indicate decreases in AOCI.
(b)
These AOCI components are included in the computation of net periodic benefit cost (see Note 8 for additional details).
(c)
Amounts do not reflect a tax benefit as a result of a full valuation allowance on our domestic deferred tax assets.
20.
Transactions with Related Parties
Net sales to related parties and receivables from related parties primarily reflect sales of raw materials and steel products to equity investees and U. S. Steel Canada Inc. (USSC) after the Canada Companies' Creditor Arrangement Act (CCAA) filing on September 16, 2014, but before the sale to an affiliate of Bedrock Industries Group LLC (Bedrock) on June 30, 2017. Generally, transactions are conducted under long-term contractual arrangements. Related party sales and service transactions were
$367 million
and
$357 million
for the three months ended
June 30, 2018
and
2017
, respectively and
$695 million
and
$670 million
for the six months ended
June 30, 2018
and
2017
, respectively.
Purchases from related parties for outside processing services provided by equity investees and USSC after the CCAA filing on September 16, 2014, but before the sale to Bedrock, amounted to
$8 million
and
$41 million
for the three months ended
June 30, 2018
and
2017
, respectively and
$15 million
and
$55 million
for the six months ended
June 30, 2018
and
2017
, respectively. Purchases of iron ore pellets from related parties amounted to
$25 million
and
$44 million
for the three months ended
June 30, 2018
and
2017
, respectively and
$42 million
and
$80 million
for the six months ended
June 30, 2018
and
2017
.
Accounts payable to related parties include balances due to PRO-TEC Coating Company, LLC (PRO-TEC) of
$90 million
and
$72 million
at
June 30, 2018
and
December 31, 2017
, respectively for invoicing and receivables collection services provided by U. S. Steel on PRO-TEC's behalf. U. S. Steel, as PRO-TEC’s exclusive sales agent, is responsible for credit risk related to those receivables. U. S. Steel also provides PRO-TEC marketing, selling and customer service functions. Payables to other related parties totaled
$2 million
at both
June 30, 2018
and
December 31, 2017
.
21.
Restructuring and Other Charges
Restructuring charges recorded during the
six months ended June 30, 2018
were immaterial. Cash payments were made related to severance and exit costs of
$16 million
.
During the six months ended June 30, 2017, the Company recorded a net restructuring charge of
$32 million
, which consists of charges of
$35 million
related to the permanent shutdown of the No. 6 Quench & Temper Mill at Lorain Tubular Operations and a favorable adjustment of
$3 million
primarily associated with a change in estimate for previously recorded environmental costs and Company-wide headcount reductions. Cash payments were made related to severance and exit costs of
$17 million
.
Charges for restructuring and ongoing cost reduction initiatives are recorded in the period U. S. Steel commits to a restructuring or cost reduction plan, or executes specific actions contemplated by the plan and all criteria for liability recognition have been met. Charges related to the restructuring and cost reductions are reported in restructuring and other charges in the Consolidated Statements of Operations.
The activity in the accrued balances incurred in relation to restructuring and other cost reduction programs during the
six months ended June 30, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Related
|
|
Exit
|
|
|
(in millions)
|
|
Costs
|
|
Costs
|
|
Total
|
Balance at December 31, 2017
|
|
$
|
4
|
|
|
$
|
34
|
|
|
$
|
38
|
|
Cash payments/utilization
|
|
(2
|
)
|
|
(14
|
)
|
|
(16
|
)
|
Balance at June 30, 2018
|
|
$
|
2
|
|
|
$
|
20
|
|
|
$
|
22
|
|
Accrued liabilities for restructuring and other cost reduction programs are included in the following balance sheet lines:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
June 30, 2018
|
|
December 31, 2017
|
Accounts payable
|
|
$
|
12
|
|
|
$
|
26
|
|
Payroll and benefits payable
|
|
2
|
|
|
4
|
|
Deferred credits and other noncurrent liabilities
|
|
8
|
|
|
8
|
|
Total
|
|
$
|
22
|
|
|
$
|
38
|
|
22.
Contingencies and Commitments
U. S. Steel is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Consolidated Financial Statements. However, management believes that U. S. Steel will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably.
U. S. Steel accrues for estimated costs related to existing lawsuits, claims and proceedings when it is probable that it will incur these costs in the future and the costs are reasonably estimable.
Asbestos matters
–
As of
June 30, 2018
, U. S. Steel was a defendant in approximately
760
active cases involving approximately
2,300
plaintiffs. The vast majority of these cases involve multiple defendants. At December 31, 2017, U. S. Steel was a defendant in approximately
820
cases involving approximately
3,315
plaintiffs. As of
June 30, 2018
, about
1,540
, or approximately
67 percent
, of these plaintiff claims are currently pending in jurisdictions which permit filings with massive numbers of plaintiffs. Based upon U. S. Steel’s experience in such cases, we believe that the actual number of plaintiffs who ultimately assert claims against U. S. Steel will likely be a small fraction of the total number of plaintiffs.
The following table shows the number of asbestos claims in the current period and the prior three years:
|
|
|
|
|
|
|
|
|
|
Period ended
|
|
Opening
Number
of Claims
|
|
Claims
Dismissed,
Settled
and Resolved
(a)
|
|
New
Claims
|
|
Closing
Number
of Claims
|
December 31, 2015
|
|
3,455
|
|
415
|
|
275
|
|
3,315
|
December 31, 2016
|
|
3,315
|
|
225
|
|
250
|
|
3,340
|
December 31, 2017
|
|
3,340
|
|
275
|
|
250
|
|
3,315
|
June 30, 2018
|
|
3,315
|
|
1,160
|
|
145
|
|
2,300
|
(a) The period ending June 30, 2018 includes approximately
1,000
dismissed cases previously pending in the State of Texas.
Historically, asbestos-related claims against U. S. Steel fall into
three
groups: (1) claims made by persons who allegedly were exposed to asbestos on the premises of U. S. Steel facilities; (2) claims made by persons allegedly exposed to products manufactured by U. S. Steel; and (3) claims made under certain federal and maritime laws by employees of former operations of U. S. Steel.
The amount U. S. Steel accrues for pending asbestos claims is not material to U. S. Steel’s financial condition. However, U. S. Steel is unable to estimate the ultimate outcome of asbestos-related claims due to a number of uncertainties, including: (1) the rates at which new claims are filed, (2) the number of and effect of bankruptcies of other companies traditionally defending asbestos claims, (3) uncertainties associated with the variations in the litigation process from jurisdiction to jurisdiction, (4) uncertainties regarding the facts, circumstances and disease process with each claim, and (5) any new legislation enacted to address asbestos-related claims. Despite these uncertainties, management believes that the ultimate resolution of these matters will not have a material adverse effect on U. S. Steel’s financial condition, although the resolution of such matters could significantly impact results of operations for a particular quarter.
Environmental matters
–
U. S. Steel is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. Changes in accrued liabilities for remediation activities where U. S. Steel is identified as a named party are summarized in the following table:
|
|
|
|
|
(In millions)
|
Six Months Ended June 30, 2018
|
Beginning of period
|
$
|
179
|
|
Accruals for environmental remediation deemed probable and reasonably estimable
|
2
|
|
Obligations settled
|
(2
|
)
|
End of period
|
$
|
179
|
|
Accrued liabilities for remediation activities are included in the following Consolidated Balance Sheet lines:
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
June 30, 2018
|
|
December 31, 2017
|
Accounts payable
|
|
$
|
30
|
|
|
$
|
29
|
|
Deferred credits and other noncurrent liabilities
|
|
149
|
|
|
150
|
|
Total
|
|
$
|
179
|
|
|
$
|
179
|
|
Expenses related to remediation are recorded in cost of sales and were immaterial for both the three and
six
-month periods ended
June 30, 2018
and
June 30, 2017
. It is not currently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Due to uncertainties inherent in remediation projects and the associated liabilities, it is reasonably possible that total remediation costs for active matters may exceed the accrued liabilities by as much as
15
to
30 percent
.
Remediation Projects
U. S. Steel is involved in environmental remediation projects at or adjacent to several current and former U. S. Steel facilities and other locations that are in various stages of completion ranging from initial
characterization through post-closure monitoring. Based on the anticipated scope and degree of uncertainty of projects, we categorize projects as follows:
|
|
(1)
|
Projects with Ongoing Study and Scope Development -
Projects which are still in the development phase. For these projects, the extent of remediation that may be required is not yet known, the remediation methods and plans are not yet developed, and/or cost estimates cannot be determined. Therefore, significant costs, in addition to the accrued liabilities for these projects, are reasonably possible. There are six environmental remediation projects where additional costs for completion are not currently estimable, but could be material. These projects are at Fairfield Works, Lorain Tubular, USS-POSCO Industries (UPI), the Fairless Plant, Cherryvale Zinc and the former steelmaking plant at Joliet, Illinois. As of
June 30, 2018
, accrued liabilities for these projects totaled
$1 million
for the costs of studies, investigations, interim measures, design and/or remediation. It is reasonably possible that additional liabilities associated with future requirements regarding studies, investigations, design and remediation for these projects could be as much as
$30 million
to
$50 million
.
|
|
|
(2)
|
Significant Projects with Defined Scope -
Projects with significant accrued liabilities with a defined scope. As of
June 30, 2018
, there are
three
significant projects with defined scope greater than or equal to
$5 million
each, with a total accrued liability of
$135 million
. These projects are Gary Resource Conservation and Recovery Act (RCRA) (accrued liability of
$26 million
), the former Geneva facility (accrued liability of
$62 million
), and the former Duluth facility St. Louis River Estuary (accrued liability of
$47 million
).
|
|
|
(3)
|
Other Projects with a Defined Scope -
Projects with relatively small accrued liabilities for which we believe that, while additional costs are possible, they are not likely to be significant, and also include those projects for which we do not yet possess sufficient information to estimate potential costs to U. S. Steel. There are
two
other environmental remediation projects which each had an accrued liability of between
$1 million
and
$5 million
. The total accrued liability for these projects at
June 30, 2018
was
$4 million
. These projects have progressed through a significant portion of the design phase and material additional costs are not expected.
|
The remaining environmental remediation projects each have an accrued liability of less than
$1 million
each. The total accrued liability for these projects at
June 30, 2018
was approximately
$6 million
. We do not foresee material additional liabilities for any of these sites.
Post-Closure Costs
– Accrued liabilities for post-closure site monitoring and other costs at various closed landfills totaled
$22 million
at
June 30, 2018
and were based on known scopes of work.
Administrative and Legal Costs
– As of
June 30, 2018
, U. S. Steel had an accrued liability of
$8 million
for administrative and legal costs related to environmental remediation projects. These accrued liabilities were based on projected administrative and legal costs for the next
three
years and do not change significantly from year to year.
Capital Expenditures
–
For a number of years, U. S. Steel has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In both the first
six
months of
2018
and
2017
, such capital expenditures totaled
$33 million
. U. S. Steel anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements.
EU Environmental Requirements
- Under the Emission Trading Scheme (ETS), USSK's final allocation of free allowances for the Phase III period, which covers the years 2013 through 2020 is
48 million
allowances. We estimate a shortfall of approximately
16 million
allowances for the Phase III period. Based on projected future production levels, we started to purchase allowances in the third quarter of 2017 to meet the annual compliance submission in the future. As of
June 30, 2018
, we have purchased approximately
9 million
European Union Allowances totaling
€76 million
(approximately
$89 million
). However, due to a number of variables such as the future market value of allowances, future production levels and future emissions intensity levels, we cannot reliably estimate the full cost of complying with the ETS regulations at this time.
The EU’s Industry Emission Directive requires implementation of EU determined best available techniques (BAT) for Iron and Steel production to reduce environmental impacts as well as compliance with BAT associated emission levels. Our most recent broad estimate of likely total capital expenditures for projects to comply with or go beyond the BAT requirements for the 2017 to 2020 program period is
€138 million
(approximately
$161 million
). During 2017, USSK expended €
2 million
(approximately $
1 million
) toward the total estimated capital expenditures. Applications have been approved to receive EU grants to fund a portion of the total estimated
capital expenditures for the 2017 to 2020 program period. The actual amount spent will depend largely upon the amount of EU incentive grants received. In order to receive full grant amounts USSK is required to comply with certain financial covenants, which are assessed annually. USSK complied with these covenants as of June 30, 2018. If we are unable to meet these covenants in the future, USSK might be required to provide additional collateral (e.g. bank guarantee) to secure potential claims from the Slovak Government for repayment of a portion of the grant funds received.
Due to other EU legislation, BAT for Large Combustion Plants (LCP), we are required to make changes to the boilers at our steam and power generation plant in order to comply with stricter air emission limits for large combustion plants. The requirements for LCP resulted in the construction of a new boiler and certain upgrades to our existing boilers. In January 2014, the operation of USSK's boilers was approved by the European Commission (EC) as part of Slovakia's Transitional National Plan (TNP) for bringing all boilers in Slovakia into compliance by no later than 2020. The TNP establishes emissions ceilings for each category of emissions (total suspended particulate, sulfur dioxide (SO
2
), and nitrogen oxide (NO
x
)). The allowable amount of discharged emissions from existing boilers will decrease each year until mid-2020. These projects will result in a reduction in electricity, emissions, and operating, maintenance and waste disposal costs once completed. The construction of the new boiler is complete with a total final installed cost of
€75 million
(approximately
$87 million
). Reconstruction of the existing boiler is also complete with a total cost of approximately
€52 million
(approximately
$61 million
). The reconstructed boiler was put into operation on May 30, 2018 and final inspection is expected to be completed in October 2018. Broad legislative changes were enacted by the Slovak Republic to extend the scope of support for renewable sources of energy, that are intended to allow USSK to participate in Slovakia's renewable energy incentive program once the boiler projects are completed.
Guarantees
– The maximum guarantees of the indebtedness of unconsolidated entities of U. S. Steel totaled
$4 million
at
June 30, 2018
.
Other contingencies
–
Under certain operating lease agreements covering various equipment, U. S. Steel has the option to renew the lease or to purchase the equipment at the end of the lease term. If U. S. Steel does not exercise the purchase option by the end of the lease term, U. S. Steel guarantees a residual value of the equipment as determined at the lease inception date (totaling approximately
$12 million
at
June 30, 2018
).
No
liability has been recorded for these guarantees as the potential loss is not probable.
Insurance
–
U
.
S. Steel maintains insurance for certain property damage, equipment, business interruption and general liability exposures; however, insurance is applicable only after certain deductibles and retainages. U. S. Steel is self-insured for certain other exposures including workers’ compensation (where permitted by law) and auto liability. Liabilities are recorded for workers’ compensation and personal injury obligations. Other costs resulting from losses under deductible or retainage amounts or not otherwise covered by insurance are charged against income upon occurrence.
U. S. Steel uses surety bonds, trusts and letters of credit to provide whole or partial financial assurance for certain obligations such as workers’ compensation. The total amount of active surety bonds, trusts and letters of credit being used for financial assurance purposes was approximately
$174 million
as of
June 30, 2018
, which reflects U. S. Steel’s maximum exposure under these financial guarantees, but not its total exposure for the underlying obligations. A significant portion of our trust arrangements and letters of credit are collateralized by the Credit Facility Agreement. The remaining trust arrangements and letters of credit are collateralized by restricted cash. Restricted cash, which is recorded in other current and noncurrent assets, totaled
$41 million
and
$44 million
at
June 30, 2018
and
December 31, 2017
, respectively.
Capital Commitments
–
At
June 30, 2018
, U. S. Steel’s contractual commitments to acquire property, plant and equipment totaled
$604 million
.
Contractual Purchase Commitments –
U. S. Steel is obligated to make payments under contractual purchase commitments, including unconditional purchase obligations. Payments for contracts with remaining terms in excess of one year are summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Later
Years
|
|
Total
|
$296
|
|
$579
|
|
$480
|
|
$309
|
|
$300
|
|
$1,166
|
|
$3,130
|
The majority of U. S. Steel’s unconditional purchase obligations relates to the supply of industrial gases, and certain energy and utility services with terms ranging from
two
to
15
years. Unconditional purchase obligations also include coke and steam purchase commitments related to a coke supply agreement with Gateway Energy & Coke Company LLC (Gateway) under which Gateway is obligated to supply a minimum volume of the expected targeted annual production of the heat recovery coke plant, and U. S. Steel is obligated to purchase the coke from Gateway at the contract price. As of
June 30, 2018
, if U. S. Steel were to terminate the agreement, it may be obligated to pay in excess of
$173 million
.
Total payments relating to unconditional purchase obligations were
$146 million
and
$151 million
for the three months ended
June 30, 2018
and
2017
, respectively, and
$307 million
and
$292 million
for the
six months ended June 30, 2018
and
2017
, respectively.
23.
U. S. Steel Canada Inc. Retained Interest
On June 30, 2017, U. S. Steel completed the restructuring and disposition of USSC through a sale and transfer of all of the issued and outstanding shares in USSC to an affiliate of Bedrock. In accordance with the Second Amended and Restated Plan of Compromise, Arrangement and Reorganization, approved by the Ontario Superior Court of Justice on June 9, 2017, U. S. Steel received approximately
$127 million
in satisfaction of its secured claims, including interest, which resulted in a gain of
$72 million
on the Company's retained interest in USSC. U. S. Steel also agreed to the discharge and cancellation of its unsecured claims for nominal consideration. The terms of the settlement also included mutual releases among key stakeholders, including a release of all claims against the Company regarding environmental, pension and other liabilities.
24.
Significant Equity Investments
Summarized unaudited income statement information for our significant equity investments for the
six months ended June 30, 2018
and
2017
is reported below (amounts represent 100% of investee financial information):
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2018
|
|
2017
|
Net sales
|
|
$
|
571
|
|
|
$
|
533
|
|
Cost of sales
|
|
511
|
|
|
468
|
|
Operating income
|
|
38
|
|
|
43
|
|
Net earnings
|
|
33
|
|
|
38
|
|
Net earnings attributable to significant equity investments
|
|
33
|
|
|
38
|
|
U. S. Steel's portion of the equity in net earnings of the significant equity investments above was
$18 million
and
$20 million
for the
six months ended June 30, 2018
and
2017
, respectively, which is included in the earnings from investees line on the Consolidated Statement of Operations.
|
|
|
Item 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
RESULTS OF OPERATIONS
Net sales
by segment for the
three and six months
ended
June 30, 2018
and
2017
are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
(Dollars in millions, excluding intersegment sales)
|
|
2018
|
|
2017
|
|
%
Change
|
|
2018
|
|
2017
|
|
%
Change
|
Flat-Rolled Products (Flat-Rolled)
|
|
$
|
2,435
|
|
|
$
|
2,151
|
|
|
13
|
%
|
|
$
|
4,482
|
|
|
$
|
4,016
|
|
|
12
|
%
|
U. S. Steel Europe (USSE)
|
|
848
|
|
|
740
|
|
|
15
|
%
|
|
1,671
|
|
|
1,413
|
|
|
18
|
%
|
Tubular Products (Tubular)
|
|
309
|
|
|
234
|
|
|
32
|
%
|
|
575
|
|
|
405
|
|
|
42
|
%
|
Total sales from reportable segments
|
|
3,592
|
|
|
3,125
|
|
|
15
|
%
|
|
6,728
|
|
|
5,834
|
|
|
15
|
%
|
Other Businesses
|
|
17
|
|
|
19
|
|
|
(11
|
)%
|
|
30
|
|
|
35
|
|
|
(14
|
)%
|
Net sales
|
|
$
|
3,609
|
|
|
$
|
3,144
|
|
|
15
|
%
|
|
$
|
6,758
|
|
|
$
|
5,869
|
|
|
15
|
%
|
Management’s analysis of the
percentage change in net sales
for U. S. Steel’s reportable business segments for the three months ended
June 30, 2018
versus the three months ended
June 30, 2017
is set forth in the following table:
Three Months Ended
June 30, 2018
versus Three Months Ended
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Products
(a)
|
|
|
|
|
|
|
Volume
|
|
Price
|
|
Mix
|
|
FX
(b)
|
|
Coke &
Other
(c)
|
|
Net
Change
|
Flat-Rolled
|
|
3
|
%
|
|
10
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
13
|
%
|
USSE
|
|
—
|
%
|
|
5
|
%
|
|
2
|
%
|
|
8
|
%
|
|
—
|
%
|
|
15
|
%
|
Tubular
|
|
12
|
%
|
|
19
|
%
|
|
—
|
%
|
|
—
|
%
|
|
1
|
%
|
|
32
|
%
|
(a)
Excludes intersegment sales
(b)
Foreign currency translation effects
(c)
Includes sales of coke and scrap inventory
Net sales were
$3,609 million
in the three months ended
June 30, 2018
, compared with
$3,144 million
in the same period last year. The increase in sales for the Flat-Rolled segment primarily reflects higher realized prices (increase of $77 per net ton) across all product types and increased shipments (increase of 87 thousand net tons) due to accelerated demand for steel products in line with the recent economic growth. The increase in sales for the USSE segment was primarily due to strengthening of the euro versus the U.S. dollar and higher average realized euro-based prices (increase of €30 per net ton). The increase in sales for the Tubular segment resulted from higher realized prices (increase of $215 per net ton) and increased shipments (increase of 21 thousand net tons) due to improved market conditions.
Management’s analysis of the
percentage change in net sales
for U. S. Steel’s reportable business segments for the six months ended
June 30, 2018
versus the six months ended
June 30, 2017
is set forth in the following table:
Six Months Ended
June 30, 2018
versus Six Months Ended
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steel Products
(a)
|
|
|
|
|
|
|
Volume
|
|
Price
|
|
Mix
|
|
FX
(b)
|
|
Coke &
Other
(c)
|
|
Net
Change
|
Flat-Rolled
|
|
4
|
%
|
|
6
|
%
|
|
—
|
%
|
|
—
|
%
|
|
2
|
%
|
|
12
|
%
|
USSE
|
|
1
|
%
|
|
5
|
%
|
|
1
|
%
|
|
11
|
%
|
|
—
|
%
|
|
18
|
%
|
Tubular
|
|
18
|
%
|
|
23
|
%
|
|
1
|
%
|
|
—
|
%
|
|
—
|
%
|
|
42
|
%
|
(a)
Excludes intersegment sales
(b)
Foreign currency translation effects
(c)
Includes sales of coke and scrap inventory
Net sales were
$6,758 million
in the six months ended
June 30, 2018
, compared with
$5,869 million
in the same period last year. The increase in sales for the Flat-Rolled segment primarily reflects higher realized prices (increase of $49 per net ton) across all product types and increased shipments (increase of 217 thousand net tons) due to accelerated demand for steel products in line with the recent economic growth. The increase in sales for the USSE segment was primarily due to strengthening of the euro versus the U.S. dollar and higher average realized euro-based prices (increase of €23 per net ton). The increase in sales for the Tubular segment resulted from higher realized prices (increase of $247 per net ton) and increased shipments (increase of 58 thousand net tons) due to improved market conditions.
Pension and other benefits costs
Pension and other benefit costs (other than service cost) are reflected within net interest and other financial costs and the service cost component is reflected within cost of sales in the Consolidated Statements of Operations.
Defined benefit and multiemployer pension plan costs included in cost of goods sold totaled
$27 million
and
$54 million
in the
three and six months
ended
June 30, 2018
, respectively, compared to
$26 million
and
$53 million
in the comparable periods in
2017
.
Costs related to defined contribution plans totaled
$11 million
and
$21 million
for the
three and six months
ended
June 30, 2018
, respectively, compared to
$10 million
and
$21 million
in the comparable periods in
2017
.
Other benefit expense included in cost of sales totaled
$4 million
and
$8 million
in the three and six months ended
June 30, 2018
, respectively, and
$5 million
and
$9 million
in the comparable periods in
2017
.
Selling, general and administrative expenses
Selling, general and administrative expenses were
$92 million
and
$170 million
in the
three and six months
ended
June 30, 2018
, respectively, compared to
$67 million
and
$148 million
in the
three and six months
ended
June 30, 2017
, respectively. For both the three and six months ended June 30, 2018 the increase is primarily due to an increase in variable compensation.
Operating configuration update
In March 2018, U. S. Steel announced that it would restart the "B" blast furnace and steelmaking facilities at its Granite City Works facility, which would enable the Company to support anticipated increased demand for steel produced in the United States as a result of actions in the Section 232 investigation into steel imports. The restart occurred in the second quarter of 2018.
Additionally, in June 2018, U. S. Steel announced that it would restart the "A" blast furnace at its Granite City Works facility, which will support increased demand for steel manufactured in the United States, while allowing the Company to continue to support customers during planned asset revitalization efforts. The restart is expected to occur in the fourth quarter of 2018.
In March 2017, U. S. Steel made the strategic decision to permanently shut down and relocate the Lorain #6 Quench & Temper Mill as a result of the challenging market conditions for tubular products.
U. S. Steel will continue to evaluate potential strategic and organizational opportunities, which may include the acquisition, divestiture or consolidation of assets. We continue to focus on strategically deploying cash (including capital investments under our asset revitalization program), in order to invest in areas consistent with our long-term strategy, and are considering various possibilities, that we believe would further that goal and ultimately result in greater stockholder value. The Company will pursue opportunities based on its long-term strategy, and what the Board of Directors determines to be in the best interests of the Company's stockholders at the time.
Better operating performance in our Flat-Rolled segment, coupled with relatively stable market conditions during 2017 and 2018, have resulted in improved segment results in recent quarters. As we continue with the implementation of our asset revitalization program, described below, and increase investment in our facilities, we expect to realize the sustainable improvements in safety, quality, delivery and costs that we are targeting to position us to succeed over the long term and to support future growth initiatives.
Asset Revitalization
As part of our long-term strategy, the Board of Directors approved a $2 billion multi-year asset revitalization program focused on our Flat-Rolled segment. Management evaluated performance in the key industries we serve, and developed projects across multiple Flat-Rolled segment assets with a focus on continuous improvement in safety, quality, delivery and cost. The Company views this program as essential to improving reliability and our ability to compete effectively in the industry. As we revitalize our assets, we expect to increase profitability, productivity, operational stability and reduce volatility.
The asset revitalization program includes projects to address short-term operational and maintenance enhancements as well as larger initiatives. The projects vary in scope and cost. The investments specifically address issues that are critical to delivering quality products to our customers in a timely manner.
The identified projects and schedule may change to address our customers’ needs, current and future economic operating conditions, and risks identified in the production cycle. Through the multi-year asset revitalization program, we expect to make total capital investments of $1.5 billion, which consist of capital investments in our iron making facilities, steel making facilities, hot rolling facilities, and finishing facilities. The Company plans to fund the program through cash generated from operations and cash on hand.
The benefits of the asset revitalization program are evident after just one year, as we have achieved performance improvements from assets in which we have invested. We continue to experience operational challenges on assets we have not yet fully addressed. We expect further improvements in performance as we execute the remainder of our structured asset revitalization program.
Restructuring and Other Charges
Restructuring charges recorded during the six months ended June 30, 2018 were immaterial. Cash payments were made related to severance and exit costs of
$16 million
.
During the six months ended June 30, 2017, the Company recorded a net restructuring charge of
$32 million
, which consists of charges of
$35 million
related to the permanent shutdown of the No. 6 Quench & Temper Mill at Lorain Tubular Operations and a favorable adjustment of
$3 million
primarily associated with a change in estimate for previously recorded environmental costs and Company-wide headcount reductions. Cash payments were made related to severance and exit costs of
$17 million
.
Charges for restructuring and ongoing cost reduction initiatives are recorded in the period U. S. Steel commits to a restructuring or cost reduction plan, or executes specific actions contemplated by the plan and all criteria for liability recognition have been met. Charges related to the restructuring and cost reductions are reported in the restructuring and other charges in the Consolidated Statements of Operations.
Earnings (loss) before interest and income taxes
by segment for the
three and six months
ended
June 30, 2018
and
2017
is set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
%
Change
|
|
Six Months Ended June 30,
|
|
%
Change
|
(Dollars in millions)
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
|
Flat-Rolled
|
|
$
|
224
|
|
|
$
|
220
|
|
|
2
|
%
|
|
$
|
257
|
|
|
$
|
132
|
|
|
95
|
%
|
USSE
|
|
115
|
|
|
55
|
|
|
109
|
%
|
|
225
|
|
|
142
|
|
|
58
|
%
|
Tubular
|
|
(35
|
)
|
|
(29
|
)
|
|
(21
|
)%
|
|
(62
|
)
|
|
(86
|
)
|
|
28
|
%
|
Total earnings from reportable segments
|
|
304
|
|
|
246
|
|
|
24
|
%
|
|
420
|
|
|
188
|
|
|
123
|
%
|
Other Businesses
|
|
17
|
|
|
9
|
|
|
89
|
%
|
|
28
|
|
|
22
|
|
|
27
|
%
|
Segment earnings before interest and income taxes
|
|
321
|
|
|
255
|
|
|
26
|
%
|
|
448
|
|
|
210
|
|
|
113
|
%
|
Items not allocated to segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on equity investee transactions
|
|
18
|
|
|
—
|
|
|
|
|
|
18
|
|
|
—
|
|
|
|
Granite City Works restart costs
|
|
(36
|
)
|
|
—
|
|
|
|
|
|
(36
|
)
|
|
—
|
|
|
|
Granite City Works adjustment to temporary idling charges
|
|
(2
|
)
|
|
—
|
|
|
|
|
|
8
|
|
|
—
|
|
|
|
Gain associated with retained interest in U. S. Steel Canada Inc.
|
|
—
|
|
|
72
|
|
|
|
|
|
—
|
|
|
72
|
|
|
|
Loss on shutdown of certain tubular assets
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
(35
|
)
|
|
|
Total earnings before interest and income taxes
|
|
$
|
301
|
|
|
$
|
327
|
|
|
(8
|
)%
|
|
$
|
438
|
|
|
$
|
247
|
|
|
77
|
%
|
Segment results for Flat-Rolled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
%
Change
|
|
Six Months Ended June 30,
|
|
%
Change
|
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
|
Earnings before interest and taxes ($ millions)
|
|
$
|
224
|
|
|
$
|
220
|
|
|
2
|
%
|
|
$
|
257
|
|
|
$
|
132
|
|
|
95
|
%
|
Gross margin
|
|
15
|
%
|
|
15
|
%
|
|
—
|
%
|
|
12
|
%
|
|
9
|
%
|
|
3
|
%
|
Raw steel production (mnt)
|
|
2,841
|
|
|
2,711
|
|
|
5
|
%
|
|
5,626
|
|
|
5,425
|
|
|
4
|
%
|
Capability utilization
|
|
67
|
%
|
|
64
|
%
|
|
3
|
%
|
|
67
|
%
|
|
64
|
%
|
|
3
|
%
|
Steel shipments (mnt)
|
|
2,584
|
|
|
2,497
|
|
|
3
|
%
|
|
5,118
|
|
|
4,901
|
|
|
4
|
%
|
Average realized steel price per ton
|
|
$
|
819
|
|
|
$
|
742
|
|
|
10
|
%
|
|
$
|
780
|
|
|
$
|
731
|
|
|
7
|
%
|
The increase in Flat-Rolled results for the
three months ended June 30, 2018
compared to the same period in
2017
was primarily due to higher average realized prices (approximately $210 million) as a result of improved market conditions, and increased shipments, including substrate to our Tubular segment (approximately $30 million). This change was offset by higher raw material costs (approximately $125 million), increased spending for operating costs (approximately $65 million) and an increase in variable compensation (approximately $45 million).
The increase in Flat-Rolled results for the
six months ended June 30, 2018
compared to the same period in
2017
was primarily due to higher average realized prices (approximately $285 million) as a result of improved market conditions, increased shipments, including substrate to our Tubular segment (approximately $45 million) and lower energy costs (approximately $30 million). This change was partially offset by higher raw material costs, including normal seasonal improvements in our mining operations, (approximately $165 million), an increase in variable compensation (approximately $45 million) and increased spending for operating costs (approximately $25 million).
Gross margin for the six months ended
June 30, 2018
compared to the same period in
2017
increased primarily as a result of
higher average realized prices
.
Segment results for USSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
%
Change
|
|
Six Months Ended June 30,
|
|
%
Change
|
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
|
Earnings before interest and taxes ($ millions)
|
|
$
|
115
|
|
|
$
|
55
|
|
|
109
|
%
|
|
$
|
225
|
|
|
$
|
142
|
|
|
58
|
%
|
Gross margin
|
|
18
|
%
|
|
11
|
%
|
|
7
|
%
|
|
17
|
%
|
|
14
|
%
|
|
3
|
%
|
Raw steel production (mnt)
|
|
1,308
|
|
|
1,285
|
|
|
2
|
%
|
|
2,600
|
|
|
2,543
|
|
|
2
|
%
|
Capability utilization
|
|
105
|
%
|
|
103
|
%
|
|
2
|
%
|
|
105
|
%
|
|
103
|
%
|
|
2
|
%
|
Steel shipments (mnt)
|
|
1,156
|
|
|
1,157
|
|
|
—
|
%
|
|
2,283
|
|
|
2,266
|
|
|
1
|
%
|
Average realized steel price per ton
|
|
$
|
707
|
|
|
$
|
620
|
|
|
14
|
%
|
|
$
|
707
|
|
|
$
|
607
|
|
|
16
|
%
|
The increase in USSE results for the
three months ended June 30, 2018
compared to the same period in
2017
was due to higher average realized euro-based prices (approximately $40 million), the strengthening of the euro versus the U.S. dollar (approximately $20 million) and lower raw material costs (approximately $25 million), which includes a favorable first-in-first-out (FIFO) inventory impact. These increases were partially offset by increased spending for other operating costs (approximately $25 million).
The increase in USSE results for the
six months ended June 30, 2018
compared to the same period in
2017
was due to higher average realized euro-based prices (approximately $70 million) and the strengthening of the euro versus the U.S. dollar (approximately $65 million). These increases were partially offset by higher raw material costs (approximately $20 million), which includes a favorable first-in-first-out (FIFO) inventory impact and increased spending for other operating costs (approximately $35 million).
Gross margin for the three and six months ended
June 30, 2018
compared to the same period in
2017
increased primarily as a result of higher average realized prices.
Segment results for Tubular
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
%
Change
|
|
Six Months Ended June 30,
|
|
%
Change
|
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
|
Loss before interest and taxes ($ millions)
|
|
$
|
(35
|
)
|
|
$
|
(29
|
)
|
|
(21
|
)%
|
|
$
|
(62
|
)
|
|
$
|
(86
|
)
|
|
28
|
%
|
Gross margin
|
|
(5
|
)%
|
|
(5
|
)%
|
|
—
|
%
|
|
(5
|
)%
|
|
(11
|
)%
|
|
6
|
%
|
Steel shipments (mnt)
|
|
201
|
|
|
180
|
|
|
12
|
%
|
|
382
|
|
|
324
|
|
|
18
|
%
|
Average realized steel price per ton
|
|
$
|
1,449
|
|
|
$
|
1,234
|
|
|
17
|
%
|
|
$
|
1,420
|
|
|
$
|
1,173
|
|
|
21
|
%
|
The decrease in Tubular results for the
three months ended June 30, 2018
as compared to the same period in
2017
was primarily due to higher substrate costs (approximately $30 million) and increased operating costs (approximately $10 million). These decreases were partially offset by higher average realized prices (approximately $35 million).
The increase in Tubular results for the
six months ended June 30, 2018
compared to the same period in
2017
was primarily due to higher average realized prices (approximately $75 million). This increase was partially offset by higher substrate costs (approximately $40 million) and increased operating costs (approximately $10 million).
Tubular results continue to be adversely impacted by high import levels. We expect import levels to decrease in the second half of the year.
Gross margin for the six months ended
June 30, 2018
compared to the same period in
2017
increased primarily as a result of higher average realized prices.
Results for Other Businesses
Other Businesses had income of
$17 million
and
$28 million
in the
three and six months
ended
June 30, 2018
, compared to income of
$9 million
and
$22 million
in the
three and six months
ended
June 30, 2017
.
Items not allocated to segments
We recognized a
gain on equity investee transactions
of $18 million in the three and six months ended June 30, 2018 as a result of the assignment of our entire equity ownership interest in Leed's Retail Center, LLC in May 2018. This gain has been reflected in the net gain on disposal of assets line on the Consolidated Statement of Operations.
We recognized $36 million in
Granite City Works restart costs
in the three and six months ended June 30, 2018 as a result of costs associated with the restart of the "B" blast furnace at Granite City Works.
We recorded an $8 million favorable adjustment in the six months ended
June 30, 2018
related to
Granite City Works temporary idling charges
as a result of the decision to restart the "B" blast furnace and steelmaking facilities at this facility in 2018.
We recognized a $72 million
gain associated with our retained interest in U. S. Steel Canada Inc.
(USSC) in the three and six months ended June 30, 2017 as a result of the restructuring and disposition of USSC on June 30, 2017.
We recorded a $35 million
loss on the shut down of certain tubular assets
in the six months ended June 30, 2017 as a result of the permanent shut down and relocation of the No. 6 Quench & Temper Mill at Lorain Tubular Operations.
Net interest and other financial costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
%
Change
|
|
Six Months Ended June 30,
|
|
%
Change
|
(Dollars in millions)
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
|
Interest expense
|
|
$
|
43
|
|
|
$
|
55
|
|
|
(22
|
)%
|
|
$
|
93
|
|
|
$
|
113
|
|
|
(18
|
)%
|
Interest income
|
|
(5
|
)
|
|
(4
|
)
|
|
25
|
%
|
|
(10
|
)
|
|
(8
|
)
|
|
25
|
%
|
Loss on debt extinguishment
|
|
28
|
|
|
1
|
|
|
100
|
%
|
|
74
|
|
|
1
|
|
|
100
|
%
|
Other financial costs
|
|
(8
|
)
|
|
16
|
|
|
(150
|
)%
|
|
2
|
|
|
25
|
|
|
(92
|
)%
|
Net periodic benefit cost (other than service cost)
|
|
17
|
|
|
14
|
|
|
21
|
%
|
|
34
|
|
|
32
|
|
|
6
|
%
|
Total net interest and other financial costs
|
|
$
|
75
|
|
|
$
|
82
|
|
|
(9
|
)%
|
|
$
|
193
|
|
|
$
|
163
|
|
|
18
|
%
|
During the
six months ended June 30, 2018
, U. S. Steel issued $650 million aggregate principal amount of 2026 Senior Notes and repurchased through a tender offer $780 million of its 2021 Senior Secured Notes for an aggregate cash outflow of approximately $840 million, which included $60 million in premiums. Additionally, U. S. Steel repurchased approximately $31 million of its 2020 Senior Notes during the first six months of 2018. The loss on debt extinguishment line in the table above includes $63 million in premiums and $11 million in unamortized debt issuance costs which were written off in connection with the extinguishment of debt. For further information, see Note 15 to the Consolidated Financial Statements.
The decrease in net interest and other financial costs in the
three months ended June 30, 2018
as compared to the same period last year is primarily due to net foreign currency gains on our euro-U.S. dollar derivatives and reduced interest expense due to our improved debt profile partially offset by a loss on debt extinguishment.
The increase in net interest and other financial costs in the
six months ended June 30, 2018
as compared to the same period last year is primarily due to the loss on extinguishment as described above partially offset by net foreign currency gains on our euro-U.S. dollar derivatives and reduced interest expense due to our improved debt profile.
The net periodic benefit cost (other than service cost) components of pension and other benefit costs are reflected in the table above, and remained consistent in the three and six months ended June 30, 2018 as compared to the same periods last year.
Total net periodic pension cost, including service cost and multiemployer plans, is expected to total approximately
$135 million
in
2018
. Total other benefits costs, including service cost, in
2018
are expected to total approximately
$60 million
. The pension cost projection includes approximately
$54 million
of contributions to the Steelworkers Pension Trust.
Income taxes
The
income tax provision (benefit)
was
$12 million
and
$13 million
in the
three and six months
ended June 30, 2018 compared to
$(16) million
and
$3 million
in the
three and six months
ended
June 30, 2017
. In 2018, the tax provision reflects a benefit for the release of a portion of the domestic valuation allowance due to pretax income. Included in the tax provision in the first six months of 2017 is a benefit of $13 million related to the carryback of certain losses to prior years.
On December 22, 2017, the Tax Cuts and Jobs Act (the 2017 Act) was signed into law. The 2017 Act includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the immediate expensing of capital expenditures, and puts into effect the migration from a worldwide system of taxation to a territorial system, among other things. We continue to examine the impact the 2017 Act may have on our Company, and we do not expect the new provisions to have a material impact on the 2018 effective tax rate due to our current corporate tax structure and our net operating losses. However, we do expect a reduction in cash taxes paid in 2018 and future years due to the elimination of the Alternative Minimum Tax.
Each quarter U. S. Steel analyzes the likelihood that our deferred tax assets will be realized. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not that some portion, or all, of the deferred tax asset may not be realized.
At June 30, 2018, U. S. Steel reviewed all available positive and negative evidence and determined that it is more likely than not that all of its net domestic deferred tax asset may not be realized.
U. S. Steel will continue to monitor the realizability of its deferred tax assets on a quarterly basis taking into consideration, among other items, the uncertainty regarding the Company's continued ability to generate domestic income in the near term. As our projections for 2019 develop later this year, and with consideration of the profitability of our domestic operations in 2017 and 2018, we may determine that realization is more likely than not for some or all of the deferred tax assets with a valuation allowance, and we will reduce the related valuation allowance and record a non-cash benefit to earnings.
For further information on income taxes see Note 11 to the Consolidated Financial Statements.
Net earnings attributable to United States Steel Corporation were
$214 million
and
$232 million
in the
three and six months
ended
June 30, 2018
, compared to net earnings of
$261 million
and
$81 million
in the
three and six months
ended
June 30, 2017
. The changes primarily reflect the factors discussed above.
BALANCE SHEET
Accounts receivable
increased by $277 million from year-end
2017
primarily due to higher average realized prices as well as increased shipment volumes across all of our segments.
Inventories
increased by $110 million from year-end
2017
primarily as a result of increased operating levels and higher raw material prices.
Accounts payable and other accrued liabilities
increased by $161 million from year-end
2017
primarily as a result of increased operating levels and higher raw material prices across all of our segments.
Property, plant and equipment, net
increased by $121 million due to the level of capital expenditures exceeding depreciation expense.
Long-term debt
decreased by $159 million from year-end
2017
primarily due to the tender of approximately $499 million of our 2021 Senior Secured Notes in March 2018 and the redemption of the remaining $281 million in April 2018, partially offset by the issuance of $650 million aggregate principal amount of our 2026 Senior Notes in March 2018 and the repurchase of approximately $31 million of our 2020 Senior Notes in June 2018. For additional information, see Note 15 to the Consolidated Financial Statements.
Employee benefits
decreased by $67 million from year-end
2017
primarily as a result of impacts from the natural maturation of our pension plans.
CASH FLOW
Net cash provided by operating activities
was
$293 million
for the
six months ended
June 30, 2018
compared to net cash provided by operating activities of
$243 million
in the same period last year. The increase in cash from operations is primarily due to
stronger financial results, partially offset by changes in working capital period over period
.
Changes in working capital can vary significantly depending on factors such as the timing of inventory production and purchases, which is affected by the length of our business cycles as well as our captive raw materials position, customer payments of accounts receivable and payments to vendors in the regular course of business.
Our key working capital components include accounts receivable and inventory. The accounts receivable and inventory turnover ratios for the three months and twelve months ended
June 30,
2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Twelve Months Ended
June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Accounts Receivable Turnover
|
|
2.2
|
|
|
2.2
|
|
|
8.5
|
|
|
8.3
|
|
Inventory Turnover
|
|
1.7
|
|
|
1.6
|
|
|
6.4
|
|
|
5.9
|
|
The increase in the inventory turnover approximates 4 days for the three months ended
June 30, 2018
as compared to
June 30, 2017
and is primarily due to an increase in cost of goods sold mainly attributed to higher raw material costs. The increase in the inventory turnover approximates 5 days for the twelve months ended
June 30, 2018
as compared to
June 30, 2017
and is primarily due to an increase in cost of goods sold mainly attributed to higher raw material costs.
The increase in the accounts receivable turnover approximates 1 day for the twelve months ended
June 30, 2018
as compared to
June 30, 2017
and is primarily due to increased sales as a result of increased prices across all segments.
The last-in, first-out (LIFO) inventory method is the predominant method of inventory costing in the United States. At
June 30, 2018
and
June 30, 2017
, the LIFO method accounted for
73 percent
and 74 percent of total inventory values, respectively. In the U.S., management monitors inventory realizability by comparing the LIFO cost of inventory with the replacement cost of inventory. To the extent the replacement cost (i.e., market value) of inventory is lower than the LIFO cost of inventory, management will write the inventory down. As of
June 30, 2018
, and December 31, 2017 the replacement cost of the inventory was higher by approximately
$846 million
and
$802 million
, respectively. Additionally, based on the Company’s latest internal forecasts and its inventory requirements, management does not believe there will be significant permanent LIFO liquidations that would impact earnings for the remainder of 2018.
Our cash conversion cycle for the second quarter of 2018 decreased by one day as compared to the fourth quarter of 2017 as shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Conversion Cycle
|
2018
|
|
|
2017
|
|
$ millions
|
|
Days
|
|
|
$ millions
|
|
Days
|
Accounts receivable, net
(a)
|
$
|
1,656
|
|
|
41
|
|
|
$
|
1,379
|
|
|
43
|
|
|
|
|
|
|
|
|
|
+ Inventories
(b)
|
$
|
1,848
|
|
|
53
|
|
|
$
|
1,738
|
|
|
58
|
|
|
|
|
|
|
|
|
|
- Accounts Payable and Other Accrued Liabilities
(c)
|
$
|
2,318
|
|
|
65
|
|
|
$
|
2,163
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
= Cash Conversion Cycle
(d)
|
|
|
29
|
|
|
|
|
30
|
(a)
Calculated as Average Accounts Receivable, net divided by total Net Sales multiplied by the number of days in the period.
(b)
Calculated as Average Inventory divided by total Cost of Sales multiplied by the number of days in the period.
(c)
Calculated as Average Accounts Payable and Other Accrued Liabilities less bank checks outstanding and other current liabilities divided by total Cost of Sales multiplied by the number of days in the period.
(d)
Calculated as Accounts Receivable Days plus Inventory Days less Accounts Payable Days.
The cash conversion cycle is a non-generally accepted accounting principles (non-GAAP) financial measure. We believe the cash conversion cycle is a useful measure in providing investors with information regarding our cash management performance and is a widely accepted measure of working capital management efficiency. The cash conversion cycle should not be considered in isolation or as an alternative to other GAAP metrics as an indicator of performance.
Capital expenditures
for the
six months ended
June 30, 2018
, were
$381 million
, compared with
$120 million
in the same period in
2017
. Flat-rolled capital expenditures were
$318 million
and included spending for the Mon Valley sulfur dioxide (SO
2
) Boiler Stack project, Great Lakes Blast Furnace D4 Major Repairs, Minntac Open Pit Equipment, Gary Blast Furnace 6 Reline and Skip Incline Replacement, Gary ETL Demineralization Water, and various other infrastructure, environmental and strategic projects. Tubular capital expenditures of
$24 million
primarily related to Offshore Operations threading line and swage extension, as well as various other strategic capital projects. USSE capital expenditures of
$38 million
consisted of spending for a boiler house upgrade, coke oven gas desulfurization, ammonia still and boilers, steel shop ladle metallurgy dedusting and various other infrastructure and environmental projects.
U. S. Steel’s contractual commitments to acquire property, plant and equipment at
June 30, 2018
, totaled
$604 million
.
Capital expenditures for
2018
are expected to total approximately $950 million and remain focused largely on strategic, infrastructure and environmental projects, as well as asset revitalization of our equipment to improve our operating reliability and efficiency, and product quality and cost by focusing on investments in our North American Flat-Rolled segment.
Issuance of long-term debt, net of financing costs,
totaled
$640 million
in the
six months ended
June 30, 2018
. During the
six months ended
June 30, 2018
, U. S. Steel issued $650 million aggregate principal amount of 2026 Senior Notes. U. S. Steel received net proceeds from the offering of approximately $640 million after fees of approximately $10 million related to underwriting and third-party expenses. For further information, see Note 15 to the Consolidated Financial Statements.
Repayment of long-term debt
totaled
$874 million
in the
six months ended
June 30, 2018
. Pursuant to a cash tender offer, U. S. Steel repurchased $499 million of our 2021 Senior Secured Notes in March 2018 and redeemed the remaining $281 million in April 2018. Approximately $60 million in premiums were paid for the 2021 Senior Secured Notes transactions. Additionally, U. S. Steel repurchased approximately $31 million of its 2020 Senior Notes through a series of open market purchases in June 2018 and paid premiums of approximately $3 million. For further information, see Note 15 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes U. S. Steel’s liquidity as of
June 30, 2018
:
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
Cash and cash equivalents
|
$
|
1,231
|
|
|
Amount available under $1.5 Billion Credit Facility Agreement
|
1,500
|
|
|
Amount available under USSK credit facilities
|
290
|
|
|
Total estimated liquidity
|
$
|
3,021
|
|
As of
June 30, 2018
, $136 million of the total cash and cash equivalents was held by our foreign subsidiaries. Substantially all of the liquidity attributable to our foreign subsidiaries can be accessed without the imposition of income taxes as a result of the election effective December 31, 2013 to liquidate for U.S. income tax purposes a foreign subsidiary that holds most of our international operations.
On February 26, 2018, U. S. Steel entered into the Credit Facility Agreement, replacing its Third Amended and Restated Credit Agreement. The Credit Facility Agreement maintains the facility size of
$1.5 billion
and extends the maturity date to 2023.
As of
June 30, 2018
, there were
no
amounts drawn under the
$1.5 billion
Credit Facility Agreement. U. S. Steel must maintain a fixed charge coverage ratio of at least 1.00 to 1.00 for the most recent four consecutive quarters when availability under the Credit Facility Agreement is less than the greater of 10 percent of the total aggregate commitments and
$150 million
. Based on the four quarters as of
June 30, 2018
, we have met this covenant. If we are unable to meet this covenant in future periods, the amount available to the Company under this facility would be reduced by
$150 million
.
At
June 30, 2018
, USSK had no borrowings under its
€
200 million (approximately
$233 million
) unsecured revolving credit facility (the USSK Credit Agreement). The USSK Credit Agreement contains certain USSK financial covenants as well as other customary terms and conditions. At
June 30, 2018
, USSK had full availability under the USSK Credit Agreement. Currently, the USSK Credit Agreement expires in July 2021.
At
June 30, 2018
, USSK had no borrowings under its €40 million and €10 million unsecured credit facilities (collectively approximately
$58 million
) and the aggregate availability was approximately
$57 million
due to approximately
$1 million
of customs and other guarantees outstanding. The
€40 million
credit facility expires in December 2018. Currently, the
€10 million
credit facility also expires in December 2018, but can be extended one additional year to the final maturity date at the mutual consent of USSK and its lender.
During the three months ended June 30, 2018, U. S. Steel repurchased approximately $31 million of its 7.375% Senior Notes due 2020 (2020 Senior Notes) at a weighted average price of 106.946 percent of par through a series of open market purchases. Additionally, in July 2018, U. S. Steel repurchased an additional $44 million of its 2020 Senior Notes for a weighted average price 107.234 percent of par.
In March 2018, U. S. Steel issued $650 million aggregate principal amount of 2026 Senior Notes. U. S. Steel received net proceeds from the offering of approximately $640 million after fees of approximately $10 million related to the underwriting and third-party expenses. The net proceeds from the issuance of the 2026 Senior Notes, together with cash on hand, were used to repurchase all of our outstanding 2021 Senior Secured Notes (see Note 15 to the Consolidated Financial Statements, "Debt" for further details). U. S. Steel will pay interest on the notes semi-annually in arrears on March 15th and September 15th of each year, commencing on September 15, 2018.
We may from time to time seek to retire or repurchase our outstanding long-term debt through open market purchases, privately negotiated transactions, exchange transactions, redemptions or otherwise. Such purchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, and other factors and may be commenced or suspended at any time. The amounts involved may be material.
We use surety bonds, trusts and letters of credit to provide financial assurance for certain transactions and business activities. The use of some forms of financial assurance and cash collateral have a negative impact on liquidity. U. S. Steel has committed
$174 million
of liquidity sources for financial assurance purposes as of
June 30, 2018
. Increases in certain of these commitments which use collateral are reflected within cash, cash equivalents and restricted cash on the Consolidated Statement of Cash Flows.
At
June 30, 2018
, in the event of a change in control of U. S. Steel, the following may occur: (a) debt obligations totaling
$2,151 million
as of
June 30, 2018
may be declared due and payable; (b) the Credit Facility Agreement and the USSK credit facilities may be terminated and any amounts outstanding declared due and payable; and (c) U. S. Steel may be required to either repurchase the leased Fairfield slab caster for
$24 million
or provide a cash collateralized letter of credit to secure the remaining obligation.
The maximum guarantees of the indebtedness of unconsolidated entities of U. S. Steel totaled
$4 million
at
June 30, 2018
. If any default related to the guaranteed indebtedness occurs, U. S. Steel has access to its interest in the assets of the investees to reduce its potential losses under the guarantees.
Our major cash requirements in
2018
are expected to be for capital expenditures, including asset revitalization, employee benefits and operating costs, which includes purchases of raw materials. We finished the
second
quarter of
2018
with
$1,231 million
of cash and cash equivalents and $3.0 billion of total liquidity. Available cash is left on deposit with financial institutions or invested in highly liquid securities with parties we believe to be creditworthy.
U. S. Steel management believes that U. S. Steel's liquidity will be adequate to satisfy our obligations for the foreseeable future, including obligations to complete currently authorized capital spending programs. Future requirements for U. S. Steel’s business needs, including the funding of acquisitions and capital expenditures, scheduled debt maturities, repurchase of debt, share buyback, contributions to employee benefit plans, and any amounts that may ultimately be paid in connection with contingencies, are expected to be financed by a combination of internally generated funds (including asset sales), proceeds from the sale of stock, borrowings, refinancings and other external financing sources.
Environmental Matters, Litigation and Contingencies
Some of U. S. Steel’s facilities were in operation before 1900. Although management believes that U. S. Steel’s environmental practices have either led the industry or at least been consistent with prevailing industry practices, hazardous materials may have been released at current or former operating sites or delivered to sites operated by third parties.
Our U.S. facilities are subject to environmental laws applicable in the U.S., including the Clean Air Act (CAA), the Clean Water Act (CWA), the Resource Conservation and Recovery Act (RCRA) and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), as well as state and local laws and regulations.
U. S. Steel has incurred and will continue to incur substantial capital, operating, and maintenance and remediation expenditures as a result of environmental laws and regulations, related to release of hazardous materials, which in recent years have been mainly for process changes to meet CAA obligations and similar obligations in Europe.
Midwest Plant Incident
On April 11, 2017, there was a process waste water release at our Midwest Plant (Midwest) in Portage, Indiana that impacted a water outfall that discharges to Burns Waterway near Lake Michigan. U. S. Steel identified the source of the release and made the necessary repairs. We determined that all repairs were safely working as intended and, on April 14, 2017, resumed operations in a controlled, phased and highly monitored approach with extensive input from participating government agencies. The Company has since implemented substantial operational, process and notification improvements at Midwest. The Company has been presented with cost reimbursements, loss of use and penalty requests from the involved governmental agencies. Separately, the Company was placed on notice of potential citizens’ enforcement suits regarding the April 2017 incident and other historical alleged CWA and Permit violations at Midwest. In January of 2018, The Surfrider Foundation and the City of Chicago initiated suits in the Northern District of Indiana alleging such violations. On April 2, 2018, the U.S. EPA and the State of Indiana initiated a separate action against the Company and lodged a Consent Decree negotiated between U. S. Steel and the relevant governmental agencies consisting of all material terms to resolve the CWA and National Pollutant Discharge Elimination System (NPDES) violations at the Midwest Plant. The Surfrider Foundation and the City of Chicago initially agreed to stay their actions pending finalization of the Consent Decree, but recently filed a motion to lift that stay. The public comment period for the Consent Decree was extended to sixty days and has since closed. The U.S. EPA and the State of Indiana are currently reviewing the public comments and U. S. Steel is awaiting their response to those comments.
Slovak Operations
A Memorandum of Understanding (MOU) was signed in March 2013 between U. S. Steel and the government of Slovakia. The MOU outlines areas in which the government and U. S. Steel will work together to help create a more competitive environment and conditions for USSK. Incentives the government of Slovakia agreed to provide include potential participation in a renewable energy program that provides the opportunity to reduce electricity costs, as well as the potential for government grants and other support concerning investments in environmental control technology. Although there are many conditions and uncertainties regarding the grants, including matters controlled by the European Union (EU), the value of these incentives as stated in the MOU could be as much as €75 million (approximately $87 million). We currently expect the total amount of EU funds will be as much as €78 million (approximately $91 million). The final grant value will depend on actual project spending and eligible costs. The MOU expired in March 2018; however, USSK will continue to receive the incentive funding for the approved BAT projects through their completion.
The EU’s Industry Emission Directive requires implementation of EU determined best available techniques (BAT) for iron and steel production, to reduce environmental impacts as well as compliance with BAT associated emission levels. This directive includes operational requirements for air emissions, wastewater discharges, solid waste disposal and energy conservation, dictates certain operating practices and imposes stricter emissions limits. Producers were required to be in compliance with the iron and steel BAT by March 8, 2016, unless specific exceptions or extensions were granted by the Slovak environmental authority. USSK updated existing operating permits for different facilities involved in producing iron and steel in the plant in accordance with the new BAT requirements. Through this process for some facilities, USSK has obtained extensions from the 2016 compliance deadline in order to meet or exceed the BAT requirements. Compliance with stricter emissions limits going beyond BAT requirements makes us eligible for EU funding support and prepares us for any further tightening of environmental protection standards. Our most recent broad estimate of likely total capital expenditures for projects to comply with or go beyond the BAT requirements for the 2017 to 2020 program period is €138 million (approximately $161 million). During 2017, USSK expended €2 million (approximately $1 million) toward the total estimated capital expenditures for the 2017 to 2020 program period.
The EU has various programs under which funds are allocated to member states to implement broad public policies which are then awarded by the member states to public and private entities on a competitive basis. The funding intensity under these programs currently ranges from 55 percent of defined eligible costs on a project under the standard state scheme to 90 percent under an approved ad hoc scheme to improve the air quality in the Košice region of Slovakia. Based on our list of projects that comprise the approximate €138 million (approximately $161 million) of spending noted, we currently believe we will be eligible to receive up to €78 million (approximately $91 million) of incentive grants. This could potentially reduce our net cash expenditures to approximately €60 million (approximately $70 million). The actual amount of capital spending will be dependent upon, among other things, the actual amount of incentive grants received. In order to receive full grant amounts, USSK is required to comply with certain financial covenants, which are assessed annually. USSK complied with these covenants as of June 30, 2018. If we are unable to meet these covenants in the future, USSK might be required to provide additional collateral (e.g. bank guarantee) to secure potential claims from the Slovak Government for repayment of a portion of the grant funds received.
We also believe there will be increased operating costs associated with these projects, such as increased energy and maintenance costs. We are currently unable to reliably estimate what the increase in operating costs will be as many projects are still in the development stage.
On March 28, 2017, the Regional Court in Košice issued an ex parte judicial lien on USSK's real property to plaintiffs in an ongoing legal case. Following a decision of the Supreme Court, which reversed and remanded the lien petition to the Regional Court, the lien has been removed. The Regional Court, which had originally issued the ex parte judicial lien, has decided that the imposition of a lien is not warranted and has not re-imposed the lien. The underlying case is still ongoing.
For further discussion of laws applicable in Slovakia and the EU and their impact on USSK, see Note 22 to the Consolidated Financial Statements, “Contingencies and Commitments - Environmental Matters, EU Environmental Requirements.”
New and Emerging Environmental Regulations
United States and European Greenhouse Gas Emissions Regulations
Future compliance with CO
2
emission requirements may include substantial costs for emission allowances, restriction of production and higher prices for coking coal, natural gas and electricity generated by carbon based systems. Because we cannot predict what requirements ultimately will be imposed in the U.S. and Europe, it is difficult to estimate the likely impact on U. S. Steel, but it could be substantial. On March 28, 2017, President Trump signed Executive Order 13783 instructing the Environmental Protection Agency (EPA) to review the Clean Power Plan. On October 16, 2017, the EPA proposed to repeal the Clean Power Plan after reviewing the plan pursuant to President Trump’s executive order. Any repeal and/or replacement of the Clean Power Plan is likely to be challenged by various proponents of the plan, such as environmental groups and certain states. Any impacts to our operations as a result of any future greenhouse gas regulations are not estimable at this time since the matter is unsettled. In any case, to the extent expenditures associated with any greenhouse gas regulation, as with all costs, are not ultimately reflected in the prices of U. S. Steel's products and services, operating results will be reduced. In addition, on April 2, 2018, EPA Administrator Scott Pruitt signed a notice in which the EPA withdrew from its prior January 12, 2017 Final Determination regarding greenhouse gas emission standards for model year (MY) 2022-2025 light duty vehicles. In the April 2, 2018 notice, the EPA provided its new determination that the greenhouse gas emission standards for MY 2022-2025 light duty vehicles are not appropriate in light of the record before the EPA and, therefore, the standards should be revised. The EPA, in partnership with the National Highway Traffic Safety Administration, will initiate a notice and comment rulemaking in a forthcoming Federal Register notice to further consider appropriate standards for MY 2022-2025 light-duty vehicles. California and other states have threatened to sue the EPA over the Agency’s withdrawal of the prior determination. There were no material changes in U. S. Steel’s exposure to European Greenhouse Gas Emissions regulations since December 31, 2017.
United States - Air
The CAA imposes stringent limits on air emissions with a federally mandated operating permit program and civil and criminal enforcement sanctions. The CAA requires, among other things, the regulation of hazardous air pollutants through the development and promulgation of National Emission Standards for Hazardous Air Pollutants (NESHAP) and Maximum Achievable Control Technology (MACT) Standards. The EPA has developed various industry-specific MACT standards pursuant to this requirement. The CAA requires the EPA to promulgate regulations establishing emission standards for each category of Hazardous Air Pollutants. The EPA also must conduct risk assessments on each source category that is already subject to MACT standards and determine if additional standards are needed to reduce residual risks.
While our operations are subject to several different categories of NESHAP and MACT standards, the principal impact of these standards on U. S. Steel operations includes those that are specific to coke making, iron making, steel making and iron ore processing.
The EPA is currently in the process of completing a Residual Risk and Technology Review of the Integrated Iron and Steel MACT regulations, Coke MACT regulations, and Taconite Iron Ore Processing MACT regulations as required by the CAA. The EPA is under a court order to complete the Residual Risk and Technology Review of the Integrated Iron and Steel regulations no later than March 13, 2020; and to complete the Residual Risk and Technology Review of the Taconite Iron Ore Processing Regulations by June 30, 2020. Because the EPA has not completed its review, any impacts related to the EPA’s review of these standards cannot be estimated at this time.
On March 12, 2018, the New York State Department of Environmental Conservation (DEC) submitted a CAA Section 126 petition to the EPA. In the petition, the DEC asserts that stationary sources from the following nine states are interfering with attainment or maintenance of the 2008 and 2015 ozone National Ambient Air Quality Standards (NAAQS) in New York state: Illinois, Indiana, Kentucky, Maryland, Michigan, Ohio, Pennsylvania, Virginia, and West Virginia. DEC is requesting the EPA to require sources of nitrogen oxides in the nine states to reduce such emissions. Under the CAA, unless extended, the EPA has 60-days to approve or deny the petition. On May 4, 2018, citing Section 307(d)(10) of the CAA, the EPA issued a notice extending the deadline for the agency to respond to the petition until November 9, 2018. The EPA indicated the extension is justified because more time is needed to review the petition and to solicit public comment. EPA approval of the petition could potentially result in increased capital and operating costs to our operations in the states identified in the petition.
The CAA also requires the EPA to develop and implement NAAQS for criteria pollutants, which include, among others, particulate matter (PM) - consisting of PM
10
and PM
2.5
, lead, carbon monoxide, nitrogen dioxide, SO
2
, and ozone.
In June 2010, the EPA significantly lowered the primary NAAQS for SO
2
from 140 parts per billion (ppb) on a 24-hour basis to an hourly standard of 75 ppb. Subsequently, the EPA designated the areas in which Great Lakes Works and
Mon Valley Works facilities are located as nonattainment with the 2010 standard for the SO
2
NAAQS. The non-attainment designation requires the facilities to implement operational and/or capital improvements to demonstrate attainment with the 2010 standard. U. S. Steel worked with the Allegheny County Health Department (ACHD) in developing a State Implementation Plan (SIP) for the Allegheny County portion of the Pennsylvania SIP that includes reductions of SO
2
and improved dispersion from U. S. Steel sources. The SIP is currently being reviewed by the EPA. In addition, as noted in the Legal Proceedings section, U. S. Steel continues to work with the regulatory authorities to address the Wayne County, Michigan (where Great Lakes Works is located) nonattainment status. The operational and financial impacts of the SO
2
NAAQS is not estimated to be material at this time.
In October 2015, the EPA lowered the NAAQS for ozone from 75 ppb to 70 ppb. On November 6, 2017, the EPA designated most areas in which we operate as attainment with the 2015 standard. In a separate ruling, on June 4, 2018, the EPA designated other areas in which we operate as “marginal nonattainment” with the 2015 ozone standard. Because any regulatory or permitting actions to bring the ozone nonattainment areas into attainment have yet to be proposed or developed, the operational and financial impact of the ozone NAAQS cannot be reasonably estimated at this time.
On December 14, 2012, the EPA lowered the annual standard for PM
2.5
from 15 micrograms per cubic meter (ug/m3) to 12 ug/m3, and retained the PM
2.5
24-hour and PM
10
NAAQS rules. In December 2014, the EPA designated some areas in which U. S. Steel operates as nonattainment with the 2012 annual PM
2.5
standard. On April 6, 2018, the EPA published a notice that Pennsylvania, California and Idaho failed to submit a SIP to demonstrate attainment with the 2012 fine particulate standard by the deadline established by the CAA. As a result of the notice, Pennsylvania, in which we operate, is required to submit a SIP to the EPA no later than November 7, 2019 to avoid sanctions. Because it is early in the SIP development stages, any impacts to U. S. Steel cannot be reasonably estimated at this time.
In 2010, the EPA retained the annual nitrogen dioxide NAAQS standard, but created a new 1-hour NAAQS and established new data reduction and monitoring requirements. While the EPA has classified all areas as being in attainment or unclassifiable, it is requiring implementation of a network of monitoring stations to assess air quality. Until the network is implemented and further designations are made, the impact on operations at U. S. Steel facilities cannot be reasonably estimated at this time.
Environmental Remediation
In the United States, U. S. Steel has been identified as a potentially responsible party (PRP) at seven sites under CERCLA as of June 30, 2018. Of these, there are two sites where information requests have been received or there are other indications that U. S. Steel may be a PRP under CERCLA, but where sufficient information is not presently available to confirm the existence of liability or to make a reasonable estimate with respect to any potential liabilities. There are also 17 additional sites where U. S. Steel may be liable for remediation costs in excess of $100,000 under other environmental statutes, both federal and state, or where private parties are seeking to impose liability on U. S. Steel for remediation costs through discussions or litigation. At many of these sites, U. S. Steel is one of a number of parties involved and the total cost of remediation, as well as U. S. Steel’s share, is frequently dependent upon the outcome of ongoing investigations and remedial studies. U. S. Steel accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably estimable. As environmental remediation matters proceed toward ultimate resolution or as remediation obligations arise, charges in excess of those previously accrued may be required.
For further discussion of relevant environmental matters, see "Part II. Other information - Item 1. Legal Proceedings - Environmental Proceedings."
The total accrual for such liabilities at June 30, 2018 was $179 million. These amounts exclude liabilities related to asset retirement obligations, disclosed in Note 16 to the Consolidated Financial Statements.
U. S. Steel is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Consolidated Financial Statements.
OFF-BALANCE SHEET ARRANGEMENTS
U. S. Steel did not enter into any new material off-balance sheet arrangements during the
second
quarter of
2018
.
GUIDANCE
The success to date of our ongoing $2 billion asset revitalization program, as well as our earnings power in the current market, makes us increasingly optimistic about future investments that will drive long-term profitable growth.
We currently expect that third quarter 2018 adjusted EBITDA will be approximately $525 million. We expect our Flat-rolled segment results to continue to improve as more of our adjustable contract and spot shipments realize the benefit of second quarter increases in index prices, partially offset by higher planned outage costs. We expect results for our Tubular segment to turn positive as selling price increases catch up to the rising substrate costs we saw in the first half of the year. We expect results for our European segment to be lower in the third quarter, primarily due to planned outages that coincide with normal seasonal customer demand patterns.
Based on our progress to date, we are increasing full-year 2018 adjusted EBITDA guidance to approximately $1.85 - $1.90 billion.
Please refer to the table below for the reconciliation of Guidance net earnings to adjusted EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES STEEL CORPORATION
|
RECONCILIATION OF ADJUSTED EBITDA GUIDANCE
|
|
|
|
Year Ended
|
Year Ended
|
|
|
Quarter Ended
|
Dec. 31
|
Dec. 31
|
|
|
Sept. 30
|
2018
|
2018
|
(Dollars in millions)
|
2018
|
(Low end of range)
|
(High end of range)
|
Reconciliation to Projected Adjusted EBITDA Included in Guidance
|
|
|
|
|
Projected net earnings attributable to United States Steel Corporation included in Guidance
|
$
|
288
|
|
$
|
925
|
|
$
|
975
|
|
|
Estimated income tax expense
|
22
|
|
50
|
|
50
|
|
|
Estimated net interest and other financial costs
|
61
|
|
315
|
|
315
|
|
|
Estimated depreciation, depletion and amortization
|
129
|
|
520
|
|
520
|
|
|
Gain on equity investee transactions
|
—
|
|
(18
|
)
|
(18
|
)
|
|
Granite City Works blast furnace B restart costs
|
—
|
|
36
|
|
36
|
|
|
Estimated Granite City Works blast furnace A restart costs
|
25
|
|
30
|
|
30
|
|
|
Granite City works adjustment to temporary idling charges
|
—
|
|
(8
|
)
|
(8
|
)
|
|
Projected adjusted EBITDA included in Guidance
|
$
|
525
|
|
$
|
1,850
|
|
$
|
1,900
|
|
We present earnings (loss) before interest, income taxes, depreciation and amortization (EBITDA) and adjusted EBITDA, which are non-GAAP measures, as additional measurements to enhance the understanding of our operating performance. We believe that EBITDA, considered along with net earnings (loss), is a relevant indicator of trends relating to our operating performance and provides management and investors with additional information for comparison of our operating results to the operating results of other companies.
Adjusted EBITDA is a non-GAAP measure that excludes the effects of gains on the sale of ownership interests in equity investees, facility restart costs and significant temporary idling charges. We present adjusted EBITDA to enhance the understanding of our ongoing operating performance and established trends affecting our core operations, by excluding the effects of items such as gains on the sale of ownership interests in equity investees, facility restart costs and significant temporary idling charges that can obscure underlying trends. U. S. Steel's management considers adjusted EBITDA as an alternative measure of operating performance and not as an alternative measure of the Company's liquidity. U. S. Steel’s management considers adjusted EBITDA useful to investors by facilitating a comparison of our operating performance to the operating performance of our competitors. Additionally, the presentation of adjusted EBITDA provides insight into management’s view and assessment of the Company’s ongoing operating performance, because management does not consider the adjusting items when evaluating the Company’s financial performance or in preparing the Company’s annual financial Guidance. Adjusted EBITDA should not be
considered a substitute for net earnings (loss) or other financial measures as computed in accordance with U.S. GAAP and is not necessarily comparable to similarly titled measures used by other companies.
INTERNATIONAL TRADE
U. S. Steel continues to face competition from foreign steel producers, many of which are heavily subsidized by their governments and dump steel into our markets. Trade-distorting policies and practices, coupled with global steel overcapacity, impact pricing in our markets and influence the Company's ability to compete on a level playing field. U. S. Steel continues to lead the industry in efforts to address dumped and subsidized steel imports that injure the Company, our workers, and our country’s national and economic security.
On April 19, 2017, the U.S. Department of Commerce (DOC) initiated an investigation under Section 232 of the Trade Expansion Act of 1962 to determine the effects of steel imports on U.S. national security. On May 24, 2017, U. S. Steel testified at the DOC public hearing and remained active throughout the investigation. On January 11, 2018, the DOC submitted its investigation report to the President. On March 8, 2018, the President signed Proclamation 9705 imposing 25 percent tariffs on steel imports from all countries except for Canada and Mexico. On March 19, 2018, the DOC published the requirements and process for companies to request and oppose product exclusions from the 25 percent tariff. Companies have 30 days from the publication of an exclusion request to submit opposition comments, and each request should be adjudicated in roughly 90 days. On March 22, 2018, the President signed Proclamation 9711 temporarily exempting steel imports from Argentina, Australia, Brazil, Canada, the European Union (EU), Mexico, and South Korea from the 25 percent tariffs until May 1, 2018. On April 30, 2018, the President signed Proclamation 9740 that (a) extended the exemption for steel imports from Argentina, Australia, and Brazil due to agreements in principle on alternative means to the tariffs to address imports’ threat to national security; (b) extended the exemption for steel imports from Canada, the EU, and Mexico from the tariffs until June 1, 2018; and (c) imposed an annual restrictive quota and other measures on steel imports from South Korea in lieu of the tariffs, retroactive to January 1, 2018. On June 5, 2018, the President signed Proclamation 9759 that imposed annual restrictive quotas on steel imports from Argentina and Brazil, retroactive to January 1, 2018. As a result, since June 1, 2018, the 25 percent tariffs apply to steel imports from Canada, the EU, and Mexico. China, Canada, the EU, India, Mexico, Norway, and Russia have challenged the Section 232 action by filing requests for consultation with the United States at the World Trade Organization (WTO). China, the EU, India, Japan, and Turkey have also requested consultations regarding the Section 232 action under the WTO’s Agreement on Safeguards. On June 27, 2018, the American Institute for International Steel (AIIS) and AIIS members Sim-Tex and Kurt Orban Partners filed a complaint at the U.S. Court of International Trade (CIT) challenging the constitutionality of the Section 232 statute.
U. S. Steel continues to actively defend and maintain the 54 antidumping (AD) and countervailing duty (CVD) orders covering products U. S. Steel produces in proceedings before the DOC, U.S. International Trade Commission (USITC), the CIT, the U.S. Court of Appeals for the Federal Circuit, and the WTO.
On May 17, 2018, in response to circumvention petitions filed by U. S. Steel and other domestic steel producers in September 2016, the DOC found that imports of cold-rolled and corrosion-resistant steel from Vietnam made from Chinese substrate are covered by the AD/CVD orders on such imports from China. As a result of the DOC’s final determination, U.S. imports of cold-rolled steel from Vietnam made from Chinese hot-rolled steel are subject to 522.23% cash deposit requirements and U.S. imports of corrosion-resistant steel from Vietnam made from Chinese hot- or cold-rolled steel are subject to 238.48% cash deposit requirements, both retroactive to November 4, 2016. On June 12, 2018, U. S. Steel and other domestic producers filed additional similar circumvention petitions on: (1) imports of cold-rolled and corrosion-resistant steel from Vietnam made from Korean substrate; and (2) imports of corrosion-resistant steel from Vietnam made from Taiwanese substrate.
On May 31, 2018, the USITC unanimously voted (5-0) to continue the 2000 AD order on tin mill products from Japan for another five years. Thus, AD duties of up to 95.29% will continue to apply to covered tin mill imports from Japan.
On December 12, 2016, China filed a complaint at the WTO against the U.S. and the EU alleging that the U.S. and EU are violating their treaty obligations by continuing to use the non-market economy (NME) methodology for price comparisons in antidumping duty investigations and reviews. On April 3, 2017, the DOC issued a notice requesting comments and information on whether China should continue to be treated as a NME country under U.S. AD laws. U. S. Steel and other domestic producers submitted comments to the DOC on May 10, 2017. On October 26, 2017, the DOC issued a memorandum concluding that it will continue to use the NME methodology for AD proceedings involving imports from China because the state continues to fundamentally distort China’s economy. China then requested additional consultations with the U.S. regarding its WTO complaint. The outcome of these WTO disputes may impact U.S. AD orders on Chinese goods, including many steel products.
U. S. Steel continually assesses the impact of imports and global excess capacity on our business, and continues to execute a broad, global strategy to enhance the means and manner that it competes in the U.S. market and internationally.
NEW ACCOUNTING STANDARDS
See Notes 2 and 3 to the Consolidated Financial Statements in Part I Item 1 of this Form 10-Q.