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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2003
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------
UNITED STATES STEEL CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-16811 25-1897152
- -------------- ----------- ------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
600 Grant Street, Pittsburgh, PA 15219-2800
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 433-1121
------------------------------
(Registrant's telephone number,
including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
Common stock outstanding at July 31, 2003 - 103,278,239 shares
UNITED STATES STEEL CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2003
--------------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Statement of Operations (Unaudited)......................................................... 3
Balance Sheet (Unaudited)................................................................... 5
Statement of Cash Flows (Unaudited)......................................................... 6
Selected Notes to Financial Statements (Unaudited).......................................... 7
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends and Ratio of
Earnings to Fixed Charges................................................................. 29
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................................ 30
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................................................... 61
Item 4. Controls and Procedures..................................................................... 64
Supplemental Statistics..................................................................... 65
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 66
Item 4. Submission of Matters to a Vote of Security Holders......................................... 69
Item 6. Exhibits and Reports on Form 8-K............................................................ 70
SIGNATURE ........................................................................................... 72
WEB SITE POSTING .................................................................................... 72
Part I - Financial Information:
UNITED STATES STEEL CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
REVENUES AND OTHER INCOME:
Revenues ........................................... $ 2,096 $ 1,541 $ 3,757 $ 2,750
Revenues from related parties ...................... 215 220 452 442
Income (loss) from investees ....................... (9) 7 (8) 9
Net gains on disposal of assets .................... 21 4 23 5
Other income ....................................... 39 35 45 35
------- ------- ------- -------
Total revenues and other income ................. 2,362 1,807 4,269 3,241
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of revenues (excludes items shown below) ...... 2,091 1,571 3,823 2,907
Selling, general and administrative expenses ....... 142 100 271 171
Depreciation, depletion and amortization ........... 87 89 177 177
------- ------- ------- -------
Total costs and expenses ........................ 2,320 1,760 4,271 3,255
------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS ....................... 42 47 (2) (14)
Net interest and other financial costs .............. 42 19 80 53
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY
LOSS AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE ............................ - 28 (82) (67)
Provision (benefit) for income taxes ................ (3) 1 (52) (11)
------- ------- ------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 3 27 (30) (56)
Extraordinary loss, net of tax ...................... (52) - (52) -
Cumulative effect of change in accounting principle,
net of tax ......................................... - - (5) -
------- ------- ------- -------
NET INCOME (LOSS) ................................... (49) 27 (87) (56)
Dividends on preferred stock ........................ (5) - (7) -
------- ------- ------- -------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK ........ $ (54) $ 27 $ (94) $ (56)
======= ======= ======= =======
Selected notes to financial statements appear on pages 7-28.
3
UNITED STATES STEEL CORPORATION
STATEMENT OF OPERATIONS (Continued) (Unaudited)
COMMON STOCK DATA
------------------------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA:
Per share - basic and diluted:
Income (loss) before extraordinary loss and
cumulative effect of change in accounting principle ....... $ (.01) $ .28 $ (.36) $ (.60)
Extraordinary loss, net of tax ............................. (.50) - (.50) -
Cumulative effect of change in accounting
principle, net of tax ..................................... - - (.05) -
----------- ----------- ----------- -----------
Net income (loss) .......................................... $ (.51) $ .28 $ (.91) $ (.60)
=========== =========== =========== ===========
Weighted average shares, in thousands
- Basic .................................................... 103,228 95,670 102,981 92,636
- Diluted .................................................. 103,228 95,675 102,981 92,636
Dividends paid per share .................................... $ .05 $ .05 $ .10 $ .10
PROFORMA AMOUNTS ASSUMING CHANGE IN ACCOUNTING
PRINCIPLE WAS APPLIED RETROACTIVELY:
Income (loss) before extraordinary loss and
cumulative effect of change in
accounting principle adjusted .............................. $ 3 $ 26 $ (30) $ (58)
Per share adjusted - basic and diluted ..................... (.01) .28 (.36) (.62)
Net income (loss) adjusted ................................... (49) 26 (82) (58)
Per share adjusted - basic and diluted ..................... (.51) .28 (.86) (.62)
Selected notes to financial statements appear on pages 7-28.
4
UNITED STATES STEEL CORPORATION
BALANCE SHEET (Unaudited)
-------------------------------
June 30 December 31
(Dollars in millions) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 145 $ 243
Receivables, less allowance of $117 and $57...................................... 1,233 805
Receivables from related parties................................................. 118 129
Inventories...................................................................... 1,468 1,030
Deferred income tax benefits..................................................... 248 217
Other current assets............................................................. 38 16
------ ------
Total current assets........................................................... 3,250 2,440
Investments and long-term receivables,
less allowance of $2 and $2...................................................... 311 341
Long-term receivables from related parties......................................... 6 6
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$6,962 and $7,095................................................................ 3,497 2,978
Pension asset...................................................................... 1,628 1,654
Intangible pension asset........................................................... 414 414
Other intangible assets, net....................................................... 48 -
Other noncurrent assets............................................................ 179 144
------ ------
Total assets................................................................... $ 9,333 $ 7,977
====== ======
LIABILITIES
Current liabilities:
Accounts payable................................................................. $ 934 $ 677
Accounts payable to related parties.............................................. 105 90
Payroll and benefits payable..................................................... 342 254
Accrued taxes.................................................................... 349 281
Accrued interest................................................................. 39 44
Long-term debt due within one year............................................... 37 26
------ ------
Total current liabilities...................................................... 1,806 1,372
Long-term debt, less unamortized discount.......................................... 1,846 1,408
Deferred income taxes.............................................................. 169 223
Employee benefits.................................................................. 2,975 2,601
Deferred credits and other liabilities............................................. 362 346
------ ------
Total liabilities.............................................................. 7,158 5,950
------ ------
Contingencies and commitments (See Note 19)........................................ - -
STOCKHOLDERS' EQUITY
Preferred stock -
7% Series B Mandatory Convertible
Preferred issued - 5,000,000 shares
and -0- shares (no par value, liquidation
preference $50 per share)........................................................ 242 -
Common stock issued - 103,296,600 shares and
102,485,246 shares............................................................... 103 102
Additional paid-in capital......................................................... 2,695 2,689
Retained earnings (deficit)........................................................ (62) 42
Accumulated other comprehensive loss............................................... (802) (803)
Deferred compensation.............................................................. (1) (3)
------ ------
Total stockholders' equity..................................................... 2,175 2,027
------ ------
Total liabilities and stockholders' equity..................................... $ 9,333 $ 7,977
====== ======
Selected notes to financial statements appear on pages 7-28.
5
UNITED STATES STEEL CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
Six Months Ended
June 30
(Dollars in millions) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss............................................................................... $ (87) $ (56)
Adjustments to reconcile to net cash provided from (used in)
operating activities:
Extraordinary loss, net of tax....................................................... 52 -
Cumulative effect of change in accounting principle, net of tax...................... 5 -
Depreciation, depletion and amortization............................................. 177 177
Pensions and other postretirement benefits........................................... 98 (21)
Deferred income taxes................................................................ (53) (2)
Net gains on disposal of assets...................................................... (23) (5)
Income from sale of coal seam gas interests.......................................... (34) -
(Income) loss from equity investees, net of distributions............................ (22) 4
Changes in:
Current receivables
- sold............................................................................. 175 255
- repurchased...................................................................... (175) (255)
- operating turnover............................................................... (129) (292)
Inventories........................................................................ 43 (49)
Current accounts payable and accrued expenses...................................... 162 186
All other - net........................................................................ (21) (49)
------- --------
Net cash provided from (used in) operating activities................................ 168 (107)
------- --------
INVESTING ACTIVITIES:
Capital expenditures................................................................... (132) (104)
Disposal of assets..................................................................... 71 8
Sale of coal seam gas interests........................................................ 34 -
Acquisition of National Steel Corporation assets....................................... (872) -
Restricted cash - withdrawals.......................................................... 41 2
- deposits .......................................................... (66) (53)
Investees - investments (4) (5)
- loans and advances - (3)
- repayments of loans and advances.......................................... - 7
------- --------
Net cash used in investing activities................................................ (928) (148)
------- --------
FINANCING ACTIVITIES:
Issuance of long-term debt, net of deferred financing costs............................ 428 -
Repayment of long-term debt............................................................ (2) (30)
Revolving credit arrangements - net.................................................... - 10
Settlement with Marathon Oil Corporation............................................... - (54)
Preferred stock issued................................................................. 242 -
Common stock issued.................................................................... 11 218
Dividends paid......................................................................... (16) (9)
------- --------
Net cash provided from financing activities.......................................... 663 135
------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................................................ (1) 1
------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS.............................................. (98) (119)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................................... 243 147
------- --------
CASH AND EQUIVALENTS AT END OF PERIOD.................................................. $ 145 $ 28
======= ========
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized)................................................................. $ (69) $ (64)
Income taxes paid to tax authorities................................................. (3) (3)
Selected notes to financial statements appear on pages 7-28.
6
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information in these financial statements is unaudited but, in the
opinion of management, reflects all adjustments necessary for a fair
presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected 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 accounting principles generally accepted in the United
States of America for complete financial statements. Certain
reclassifications of prior year data have been made to conform to 2003
classifications. Additional information is contained in the United
States Steel Corporation Annual Report on Form 10-K for the year ended
December 31, 2002.
2. United States Steel Corporation (U. S. Steel) is engaged domestically in
the production, sale and transportation of steel mill products, coke and
taconite pellets (iron ore); steel mill products distribution; the
management of mineral resources; the management and development of real
estate; and engineering and consulting services and, through U. S. Steel
Kosice (USSK) in the Slovak Republic, in the production and sale of
steel mill products and coke primarily for the central and western
European markets. As reported in Note 4, until June 30, 2003, U. S.
Steel was also engaged in the production and sale of coal.
3. On May 20, 2003, U. S. Steel acquired substantially all of the
integrated steelmaking assets of National Steel Corporation (National).
The facilities of National that were acquired included two integrated
steel plants, Granite City in Granite City, Illinois and Great Lakes, in
Ecorse and River Rouge, Michigan; the Midwest finishing facility in
Portage, Indiana; ProCoil, a steel-processing facility in Canton,
Michigan; a 50% equity interest in Double G Coatings, L.P. near Jackson,
Mississippi; a taconite pellet operation near Keewatin, Minnesota; and
the Delray Connecting Railroad. The acquisition of National's assets has
made U. S. Steel the largest steel producer in North America and has
strengthened U. S. Steel's overall position in providing value-added
products to the automotive, container and construction markets. Results
of operations for the second quarter and six months ended June 30, 2003,
include the operations of National from May 20, 2003.
The aggregate purchase price for National's assets was $1,357 million,
consisting of $817 million in cash and the assumption or recognition of
$540 million in liabilities. The $817 million in cash reflects $844
million paid to National at closing and transaction costs of $28
million, less an estimated working capital adjustment in accordance with
the terms of the Asset Purchase Agreement of $55 million. The $55
working capital adjustment has been calculated and submitted to National
and U. S. Steel has recorded a receivable for this amount. If this
amount is contested, the matter is to be resolved within 75 days of the
submission of the calculation to National. In addition to certain direct
obligations of National assumed by U. S. Steel, obligations recognized
on the opening balance sheet include amounts for employee related
liabilities that resulted from the new labor agreement with the United
Steelworkers of America (USWA) as it pertains to the employees hired
from National. The new labor agreement and these liabilities are
discussed in more detail below.
7
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
In connection with the acquisition of National's assets, U. S. Steel
reached a new labor agreement with the USWA, which covers employees at
the U. S. Steel facilities and the acquired National facilities. The
agreement was ratified by the USWA membership in May 2003, expires in
2008 and provides for a workforce restructuring through a Transition
Assistance Program (TAP). U. S. Steel assumed a 20% participation level
in the TAP in calculating the estimated fair value of the obligations
recorded for benefits granted under the labor agreement to former active
National employees represented by the USWA and hired by U. S. Steel. The
liabilities included $214 million for future retiree medical costs,
subject to certain eligibility requirements, $59 million related to
future payments for employees who participate in the TAP, and $24
million for accrued vacation benefits. U. S. Steel also recognized a $12
million liability related to two cash contributions to be made to the
Steelworkers Pension Trust in 2003 and 2004 based on the number of
National's represented employees as of the date of the acquisition of
National's assets, less the number of these employees estimated to
participate in the TAP. The Steelworkers Pension Trust is a
multiemployer pension plan to which U. S. Steel will make defined
contributions for all former National represented employees who join
U. S. Steel and, in the future, for all new U. S. Steel employees
represented by the USWA.
The following is a summary of the preliminary allocation of the purchase
price to the assets acquired and liabilities assumed or recognized based
on their estimated fair market values. Independent appraisers have
provided fair values for inventory, property, plant and equipment,
intangible assets and other noncurrent assets. The appraisal is
preliminary at this time and U. S. Steel is in the process of reviewing
the appraisal report. Based on the preliminary appraisal, the fair value
of the net assets acquired from National was in excess of the purchase
price, resulting in negative goodwill. In accordance with SFAS 141
"Business Combinations," the negative goodwill was allocated as a pro
rata reduction to the amounts that would have otherwise been assigned to
the acquired noncurrent assets, primarily property, plant and equipment
and intangible assets, based on their relative fair values.
Allocated
Purchase Price
--------------------
(In millions)
Acquired assets:
Accounts receivable ............................ $ 225
Inventory ...................................... 499
Other current assets ........................... 22
Property, plant & equipment .................... 559
Intangible assets .............................. 49
Other noncurrent assets ........................ 3
------
Total assets ................................ 1,357
------
Acquired liabilities:
Accounts payable ............................... 159
Payroll and benefits payable ................... 71
Other current liabilities ...................... 31
Employee benefits .............................. 243
Other noncurrent liabilities ................... 36
------
Total liabilities ........................... 540
------
Purchase price-cash ................................. $ 817
======
8
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
The above allocation of the purchase price has been prepared on a
preliminary basis. Changes are expected to be made as additional
information becomes available, including the resolution of the working
capital adjustment and any preacquisition contingencies; and completion
of the TAP, environmental assessments and asset appraisal.
The $49 million of intangible assets is primarily comprised of
proprietary software with a weighted average useful life of
approximately 6 years. U. S. Steel recognized $1 million of amortization
expense in the second quarter of 2003 related to these intangible
assets.
The following unaudited pro forma data for U. S. Steel includes the
results of operations of the National acquisition as if it had been
consummated at the beginning of the periods presented, including the
effects of the new labor agreement as it pertains to the former National
facilities and the financings incurred to fund the acquisition. In
addition, the unaudited pro forma data is based on historical
information and does not necessarily reflect the actual results that
would have occurred nor is it necessarily indicative of future results
of operations.
Second Quarter Six Months
Ended Ended
June 30 June 30
(In millions, except per share data) 2003 2002 2003 2002
-----------------------------------------------------------------------------------------------------------------
Revenues and other income ..................................... $ 2,703 $ 2,455 $ 5,272 $ 4,491
Income (loss) before extraordinary loss and cumulative effect
cumulative effect of change
in accounting principle ..................................... 11 27 (34) (89)
Per share - basic and diluted ............................ .06 .24 (.42) (1.06)
Net income (loss) ............................................. (41) 27 (93) (89)
Per share - basic and diluted ............................ (.44) .24 (.99) (1.06)
4. On June 30, 2003, U. S. Steel completed the sale of the coal mines and
related assets of U. S. Steel Mining Company, LLC (Mining Sale) to
PinnOak Resources, LLC (PinnOak), which is not affiliated with U. S.
Steel. PinnOak acquired the Pinnacle No. 50 mine complex located near
Pineville, West Virginia and the Oak Grove mine complex located near
Birmingham, Alabama. In conjunction with the sale, U. S. Steel and
PinnOak entered into a long-term coal supply agreement, which runs
through December 31, 2006.
9
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. (Continued)
The gross proceeds from the sale are estimated to be $57 million, of
which $50 million was received at closing and an estimated $7 million
that relates to an adjustment to the purchase price based on inventory
levels at June 30, 2003, will be received in the fourth quarter. U. S.
Steel recognized a pretax gain of $13 million on the sale in the second
quarter of 2003. In addition, EITF 92-13, "Accounting for Estimated
Payments in Connection with the Coal Industry Retiree Health Benefit Act
of 1992" requires that enterprises that no longer have operations in the
coal industry must account for their entire obligation related to the
multiemployer health care benefit plans created by the Act as a loss in
accordance with SFAS No. 5, "Accounting for Contingencies." Accordingly,
U. S. Steel recognized the present value of these obligations in the
amount of $85 million, resulting in the recognition of an extraordinary
loss of $52 million, net of tax of $33 million.
5. U. S. Steel has various stock-based employee compensation plans. The
Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based employee
compensation cost is reflected in net income for stock options or stock
appreciation rights (SARs) at the date of grant, as all options and SARs
granted had an exercise price equal to the market value of the
underlying common stock. When the stock price exceeds the grant price,
SARs are adjusted for changes in the market value and compensation
expense is recorded. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation."
Second Quarter Ended
June 30
(In millions, except per share data) 2003 2002
-------------------------------------------------------------------------------------------------------------------
Net income (loss) ............................................................ $(49) $ 27
Add: Stock-based employee compensation expense included in
reported net income (loss), net of related tax effects ..................... 1 -
Deduct: Total stock-based employee compensation expense
determined under fair value methods for all awards,
net of related tax effects ................................................. (1) (1)
---- ----
Pro forma net income (loss) .................................................. $(49) $ 26
==== ====
Basic and diluted net income (loss) per share:
- As reported .............................................................. $(.51) $.28
- Pro forma ................................................................ (.52) .27
10
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
The above pro forma amounts were based on a Black-Scholes option-pricing
model, which included the following information and assumptions:
Second Quarter Ended
June 30
2003 2002
---------------------------------------------------------------------------------------------------------------------
Weighted average grant date exercise price per share ........................ $14.38 $20.42
Expected annual dividends per share ......................................... $ .20 $ .20
Expected life in years ...................................................... 5 5
Expected volatility ......................................................... 45.3 43.4
Risk-free interest rate ..................................................... 2.4 4.4
Weighted-average grant date fair value of options granted
during the period, as calculated from above ................................ $ 5.41 $ 8.29
Six Months Ended
June 30
(In millions, except per share data) 2003 2002
---------------------------------------------------------------------------------------------------------------------
Net loss .................................................................... $ (87) $ (56)
Add: Stock-based employee compensation expense included
in reported net loss, net of related tax effects .......................... 1 -
Deduct: Total stock-based employee compensation expense
determined under fair value methods for all awards, net
of related tax effects .................................................... (3) (3)
------ ------
Pro forma net loss .......................................................... $ (89) $ (59)
====== ======
Basic and diluted net loss per share:
- As reported ............................................................. $ (.91) $ (.60)
- Pro forma ............................................................... (.93) (.64)
The above pro forma amounts were based on a Black-Scholes option-pricing
model, which included the following information and assumptions:
Six Months Ended
June 30
2003 2002
---------------------------------------------------------------------------------------------------------------------
Weighted average grant date exercise price per share ........................ $16.97 $20.22
Expected annual dividends per share ......................................... $ .20 $ .20
Expected life in years ...................................................... 5 5
Expected volatility ......................................................... 44.5 42.0
Risk-free interest rate ..................................................... 3.3 4.6
Weighted-average grant date fair value of options granted
during the period, as calculated from above ................................ $ 6.65 $ 8.07
11
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143 established a new
accounting model for the recognition and measurement of retirement
obligations associated with tangible long-lived assets. SFAS No. 143
requires that an asset retirement obligation be capitalized as part of
the cost of the related long-lived asset and subsequently allocated to
expense using a systematic and rational method. SFAS No. 143 requires
proforma disclosure of the amount of the liability for obligations as if
the statement had been applied during all periods affected, using
current information, current assumptions and current interest rates. In
addition, the effect of adopting a new accounting principle on net
income and on the related per share amounts is required to be shown on
the face of the statement of operations for all periods presented under
Accounting Principles Board Opinion No. 20, "Accounting Changes."
On January 1, 2003, the date of adoption, U. S. Steel recorded asset
retirement obligations (AROs) of $14 million (in addition to $15 million
already accrued), compared to the associated long-lived asset, net of
accumulated depreciation, of $7 million that was recorded, resulting in
a cumulative effect of adopting this Statement of $5 million, net of tax
of $2 million. The obligations recorded on January 1, 2003, and the
amounts acquired from National primarily relate to mine and landfill
closure and post-closure costs.
The following table reflects changes in the carrying values of AROs for
the six months ended June 30, 2003, and the pro forma impacts for the
year ended December 31, 2002, as if SFAS No. 143 had been adopted on
January 1, 2002:
Six Months (Pro Forma)
Ended Year Ended
(In millions) June 30, 2003 December 31, 2002
------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period .............................................. $ 29 $ 26
Liabilities acquired with National's assets ................................. 4 -
Accretion expense ........................................................... 2 3
Liabilities removed with Mining Sale ........................................ (14) -
------ ------
Balance at end of period .................................................... $ 21 $ 29
====== ======
Certain asset retirement obligations related to disposal costs of fixed
assets at our steel facilities have not been recorded because they have
an indeterminate settlement date. These asset retirement obligations
will be initially recognized in the period in which sufficient
information exists to estimate fair value.
12
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. (Continued)
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." The Interpretation
elaborates on the disclosure to be made by a guarantor about obligations
under certain guarantees that it has issued. It also clarifies that at
the inception of a guarantee, the company must recognize liability for
the fair value of the obligation undertaken in issuing the guarantee.
The initial recognition and measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31,
2002. The disclosure requirements were adopted for the 2002 annual
financial statements. U. S. Steel is applying the remaining provisions
of the Interpretation prospectively as required.
FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities," was issued in January 2003 and addresses consolidation by
business enterprises of variable interest entities that do not have
sufficient equity investment to permit the entity to finance its
activities without additional subordinated financial support from other
parties or whose equity investors lack the characteristics of a
controlling financial interest. This Statement was adopted in the first
quarter of 2003 with no initial impact to U. S. Steel.
In April 2003, the FASB issued SFAS No. 149, "Accounting for Derivative
Instruments and Hedging Activities." The Statement amends and clarifies
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. The amendments set forth in SFAS No. 149 improve
financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. SFAS No. 149 is effective
for contracts entered into or modified after June 30, 2003, except for
certain outlined exceptions. This Statement was adopted with no initial
impact.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 changes the accounting for certain financial
instruments that, under previous guidance, could be classified as equity
or "mezzanine" equity, by now requiring these instruments be classified
as liabilities (or assets in some circumstances) in the balance sheet.
Further, SFAS No. 150 requires disclosure regarding the terms of those
instruments and settlement alternatives. The guidance in the Statement
is generally effective for all financial instruments entered into or
modified after May 31, 2003, and is otherwise effective at the beginning
of the first interim period beginning after June 15, 2003. This
Statement was adopted with no initial impact.
7. U. S. Steel has five reportable segments: Flat-rolled, Tubular, USSK,
Straightline Source (Straightline) and USS Real Estate (Real Estate).
13
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
The Flat-rolled segment includes the operating results of U. S. Steel's
domestic integrated steel mills and equity investees involved in the
production of sheet, plate and tin mill products. These operations are
principally located in the United States and primarily serve customers
in the transportation (including automotive), appliance, service center,
conversion, container and construction markets. Effective May 20, 2003,
the Flat-rolled segment includes the operating results of Granite City,
Great Lakes, the Midwest finishing facility, ProCoil and U. S. Steel's
equity interest in Double G Coatings, which were acquired from National.
The Tubular segment includes the operating results of U. S. Steel's
domestic tubular production facilities and prior to May 2003, included
U. S. Steel's equity interest in Delta Tubular Processing (Delta). These
operations produce and sell both seamless and electric resistance weld
tubular products and primarily serve customers in the oil, gas and
petrochemical markets. In May 2003, U. S. Steel sold its interest in
Delta.
The USSK segment includes the operating results of U. S. Steel's
integrated steel mill located in the Slovak Republic; a production
facility in Germany; and operations under facility management and
support agreements in Serbia. These operations produce and sell sheet,
plate, tin, tubular, precision tube and specialty steel products, as
well as coke. USSK primarily serves customers in the central and western
European construction, conversion, appliance, transportation, service
center, container, and oil, gas and petrochemical markets. In June 2003,
USSK sold its equity interest in Rannila Kosice, s.r.o.
The Straightline segment includes the operating results of U. S. Steel's
technology-enabled distribution business that serves steel customers
primarily in the eastern and central United States. Straightline
competes in the steel service center marketplace using a nontraditional
business process to sell, process and deliver flat-rolled steel products
in small to medium sized order quantities primarily to job shops,
contract manufacturers and original equipment manufacturers across an
array of industries.
The Real Estate segment includes the operating results of U. S. Steel's
domestic mineral interests that are not assigned to other operating
units; timber properties; and residential, commercial and industrial
real estate that is managed or developed for sale or lease. In April of
2003, U. S. Steel sold certain coal seam gas interests in Alabama. Prior
to the sale, income generated from these interests was reported in the
Real Estate segment.
All other U. S. Steel businesses not included in reportable segments are
reflected in Other Businesses. In the second quarter of 2003, these
businesses were involved in the production and sale of coal, coke and
iron-bearing taconite pellets; transportation services; and engineering
and consulting services. Effective May 20, 2003, Other Businesses
include the operating results of the taconite pellet operations and the
Delray Connecting Railroad, which were acquired from National. Effective
with the USM sale on June 30, 2003, Other Businesses are no longer
involved in the production and sale of coal.
14
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
The chief operating decision maker evaluates performance and determines
resource allocations based on a number of factors, the primary measure
being income (loss) from operations. Income (loss) from operations for
reportable segments and Other Businesses does not include net interest
and other financial costs, the income tax provision (benefit), or items
not allocated to segments. Information on segment assets is not
disclosed as it is not reviewed by the chief operating decision maker.
The accounting principles applied at the operating segment level in
determining income (loss) from operations are generally the same as
those applied at the consolidated financial statement level.
Intersegment sales and transfers for some operations are accounted for
at cost, while others are accounted for at market-based prices, and are
eliminated at the corporate consolidation level. All 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 second quarter of 2003 and
2002 are:
Total
Flat- Straight- Real Reportable
(In millions) rolled Tubular USSK line Estate Segments
- ------------------------------------------------------------------------------------------------------------------------------
Second Quarter 2003
- -------------------
Revenues and other
income:
Customer ................ $ 1,397 $ 140 $ 467 $ 35 $ 24 $ 2,063
Intersegment ............ 50 - 2 - 2 54
Equity income
(loss)(a) .............. 5 - 1 - - 6
Other ................... 2 5 2 - 3 12
------- ------- ------- ------- ------- -------
Total .................. $ 1,454 $ 145 $ 472 $ 35 $ 29 $ 2,135
======= ======= ======= ======= ======= =======
Income (loss)
from operations .......... $ (68) $ (4) $ 67 $ (18) $ 17 $ (6)
======= ======= ======= ======= ======= =======
Second Quarter 2002
- -------------------
Revenues and other
income:
Customer ................ $ 1,063 $ 143 $ 300 $ 19 $ 16 $ 1,541
Intersegment ............ 49 - - - 2 51
Equity income
(loss)(a) .............. 2 - - - - 2
Other ................... (1) - 2 - 4 5
------- ------- ------- ------- ------- -------
Total .................. $ 1,113 $ 143 $ 302 $ 19 $ 22 $ 1,599
======= ======= ======= ======= ======= =======
Income (loss)
from operations .......... $ (26) $ 6 $ 26 $ (9) $ 12 $ 9
======= ======= ======= ======= ======= =======
(a) Represents equity in earnings (losses) of unconsolidated investees.
15
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
Total
Reportable Other Reconciling Total
(In millions) Segments Businesses Items Corp.
- -----------------------------------------------------------------------------------------------------------------------------
Second Quarter 2003
- -------------------
Revenues and other income:
Customer ................................... $ 2,063 $ 248 $ - $ 2,311
Intersegment ............................... 54 262 (316) -
Equity income (loss)(a) .................... 6 (4) (11) (9)
Other ...................................... 12 1 47 60
------- ------- ------- -------
Total ..................................... $ 2,135 $ 507 $ (280) $ 2,362
======= ======= ======= =======
Income (loss) from operations ................ $ (6) $ 12 $ 36 $ 42
======= ======= ======= =======
Second Quarter 2002
- -------------------
Revenues and other income:
Customer ................................... $ 1,541 $ 220 $ - $ 1,761
Intersegment ............................... 51 265 (316) -
Equity income (loss)(a) .................... 2 (1) 6 7
Other ...................................... 5 1 33 39
------- ------- ------- -------
Total ..................................... $ 1,599 $ 485 $ (277) $ 1,807
======= ======= ======= =======
Income (loss) from operations ................ $ 9 $ 23 $ 15 $ 47
======= ======= ======= =======
(a) Represents equity in earnings (losses) of unconsolidated investees.
The following is a schedule of reconciling items for the second quarter of 2003
and 2002:
Revenues Income (Loss)
And From
Other Income Operations
(In millions) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Elimination of intersegment revenues ......................... $ (316) $(316) * *
------- -----
Items not allocated to segments:
Income from sale of coal seam gas interests .............. 34 - $ 34 $ -
Gain on sale of coal mining assets ....................... 13 - 13 -
Asset impairments ........................................ (11) - (11) (14)
Federal excise tax refund ................................ - 33 - 33
Pension settlement loss .................................. - - - (10)
Insurance recoveries related to USS-POSCO fire ........... - 6 - 6
------- ----- ----- -----
36 39 36 15
------- ----- ----- -----
Total reconciling items ...................................... $ (280) $(277) $ 36 $ 15
======= ===== ===== =====
* Elimination of intersegment revenues is offset by the elimination of
intersegment cost of revenues within income (loss) from operations at the
corporate consolidation level.
16
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
The results of segment operations for the six months of 2003 and 2002
are:
Total
Flat- Straight- Real Reportable
(In millions) rolled Tubular USSK line Estate Segments
- --------------------------------------------------------------------------------------------------------------------------------
Six Months 2003
- ---------------
Revenues and other
income:
Customer ................ $ 2,452 $ 276 $ 893 $ 60 $ 51 $ 3,732
Intersegment ............ 102 - 7 - 5 114
Equity income
(loss)(a) .............. 10 - 1 - - 11
Other ................... 8 5 2 - 4 19
------- ------- ------- ------- ------- -------
Total .................. $ 2,572 $ 281 $ 903 $ 60 $ 60 $ 3,876
======= ======= ======= ======= ======= =======
Income (loss)
from operations .......... $ (108) $ (9) $ 131 $ (33) $ 30 $ 11
======= ======= ======= ======= ======= =======
Six Months 2002
- ---------------
Revenues and other
income:
Customer ................ $ 1,989 $ 267 $ 501 $ 25 $ 31 $ 2,813
Intersegment ............ 87 - - - 4 91
Equity income
(loss)(a) .............. (9) - 1 - - (8)
Other ................... (1) - 3 - 4 6
------- ------- ------- ------- ------- -------
Total .................. $ 2,066 $ 267 $ 505 $ 25 $ 39 $ 2,902
======= ======= ======= ======= ======= =======
Income (loss)
from operations .......... $ (100) $ 9 $ 25 $ (17) $ 22 $ (61)
======= ======= ======= ======= ======= =======
(a) Represents equity in earnings (losses) of unconsolidated investees.
17
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
Total
Reportable Other Reconciling Total
(In millions) Segments Businesses Items Corp.
- --------------------------------------------------------------------------------------------------------------------------------
Six Months 2003
- ---------------
Revenues and other income:
Customer ..................................... $ 3,732 $ 477 $ - $ 4,209
Intersegment ................................. 114 419 (533) -
Equity income (loss)(a) ...................... 11 (8) (11) (8)
Other ........................................ 19 2 47 68
------- ------- ------- -------
Total ....................................... $ 3,876 $ 890 $ (497) $ 4,269
======= ======= ======= =======
Income (loss) from operations .................. $ 11 $ (24) $ 11 $ (2)
======= ======= ======= =======
Six Months 2002
- ---------------
Revenues and other income:
Customer ..................................... $ 2,813 $ 379 $ - $ 3,192
Intersegment ................................. 91 451 (542) -
Equity income (loss)(a) ...................... (8) (1) 18 9
Other ........................................ 6 1 33 40
------- ------- ------- -------
Total ....................................... $ 2,902 $ 830 $ (491) $ 3,241
======= ======= ======= =======
Income (loss) from operations ................ $ (61) $ 12 $ 35 $ (14)
======= ======= ======= =======
(a) Represents equity in earnings (losses) of unconsolidated investees.
The following is a schedule of reconciling items for the six months of 2003 and
2002:
Revenues Income (Loss)
And From
Other Income Operations
(In millions) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Elimination of intersegment revenues ........... $ (533) $ (542) * *
------- ------- ------- -------
Items not allocated to segments:
Income from sale of coal seam gas interests .. 34 - $ 34 $-
Gain on sale of coal mining assets ........... 13 - 13 -
Litigation items ............................. - - (25) 9
Asset impairments ............................ (11) - (11) (14)
Federal excise tax refund .................... - 33 - 33
Pension settlement loss ...................... - - - (10)
Insurance recoveries related to USS-POSCO fire - 18 - 18
Costs related to Fairless shutdown ........... - - - (1)
------- ------- ------- -------
36 51 11 35
------- ------- ------- -------
Total reconciling items ........................ $ (497) $ (491) $ 11 $ 35
======= ======= ======= =======
* Elimination of intersegment revenues is offset by the elimination of
intersegment cost of revenues within income (loss) from operations at the
corporate consolidation level.
18
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. On April 25, 2003, U. S. Steel sold certain coal seam gas interests in
Alabama for net cash proceeds of approximately $34 million, which was
reflected in other income.
In the second quarter of 2002, U. S. Steel recognized a pretax gain of
$33 million associated with the recovery of black lung excise taxes that
were paid on coal export sales during the period 1993 through 1999. This
gain is included in other income in the statement of operations and
resulted from a 1998 federal district court decision that found such
taxes to be unconstitutional. Of the $33 million recognized, $10 million
represents the interest component of the gain.
9. Net interest and other financial costs include amounts related to the
remeasurement of USSK's net monetary assets into the U.S. dollar, which
is USSK's functional currency. During the second quarter and six months
of 2003, net gains of $2 million and net losses of $3 million,
respectively, were recorded as compared with a net gain of $13 million
in the second quarter and six months of 2002.
10. Income from investees for the second quarter and six months of 2003
included an impairment charge of $11 million due to an other than
temporary decline in value of a cost method investment. Income from
investees for the second quarter and six months of 2002 included pretax
gains of $6 million and $18 million, respectively, for U. S. Steel's
share of insurance recoveries related to the May 31, 2001 fire at the
USS-POSCO joint venture.
11. Total comprehensive income (loss) was $(48) million for the second
quarter of 2003, $35 million for the second quarter of 2002, $(86)
million for the six months of 2003 and $(48) million for the six months
of 2002.
12. The income tax benefit in the six months of 2003 reflected an estimated
annual effective tax rate of approximately 57%. Additionally, a $4
million deferred tax benefit relating to the reversal of a state
valuation allowance was included in the six months of 2003.
The tax benefit in the six months of 2003 is based on an estimated
annual effective rate, which requires management to make its best
estimate of annual forecasted pretax income (loss) for the year. During
the year, management regularly updates forecast estimates based on
changes in various factors such as prices, shipments, product mix, plant
operating performance, cost estimates and pension issues. To the extent
that actual pretax results for domestic and foreign income in 2003 vary
from forecast estimates applied at the end of the most recent interim
period, the actual tax benefit recognized in 2003 could be materially
different from the forecasted annual tax benefit as of the end of the
second quarter.
19
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
12. (Continued)
As of June 30, 2003, U. S. Steel had net federal and state deferred tax
assets of $61 million and $20 million, respectively. Although U. S.
Steel has experienced domestic losses in the current and prior year,
management believes that it is more likely than not that tax planning
strategies generating at least $200 million in future taxable income can
be utilized to realize the deferred tax assets. Tax planning strategies
include the implementation of the previously announced plan to dispose
of nonstrategic assets, as well as the ability to elect alternative tax
accounting methods. However, the amount of the realizable deferred tax
assets at June 30, 2003, could be adversely affected to the extent
losses continue in the future or if future events affect the ability to
implement tax planning strategies.
The income tax benefit in the six months of 2002 reflected an estimated
annual effective tax rate of approximately 24%. The tax benefit also
included a $4 million deferred tax charge related to a newly enacted
state tax law.
The Slovak Income Tax Act provides an income tax credit which is
available to USSK if certain conditions are met. In order to claim the
tax credit in any year, 60% of USSK's sales must be export sales and
USSK must reinvest the tax credits claimed in qualifying capital
expenditures during the five years following the year in which the tax
credit is claimed. The provisions of the Slovak Income Tax Act permit
USSK to claim a tax credit of 100% of USSK's tax liability for years
2000 through 2004 and 50% for the years 2005 through 2009. Management
believes that USSK fulfilled all of the necessary conditions for
claiming the tax credit for the years for which it was claimed and
anticipates meeting such requirements in 2003. As a result of claiming
these tax credits and management's intent to reinvest earnings in
foreign operations, virtually no income tax provision is recorded for
USSK income.
13. In February 2003, U. S. Steel sold 5 million shares of 7% Series B
Mandatory Convertible Preferred Shares (liquidation preference $50 per
share) (Series B Preferred) for net proceeds of $242 million. The Series
B Preferred have a dividend yield of 7%, a 20% conversion premium (for
an equivalent conversion price of $15.66 per common share) and will
mandatorily convert into shares of U. S. Steel common stock on June 15,
2006. The net proceeds of the offering were used for general corporate
purposes and to fund a portion of the cash purchase price for the
acquisition of National's assets. The number of common shares that could
be issued upon conversion of the 5 million shares of Series B Preferred
ranges from approximately 16.0 million shares to 19.2 million shares,
based upon the timing of the conversion and the average market price of
U. S. Steel's common stock.
20
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
14. Revenues from related parties and receivables from related parties
primarily reflect sales of steel products, raw materials, transportation
services and fees for providing various management and other support
services to equity and certain other investees. Generally, transactions
are conducted under long-term market-based contractual arrangements.
Receivables from related parties at June 30, 2003 and December 31, 2002,
also included $28 million due from Marathon Oil Corporation (Marathon)
for tax settlements in accordance with the tax sharing agreement.
Long-term receivables from related parties at June 30, 2003 and December
31, 2002, reflect amounts due from Marathon related to contractual
reimbursements for the retirement of participants in the non-qualified
employee benefit plans. These amounts will be paid by Marathon as
participants retire.
Accounts payable to related parties reflect balances due to PRO-TEC
Coating Company (PRO-TEC) under an agreement whereby U. S. Steel
provides marketing, selling and customer service functions, including
invoicing and receivables collection, for PRO-TEC. U. S. Steel, as
PRO-TEC's exclusive sales agent, is responsible for credit risk
associated with the receivables. Payables to PRO-TEC under the agreement
were $59 million and $42 million at June 30, 2003 and December 31, 2002,
respectively.
Accounts payable to related parties at both June 30, 2003 and December
31, 2002, also included amounts related to the purchase of outside
processing services from equity investees and the net present value of
the second and final $37.5 million installment of contingent
consideration payable to VSZ a.s. related to the acquisition of USSK,
which was paid in July 2003.
15. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
(In millions)
--------------------------------------
June 30 December 31
2003 2002
---------- -----------
Raw materials .................................................. $ 265 $ 228
Semi-finished products ......................................... 665 472
Finished products .............................................. 478 271
Supplies and sundry items ...................................... 60 59
------ ------
Total ........................................................ $1,468 $1,030
====== ======
Costs of revenues increased by $1 million in the six months of 2003 and
2002, as a result of liquidations of LIFO inventories.
21
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
16. Net income (loss) per common share was calculated by adjusting net
income (loss) for dividend requirements of preferred stock and is based
on the weighted average number of common shares outstanding during the
quarter.
Diluted net income (loss) assumes the exercise of stock options and
conversion of preferred stock, provided in each case, the effect is
dilutive. For the second quarters ended June 30, 2003 and 2002, the
potential common stock related to employee options to purchase 6,908,455
shares and 5,068,902 shares of common stock, respectively, and
15,964,000 shares applicable to the conversion of preferred stock at
June 30, 2003, have been excluded from the computation of diluted net
income (loss) because their effect was antidilutive. For the six months
ended June 30, 2003 and 2002, the potential common stock related to
employee options to purchase 5,071,016 shares and 6,945,967 shares of
common stock, respectively, and 12,436,044 shares applicable to the
conversion of preferred stock at June 30, 2003, have been excluded from
the computation of diluted net income (loss) because their effect was
antidilutive.
17. On May 20, 2003, U. S. Steel entered into a new revolving credit
facility that provides for borrowings of up to $600 million that
replaced a similar $400 million facility entered into on November 30,
2001. The new facility, which is secured by a lien on U. S. Steel's
inventory and receivables (to the extent not sold under the Receivables
Purchase Agreement) expires in May 2007 and contains a number of
covenants that require lender consent to incur debt or make capital
expenditures above certain limits; sell assets used in the production of
steel or steel products or incur liens on assets; and limit dividends
and other restricted payments if the amount available for borrowings
drops below certain levels. The facility also contains a fixed charge
coverage ratio, calculated as the ratio of operating cash flow to cash
charges as defined in the agreement, which effectively reduces
availability by $100 million if not met. At June 30, 2003, $556 million
was available under this facility.
At June 30, 2003, USSK had no borrowings against its $10 million
short-term credit facility or against its $40 million long-term
facility. At June 30, 2003, $46 million was available under these
facilities as a result of customs guarantees issued against the
short-term credit facility.
At June 30, 2003, in the event of a change in control of U. S. Steel,
debt obligations totaling $1,335 million may be declared immediately due
and payable. In such event, U. S. Steel may also be required to either
repurchase the leased Fairfield slab caster for $86 million or provide a
letter of credit to secure the remaining obligation.
In May 2003, U. S. Steel issued $450 million of Senior Notes due May 15,
2010 (9 3/4% Senior Notes). These notes have a coupon interest rate of 9
3/4% per annum payable semi-annually on May 15 and November 15,
commencing November 15, 2003. The 9 3/4% Senior Notes were issued under
U. S. Steel's shelf registration statement and were not listed on any
national securities exchange. Proceeds from the sale of the 9 3/4%
Senior Notes were used to finance a portion of the purchase price to
acquire National's assets. In 2001, U. S. Steel issued $535 million of
10 3/4% Senior Notes. As of June 30, 2003, the aggregate principal
amount of 9 3/4% and 10 3/4% Senior Notes outstanding was $450 million
and $535 million, respectively.
22
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
17. (Continued)
In conjunction with issuing the 9 3/4 Senior Notes, U. S. Steel
solicited the consent of the holders of the 10 3/4% Senior Notes to
modify certain terms of the notes to conform to the terms of the 9 3/4%
Senior Notes. Those conforming changes modified the definitions of
Consolidated Net Income, EBITDA and Like-Kind Exchange, permitted
dividend payments on the 7.00% Series B Mandatory Convertible Preferred
Shares and expanded permitted investments to include loans made for the
purpose of facilitating like-kind exchange transactions. U. S. Steel
received the consent from holders of more than 90% of the principal
amount of the 10 3/4% Senior Notes and the amendments were effective May
20, 2003.
The 9 3/4% and 10 3/4% Senior Notes impose certain restrictions that
limit U. S. Steel's ability to, among other things: incur debt; pay
dividends or make other payments from its subsidiaries; issue and sell
capital stock of its subsidiaries; engage in transactions with
affiliates; create liens on assets to secure indebtedness; transfer or
sell assets; and consolidate, merge or transfer all or substantially all
of U. S. Steel's assets or the assets of its subsidiaries.
U. S. Steel was in compliance with all of its debt covenants at
June 30, 2003.
18. On May 19, 2003, U. S. Steel entered into an amendment to the
Receivables Purchase Agreement, which increased fundings under the
facility to the lesser of eligible receivables or $500 million. During
the six months ended June 30, 2003, U. S. Steel Receivables LLC (USSR)
sold to conduits and subsequently repurchased $175 million of revolving
interest in accounts receivable under the Receivables Purchase
Agreement. During the six months ended June 30, 2002, USSR sold to
conduits and subsequently repurchased $255 million of revolving interest
in accounts receivable. As of June 30, 2003, $500 million was available
to be sold under this facility.
USSR pays the conduits a discount based on the conduits' borrowing costs
plus incremental fees. During the three and six months ended June 30,
2003, U. S. Steel incurred costs on the sale of its receivables of $1
million. During the three and six months ended June 30, 2002, U. S.
Steel incurred costs of $1 million and $2 million, respectively, on the
sale of its receivables.
While the term of the facility is five years, the facility also
terminates on the occurrence and failure to cure certain events,
including, among others, certain defaults with respect to the Inventory
Facility and other debt obligations, any failure of USSR to maintain
certain ratios related to the collectibility of the receivables, and
failure to extend the commitments of the commercial paper conduits'
liquidity providers which currently terminate on November 26, 2003.
23
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
19. 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.
ASBESTOS MATTERS - U. S. Steel is a defendant in a large number of cases
in which approximately 14,000 claimants actively allege injury resulting
from exposure to asbestos including approximately 200 who allege they
are suffering from mesothelioma. Almost all these cases involve multiple
plaintiffs and multiple defendants. These claims fall into three major
groups: (1) claims made under certain federal and general maritime laws
by employees of the Great Lakes Fleet or Intercoastal Fleet, former
operations of U. S. Steel; (2) claims made by persons who performed work
at U. S. Steel facilities (referred to as "premises claims"); and (3)
claims made by industrial workers allegedly exposed to an electrical
cable product formerly manufactured by U. S. Steel. On March 28, 2003, a
jury in Madison County, Illinois returned a verdict against U. S. Steel
related to an asbestos lawsuit for $50 million in compensatory damages
and $200 million in punitive damages. U. S. Steel believes that the
plaintiff's exclusive remedy was provided by the Indiana workers'
compensation law and this issue and other errors at trial would have
enabled U. S. Steel to succeed on appeal. However, in order to avoid the
delay and uncertainties of further litigation and posting an appeal bond
equal to the amount of the verdict, U. S. Steel settled this case for an
amount substantially less than the compensatory damages award, which
represented a small fraction of the total award. This settlement was
reflected in the first quarter 2003 results.
While it is not possible to predict the ultimate outcome of
asbestos-related lawsuits, claims and proceedings, the Company believes
that the ultimate resolution of these matters will not have a material
adverse effect on the Company's financial position.
PROPERTY TAXES - U. S. Steel is a party to several property tax disputes
involving its Gary Works property in Indiana, including claims for
refunds totaling approximately $65 million pertaining to tax years
1994-96 and 1999, and assessments totaling approximately $133 million in
excess of amounts paid for the 2000, 2001 and 2002 tax years. In
addition, interest may be imposed upon any final assessment. The
disputes involve property values and tax rates and are in various stages
of administrative appeal. U. S. Steel is vigorously defending against
the assessments and pursuing its claims for refunds.
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. Accrued liabilities for remediation totaled $140 million
and $135 million at June 30, 2003 and December 31, 2002, respectively.
It is not presently possible to estimate the ultimate amount of all
remediation costs that might be incurred or the penalties that may be
imposed.
24
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
19. (Continued)
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 the six months of 2003 and for the
years 2002 and 2001, such capital expenditures totaled $7 million, $14
million and $15 million, respectively. 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.
Throughout its history, U. S. Steel has sold numerous properties and
businesses and has provided various indemnifications with respect to
many of the assets that were sold. These indemnifications have been
associated with the condition of the property, the approved use, certain
representations and warranties, matters of title and environmental
matters. While the vast majority of indemnifications have not covered
environmental issues, there have been a few transactions in which U. S.
Steel indemnified the buyer for non-compliance with past, current and
future environmental laws related to existing conditions; however, most
recent indemnifications are of a limited nature only applying to
non-compliance with past and/or current laws. Some indemnifications only
run for a specified period of time after the transactions close and
others run indefinitely. The amount of potential liability associated
with these transactions is not estimable due to the nature and extent of
the unknown conditions related to the properties sold. Aside from
approximately $15 million of liabilities already recorded as a result of
these indemnifications due to specific environmental remediation cases
(included in the $140 million of accrued liabilities for remediation
discussed above), there are no other known liabilities related to these
indemnifications.
GUARANTEES - Guarantees of the liabilities of unconsolidated entities of
U. S. Steel totaled $30 million at June 30, 2003, including $7 million
related to an equity interest acquired as part of the National asset
purchase, and $27 million at December 31, 2002. In the event that any
defaults of guaranteed liabilities occur, U. S. Steel has access to its
interest in the assets of the investees to reduce potential losses
resulting from these guarantees. As of June 30, 2003, the largest
guarantee for a single such entity was $15 million, which represents the
maximum exposure to loss under a guarantee of debt service payments of
an equity investee. No liability has been recorded for these guarantees.
CONTINGENCIES RELATED TO SEPARATION FROM MARATHON - U. S. Steel was
contingently liable for debt and other obligations of Marathon in the
amount of approximately $75 million at June 30, 2003, compared to $168
million at December 31, 2002. In the event of the bankruptcy of
Marathon, these obligations for which U. S. Steel is contingently liable
may be declared immediately due and payable. If such event occurs, U. S.
Steel may not be able to satisfy such obligations. No liability has been
recorded for these contingencies as management believes the likelihood
of occurrence is remote.
25
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
19. (Continued)
If the Separation is determined to be a taxable distribution of the
stock of U. S. Steel, but there is no breach of a representation or
covenant by either U. S. Steel or Marathon, U. S. Steel would be liable
for any resulting taxes (Separation No-Fault Taxes) incurred by
Marathon. U. S. Steel's indemnity obligation for Separation No-Fault
Taxes survives until the expiration of the applicable statute of
limitations. The maximum potential amount of U. S. Steel's indemnity
obligation for Separation No-Fault Taxes at June 30, 2003 and December
31, 2002, was estimated to be approximately $90 million. No liability
has been recorded for this indemnity obligation as management believes
that the likelihood of the Separation being determined to be a taxable
distribution of the stock of U. S. Steel is remote.
OTHER CONTINGENCIES - U. S. Steel is contingently liable to its Chairman
and Chief Executive Officer for a $3 million retention bonus. The bonus
is payable upon the earlier of his retirement from active employment or
December 31, 2004, and is subject to certain performance measures.
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 $53 million at June 30, 2003 and $51
million at December 31, 2002). No liability has been recorded for these
guarantees as either management believes that the potential recovery of
value from the equipment when sold is greater than the residual value
guarantee, or the potential loss is not probable and/or estimable.
MINING SALE - U. S. Steel remains secondarily liable in the event that
PinnOak triggers a withdrawal within five years of the closing date from
the multiemployer pension plan that covers employees of the coal mining
business. A withdrawal is triggered when annual contributions to the
plan are substantially less than contributions made in prior years. The
maximum exposure for the fee that would be assessed upon a withdrawal is
$79 million. U. S. Steel recorded the fair value of this liability as of
June 30, 2003. U. S. Steel has agreed to indemnify PinnOak for certain
environmental matters, which are included in the environmental matters
discussion.
TRANSTAR REORGANIZATION - The 2001 reorganization of Transtar was
intended to be tax-free for federal income tax purposes, with U. S.
Steel and Transtar Holdings, L.P. (Holdings) agreeing through various
representations and covenants to protect the reorganization's tax-free
status. If the reorganization is determined to be taxable, but there is
no breach of a representation or covenant by either U. S. Steel or
Holdings, U. S. Steel is liable for 44% of any resulting Holdings taxes
(Transtar No-Fault Taxes), and Holdings is responsible for 56% of any
resulting U. S. Steel taxes. U. S. Steel's indemnity obligation for
Transtar No-Fault Taxes survives until 30 days after the expiration of
the applicable statute of limitations. The maximum potential amount of
U. S. Steel's indemnity obligation for Transtar No-Fault Taxes at June
30, 2003 and December 31, 2002, was estimated to be approximately $70
million. No liability has been recorded for this indemnity obligation as
management believes that the likelihood of the reorganization being
determined to be taxable is remote. U. S. Steel can recover all or a
portion of any indemnified Transtar No-Fault Taxes if Holdings receives
a future tax benefit as a result of the Transtar reorganization being
taxable.
26
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
19. (Continued)
CLAIRTON 1314B PARTNERSHIP - U. S. Steel has a commitment to fund
operating cash shortfalls of the partnership of up to $150 million.
Additionally, U. S. Steel, under certain circumstances, is required to
indemnify the limited partners if the partnership product sales fail to
qualify for the credit under Section 29 of the Internal Revenue Code.
This indemnity will effectively survive until the expiration of the
applicable statute of limitations. The maximum potential amount of this
indemnity obligation at June 30, 2003 and December 31, 2002, including
interest and tax gross-up, was approximately $600 million. Furthermore,
U. S. Steel under certain circumstances has indemnified the partnership
for environmental obligations. See discussion of environmental matters
above. The maximum potential amount of this indemnity obligation is not
estimable. Management believes that the $150 million deferred gain
related to the partnership, which is recorded in deferred credits and
other liabilities, is more than sufficient to cover any probable
exposure under these commitments and indemnifications.
SELF-INSURANCE - U. S. Steel is self-insured for certain exposures
including workers' compensation, auto liability and general liability,
as well as property damage and business interruption, within specified
deductible and retainage levels. Certain equipment that is leased by U.
S. Steel is also self-insured within specified deductible and retainage
levels. Liabilities are recorded for workers' compensation and personal
injury obligations. Other costs resulting from self-insured losses 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 $120 million as of June 30, 2003 and $144 million as of
December 31, 2002, which reflects U. S. Steel's maximum exposure under
these financial guarantees, but not its total exposure for the
underlying obligations. Most of the trust arrangements and letters of
credit are collateralized by restricted cash that is recorded in other
noncurrent assets.
COMMITMENTS - At June 30, 2003 and December 31, 2002, U. S. Steel's
domestic contract commitments to acquire property, plant and equipment
totaled $35 million and $24 million, respectively.
USSK has a commitment to the Slovak government for a capital
improvements program of $700 million, subject to certain conditions,
over a period commencing with the acquisition date of November 24, 2000,
and ending on December 31, 2010. The remaining commitments under this
capital improvements program as of June 30, 2003 and December 31, 2002,
were $504 million and $541 million, respectively.
U. S. Steel entered into a 15-year take-or-pay arrangement in 1993,
which requires it to accept pulverized coal each month or pay a minimum
monthly charge of approximately $1 million. If U. S. Steel elects to
terminate the contract early, a maximum termination payment of $79
million as of June 30, 2003, which declines over the duration of the
agreement, may be required.
27
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
20. On March 31, 2003, U. S. Steel Balkan d.o.o., a wholly owned Serbian
subsidiary of U. S. Steel, agreed to purchase out of bankruptcy, Serbian
steel producer Sartid a.d. and six of its subsidiaries for a purchase
price of $23 million. The transaction is targeted for completion during
the third quarter of 2003, subject to the resolution of matters arising
in Sartid's bankruptcy proceedings.
In an associated agreement, which will become effective upon the
completion of the acquisition, U. S. Steel Balkan committed to future
spending of up to $150 million over five years for working capital and
the repair, rehabilitation, improvement, modification and upgrade of the
facilities. A portion of this spending is subject to certain conditions
related to Sartid's commercial operations, cash flow and viability. U.
S. Steel Balkan will conduct economic development activities over the
course of three years and spend no less than $1.5 million on these
efforts, and has agreed to support community, charitable and sport
activities in a total amount of not less than $5 million during the
three-year period following closing of the transaction. In addition, U.
S. Steel Balkan has agreed to refrain from layoffs for a period of three
years. The agreement also requires U. S. Steel Balkan to obtain the
consent of the Serbian government prior to a transfer of a controlling
interest of Sartid within five years of the closing date.
28
UNITED STATES STEEL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
--------------------------------------------------
(Unaudited)
Six Months Ended
June 30 Year Ended December 31
---------------------- -----------------------------------------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
(a) (b) 1.04 (c) 1.05 2.10 5.15
==== ==== ==== ==== ==== ==== ====
(a) Earnings did not cover combined fixed charges and preferred stock dividends
by $70 million.
(b) Earnings did not cover combined fixed charges and preferred stock dividends
by $66 million.
(c) Earnings did not cover combined fixed charges and preferred stock dividends
by $598 million.
UNITED STATES STEEL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
(Unaudited)
Six Months Ended
June 30 Year Ended December 31
---------------------- -----------------------------------------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
(a) (b) 1.04 (c) 1.13 2.33 5.89
==== ==== ==== ==== ==== ==== ====
(a) Earnings did not cover fixed charges by $60 million.
(b) Earnings did not cover fixed charges by $66 million.
(c) Earnings did not cover fixed charges by $586 million.
29
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
On May 20, 2003, United States Steel Corporation (U. S. Steel) acquired
substantially all of the integrated steelmaking assets of National Steel
Corporation (National). See Note 3 of Selected Notes to Financial Statements for
information regarding the acquisition. The facilities that were acquired
included two integrated steel plants, Granite City in Granite City, Illinois,
and Great Lakes in Ecorse and River Rouge, Michigan; the Midwest finishing
facility in Portage, Indiana; ProCoil in Canton, Michigan; a 50% equity interest
in Double G Coatings, L.P. near Jackson, Mississippi; the taconite pellet
operations in Keewatin, Minnesota; and the Delray Connecting Railroad.
Granite City has an annual raw steel production capability of
approximately 2.8 million tons. Principal products include hot-rolled,
hot-dipped galvanized and Galvalume(R) steel.
Great Lakes has an annual raw steel production capability of
approximately 3.8 million tons. Principal products include hot-rolled,
cold-rolled, electrolytic galvanized and hot dip galvanized.
The Midwest facility finishes hot-rolled bands. Principal products
include tin mill products, hot dip galvanized and Galvalume(R) steel,
cold-rolled and electrical lamination steels.
ProCoil slits and cuts steel coils to desired specifications, provides
laser welding services and warehouses material to service automotive market
customers.
Double G Coatings, L.P. is a 300,000 ton per year hot dip galvanizing
and Galvalume(R)facility.
The taconite pellet operations are located on the western end of the
Mesabi Iron Ore Range and have a current annual effective iron ore pellet
capacity of over five million gross tons.
The acquisition of the assets of National (National Acquisition)
increased U. S. Steel's domestic and total annual raw steel production
capability to 19.4 million tons and 24.4 million tons, respectively, making it
the largest domestic integrated producer and the sixth largest in the world
based upon raw steel production.
On June 30, 2003, U. S. Steel completed the sale of the coal mines and
related assets of U. S. Steel Mining Company, LLC (Mining Sale). See Note 4 of
Selected Notes to Financial Statements for details regarding the sale.
U. S. Steel has five reportable segments: Flat-rolled Products
(Flat-rolled), Tubular Products (Tubular), U. S. Steel Kosice (USSK),
Straightline Source (Straightline) and USS Real Estate (Real Estate). Businesses
not included in the reportable segments are reflected in Other Businesses. The
National acquisition changed the composition of the Flat-rolled segment and
Other Businesses as described below, but did not result in a change in U. S.
Steel's reportable segments. Effective with the Mining Sale, Other Businesses
are no longer involved in the production and sale of coal.
Prior to December 31, 2001, the businesses of U. S. Steel comprised an
operating unit of USX Corporation, now named Marathon Oil Corporation
(Marathon). On December 31, 2001, U. S. Steel was capitalized through the
issuance of 89.2 million shares of common stock to holders of USX-U. S. Steel
Group common stock (Steel Stock) in exchange for all outstanding shares of Steel
Stock on a one-for-one basis (the Separation).
30
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Effective with the first quarter of 2002, following the Separation,
U. S. Steel established a new internal financial reporting structure, which
resulted in a change in reportable segments from Domestic Steel and USSK to
Flat-rolled, Tubular and USSK. In addition, U. S. Steel revised the presentation
of several items of income and expense within income (loss) from reportable
segments. Net pension credits, costs related to former businesses and
administrative expenses previously not reported at the segment level are now
directly charged or allocated to the reportable segments and Other Businesses.
Effective with the fourth quarter of 2002, the Straightline and Real Estate
reportable segments, which were previously reflected in Other Businesses, were
added. The presentation of Straightline and Real Estate as separate segments
resulted from the application of quantitative threshold tests under Statement of
Financial Accounting Standards (SFAS) No. 131 rather than from any fundamental
change in the management or structure of the businesses. The composition of the
Flat-rolled, Tubular and USSK segments remained unchanged from prior periods.
Comparative results for 2002 have been conformed to the current year
presentation.
The Flat-rolled segment includes the operating results of U. S. Steel's
domestic integrated steel mills and equity investees involved in the production
of sheet, plate and tin mill products. These operations are principally located
in the United States and primarily serve customers in the transportation
(including automotive), appliance, service center, conversion, container, and
construction markets. Effective May 20, 2003, the Flat-rolled segment includes
the operating results of Granite City, Great Lakes, the Midwest finishing
facility, ProCoil and U. S. Steel's equity interest in Double G Coatings, which
were acquired from National.
The Tubular segment includes the operating results of U. S. Steel's
domestic tubular production facilities and, prior to May 2003, included U. S.
Steel's equity interest in Delta Tubular Processing (Delta). These operations
produce and sell both seamless and electric resistance weld tubular products and
primarily serve customers in the oil, gas and petrochemical markets. In May
2003, U. S. Steel sold its interest in Delta.
The USSK segment includes the operating results of U. S. Steel's
integrated steel mill located in the Slovak Republic, a production facility in
Germany, and operations under facility management and support agreements in
Serbia. These operations produce and sell sheet, plate, tin, tubular, precision
tube and specialty steel products, as well as coke. USSK primarily serves
customers in the central and western European construction, conversion,
appliance, transportation, service center, container, and oil, gas and
petrochemical markets. In June 2003, USSK sold its equity interest in Rannila
Kosice, s.r.o.
The Straightline segment includes the operating results of U. S.
Steel's technology-enabled distribution business that serves steel customers
primarily in the eastern and central United States. Straightline competes in the
steel service center marketplace using a nontraditional business process to
sell, process and deliver flat-rolled steel products in small to medium sized
order quantities primarily to job shops, contract manufacturers and original
equipment manufacturers across an array of industries.
31
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Real Estate segment includes the operating results of U. S. Steel's
domestic mineral interests that are not assigned to other operating units;
timber properties; and residential, commercial and industrial real estate that
is managed or developed for sale or lease. In April 2003, U. S. Steel sold
certain coal seam gas interests in Alabama. Prior to the sale, income generated
from these interests was reported in the Real Estate segment.
All other U. S. Steel businesses not included in reportable segments
are reflected in Other Businesses. In the second quarter of 2003, these
businesses were involved in the production and sale of coal, coke and
iron-bearing taconite pellets; transportation services; and engineering and
consulting services. Effective May 20, 2003, Other Businesses include the
operating results of the taconite pellet operations and the Delray Connecting
Railroad, which were acquired from National. Effective with the Mining Sale on
June 30, 2003, Other Businesses are no longer involved in the production and
sale of coal.
Certain sections of Management's Discussion and Analysis include
forward-looking statements concerning trends or events potentially affecting the
businesses of U. S. Steel. These statements typically contain words such as
"anticipates," "believes," "estimates," "expects," "intends" or similar words
indicating that future outcomes are not known with certainty and are subject to
risk factors that could cause these outcomes to differ significantly from those
projected. In accordance with "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, these statements are accompanied by cautionary
language identifying important factors, though not necessarily all such factors,
that could cause future outcomes to differ materially from those set forth in
forward-looking statements. For discussion of risk factors affecting the
businesses of U. S. Steel, see Supplementary Data -- Disclosures About
Forward-Looking Statements in the U. S. Steel Annual Report on Form 10-K for the
year ended December 31, 2002.
Results of Operations
- ---------------------
REVENUES AND OTHER INCOME was $2,362 million in the second quarter of
2003, compared with $1,807 million in the same quarter last year. Revenues and
other income for the first six months of 2003 totaled $4,269 million, compared
with $3,241 million in the first six months of 2002. The increases in both
periods primarily reflected higher shipment volumes for domestic sheet and tin
products, due in large part to the National Acquisition, increased prices and
shipment volumes for USSK and increased prices for domestic sheet products. The
improvements also reflected increased shipments of slabs, higher prices and
volumes on commercial coke shipments and increased shipments for Straightline.
Other income in the second quarter and first six months of 2003 included $34
million from the sale of the coal seam gas interests. Other income in the second
quarter and first six months of 2002 included $33 million from a Federal excise
tax refund.
32
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
INCOME (LOSS) FROM OPERATIONS for U. S. Steel for the second quarter
and first six months of 2003 and 2002 is set forth in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2003 2002 2003 2002
- ----------------------------------------------------------------------------- ------ ------ ------ ------
Flat-rolled.................................................................. $(68) $(26) $(108) $(100)
Tubular (4) 6 (9) 9
USSK......................................................................... 67 26 131 25
Straightline................................................................. (18) (9) (33) (17)
Real Estate.................................................................. 17 12 30 22
------ ------ ------ ------
Total income (loss) from reportable segments.............................. (6) 9 11 (61)
Other Businesses............................................................. 12 23 (24) 12
------ ------ ------ ------
Income (Loss) from operations before items not
allocated to segments................................................... 6 32 (13) (49)
Items not allocated to segments:
Litigation items........................................................... - - (25) 9
Asset impairments.......................................................... (11) (14) (11) (14)
Pension settlement loss.................................................... - (10) - (10)
Costs related to Fairless shutdown......................................... - - - (1)
Income from sale of coal seam gas interests................................ 34 - 34 -
Gain on sale of coal mining assets......................................... 13 - 13 -
Federal excise tax refund.................................................. - 33 - 33
Insurance recoveries related to USS-POSCO fire............................. - 6 - 18
------ ------ ------ ------
Total income (loss) from operations..................................... $ 42 $ 47 $ (2) $ (14)
====== ====== ====== ======
SEGMENT RESULTS FOR FLAT-ROLLED
The segment loss for Flat-rolled was $68 million in the second quarter
of 2003, compared with a loss of $26 million in the same quarter of 2002.
Flat-rolled had a loss of $108 million in the first six months of 2003, compared
with a loss of $100 million in the same period in 2002. The increased losses in
both periods mainly resulted from higher employee benefit costs, increased
prices for natural gas and costs for scheduled repair outages at Gary Works,
partially offset by higher sheet shipments, including the effects of the
National Acquisition, and higher average realized prices for sheet products. The
National Acquisition resulted in 624,000 tons of additional shipments for both
2003 periods.
SEGMENT RESULTS FOR TUBULAR
The segment loss for Tubular was $4 million in the second quarter of
2003, compared with income of $6 million in the same quarter last year. Tubular
reported a loss of $9 million for the first six months of 2003, compared with
income of
33
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
$9 million in the first six months of 2002. The declines resulted primarily from
increased employee benefit costs, higher natural gas prices, increased labor
costs and lower average realized prices for seamless products. These were
partially offset by income from the sale of U. S. Steel's interest in Delta.
SEGMENT RESULTS FOR USSK
Segment income for USSK was $67 million in the second quarter of 2003,
compared with income of $26 million in the second quarter of 2002. For the first
half of 2003, USSK recorded income of $131 million, compared with income of $25
million in the corresponding period in 2002. The improvements in both periods
were primarily due to higher average realized prices, which were due to
favorable exchange rate effects and partial collection of announced price
increases, as well as increased shipment volumes. Shipments included those
realized under toll conversion agreements with Sartid a.d. in Serbia (Sartid).
These improvements were partially offset by the unfavorable effect on costs of
foreign exchange rate changes, and costs associated with conversion and facility
management agreements with Sartid due mainly to operating and maintenance
expenses required under such agreements.
SEGMENT RESULTS FOR STRAIGHTLINE
The Straightline segment loss was $18 million in the second quarter
2003, compared to a $9 million loss in the year earlier quarter. Straightline's
loss for the first six months of 2003 was $33 million, compared with a loss of
$17 million in the same period last year. The increased losses resulted mainly
from higher 2003 sales volumes at negative margins. The negative margins were
largely due to selling higher-priced inventories purchased in the second half of
2002.
SEGMENT RESULTS FOR REAL ESTATE
Segment income for Real Estate was $17 million in the second quarter of
2003, compared with income of $12 million in the second quarter of 2002. Real
Estate income for the first six months of 2003 was $30 million, compared with
$22 million in the comparable 2002 period. The increases in both periods were
primarily due to increased coal seam gas royalties.
RESULTS FOR OTHER BUSINESSES
Income for Other Businesses in the second quarter of 2003 was $12
million, compared with income of $23 million in the second quarter of 2002. The
decline was mainly due to higher employee benefit costs and lower results for
iron ore and coal operations, partially offset by improved results for coke
operations. For the first six months of 2003, Other Businesses generated a loss
of $24 million, compared with income of $12 million in the year earlier period.
The decline primarily reflected increased employee benefit costs and losses at
iron ore operations, partially offset by improved results for coke operations.
Iron ore operations in both 2003 periods were negatively affected by higher
natural gas prices, while coke operations benefited from increased selling
prices for coke oven gas consumed by Flat-rolled units.
34
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS
Pension and other postretirement benefit costs, which are included in
income (loss) from operations, were $63 million and $130 million for the second
quarter and first six months of 2003, respectively, compared to $16 million and
$24 million for the corresponding periods of 2002. The changes were primarily
due to lower plan assets, reduced asset return assumptions, a lower discount
rate, increased medical claim costs and a higher assumed escalation trend
applied to those claim costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses included in income (loss)
from operations were $142 million for the second quarter of 2003, compared to
$100 million in the second quarter of 2002. Selling, general and administrative
expenses totaled $271 million for the first six months of 2003, compared with
$171 million in the first six months of 2002. The increases in 2003 were
primarily due to the increases in pension and other postretirement benefit costs
as previously discussed, and higher expenses at USSK due mainly to the
unfavorable effects of foreign currency exchange rate differences and increased
business development expenses. These were partially offset by the favorable
effect of the absence in 2003 of the impairment of retiree medical cost
reimbursements receivable from Republic, which occurred in the second quarter of
2002.
ITEMS NOT ALLOCATED TO SEGMENTS:
LITIGATION ITEMS resulted in a charge of $25 million in the first six
months of 2003 and a credit of $9 million in the first six months of 2002.
ASSET IMPAIRMENTS of $11 million in the second quarter and first six
months of 2003 resulted from U. S. Steel's impairment of a cost method
investment. Asset impairments in the second quarter and first six months of 2002
were for charges to establish reserves against retiree medical cost
reimbursements owed by Republic.
PENSION SETTLEMENT LOSS was related to retirements of personnel covered
under the non tax-qualified excess and supplemental pension plans for executive
and senior management.
COSTS RELATED TO FAIRLESS SHUTDOWN resulted from the permanent shutdown
of the pickling, cold-rolling and tin mill facilities at the Fairless Plant in
the fourth quarter of 2001.
INCOME FROM SALE OF COAL SEAM GAS INTERESTS resulted from the sale in
April 2003 of certain coal seam gas interests in Alabama, which were included in
the Real Estate segment prior to the sale.
GAIN ON SALE OF COAL MINING ASSETS resulted from the Mining Sale.
FEDERAL EXCISE TAX REFUND represents the recovery of black lung excise
taxes that were paid on coal export sales during the period 1993 through 1999.
During the second quarter of 2002, U. S. Steel received cash and recognized
pre-tax income of $33 million, which was included in other income on the
statement of operations. Of the $33 million received, $10 million represented
interest. The refunds resulted from a 1998 federal district court decision that
found such taxes to be unconstitutional.
35
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
INSURANCE RECOVERIES RELATED TO USS-POSCO FIRE represent U. S. Steel's
share of insurance recoveries in excess of facility repair costs for the
cold-rolling mill fire at USS-POSCO, which occurred in May 2001.
NET INTEREST AND OTHER FINANCIAL COSTS were $42 million in the second
quarter of 2003, compared with $19 million during the same period in 2002. Net
interest and other financial costs in the first six months of 2003 were $80
million, compared with $53 million in the same period in 2002. The increases in
2003 primarily reflected unfavorable changes in foreign currency effects. These
effects were primarily due to remeasurement of USSK net monetary assets into the
U.S. dollar, which is the functional currency, and resulted in a net gain of $2
million and a net loss of $3 million in the second quarter and first six months
of 2003, respectively. These compared to net gains of $13 million in the second
quarter and first six months of 2002. The increases also reflected interest on
the new 9 3/4% senior notes that were issued in May 2003. For discussion, see
"Liquidity".
The BENEFIT FOR INCOME TAXES in the second quarter of 2003 was $3
million, compared with a provision of $1 million in the second quarter last
year. The benefit for income taxes in the first six months of 2003 was $52
million, compared with a benefit of $11 million in the first six months of 2002.
The income tax benefit in the six months of 2003 reflected an estimated
annual effective tax rate of approximately 57%. Additionally, a $4 million
deferred tax benefit relating to the reversal of a state valuation allowance was
included in the six months of 2003.
The tax benefit in the six months of 2003 is based on an estimated
annual effective rate, which requires management to make its best estimate of
annual forecasted pretax income (loss) for the year. During the year, management
regularly updates forecast estimates based on changes in various factors such as
prices, shipments, product mix, plant operating performance, cost estimates and
pension issues. An annual forecasted pretax loss from domestic operations, which
includes a charge of approximately $500 million for planned workforce reductions
under the Transition Assistance Program and the related remeasurement of pension
plans for the second half of 2003, and pretax income from USSK have been
included in the development of U. S. Steel's estimated annual effective tax rate
for 2003 as of June 30, 2003. To the extent that actual pretax results for
domestic and foreign income in 2003 vary from forecast estimates applied at the
end of the most recent interim period, the actual tax benefit recognized in 2003
could be materially different from the forecasted annual tax benefit as of the
end of the second quarter.
As of June 30, 2003, U. S. Steel had net federal and state deferred tax
assets of $61 million and $20 million, respectively, which are expected to
increase during the remainder of the year. Although U. S. Steel has experienced
domestic losses in the current and prior year, management believes that it is
more likely than not that tax planning strategies generating at least $200
million in future taxable income can be utilized to realize the deferred tax
assets. Tax planning strategies include the implementation of the previously
announced plan to dispose of nonstrategic assets, as well as the ability to
elect alternative tax accounting methods to provide future taxable income to
assure realization of the anticipated deferred tax assets. The company has
identified additional tax planning strategies that will
36
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
permit the recognition of anticipated deferred tax assets in the second half of
2003 resulting from the charges described above. However, the amount of the
realizable deferred tax assets at June 30, 2003, and those expected to be
recognized in the second half of the year could be adversely affected to the
extent that losses continue in the future or if future events affect the ability
to implement tax planning strategies.
The income tax benefit in the six months of 2002 reflected an estimated
annual effective tax rate of approximately 24%. The tax benefit also included a
$4 million deferred tax charge related to a newly enacted state tax law.
The Slovak Income Tax Act provides an income tax credit, which is
available to USSK if certain conditions are met. In order to claim the tax
credit in any year, 60% of USSK's sales must be export sales and USSK must
reinvest the tax credits claimed in qualifying capital expenditures during the
five years following the year in which the tax credit is claimed. The provisions
of the Slovak Income Tax Act permit USSK to claim a tax credit of 100% of USSK's
tax liability for years 2000 through 2004 and 50% for the years 2005 through
2009. Management believes that USSK fulfilled all of the necessary conditions
for claiming the tax credit for the years for which it was claimed and
anticipates meeting such requirements in 2003. As a result of claiming these tax
credits and management's intent to reinvest earnings in foreign operations,
virtually no income tax provision is recorded for USSK income.
In October 2002, a tax credit limit was negotiated by the Slovak
government as part of the Accession Treaty governing the Slovak Republic's entry
into the European Union (EU). The Treaty limits to $500 million the total tax
credit to be granted to USSK during the period 2000 through 2009. The impact of
the tax credit limit is expected to be minimal since Slovak tax laws have been
modified and tax rates have been reduced since the acquisition of USSK. The
Treaty also places limits upon total production and export sales to the EU,
allowing for modest growth during the period covered by the investment
incentive. The limits upon export sales to the EU take effect upon the Slovak
Republic's entry into the EU, which is expected to occur in May 2004. A question
has recently arisen with respect to the effective date of the production limits.
Slovak Republic representatives have stated their belief that the Treaty
intended that these limits take effect upon entry into the EU, whereas the
European Commission has taken the position that the production limitations apply
as of 2002. Discussions between representatives of the Slovak Republic and the
European Commission are ongoing. At this time it is not possible to predict the
outcome of those discussions or the impact upon the results of USSK.
The EXTRAORDINARY LOSS, NET OF TAX resulted from the Mining Sale, which
ended U. S. Steel's production of coal and resulted in the recognition of the
present value of obligations related to a multiemployer health care benefit plan
created by the Coal Industry Retiree Health Benefit Act of 1992. The recognition
of these obligations, which totaled $85 million, resulted in an extraordinary
loss of $52 million, net of tax benefits of $33 million.
The CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX was
a charge of $5 million in the first quarter of 2003, and resulted from the
adoption on January 1, 2003, of Statement of Financial Accounting Standards
(SFAS) No. 143, "Accounting for Asset Retirement Obligations."
37
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
U. S. STEEL'S NET LOSS was $49 million in the second quarter of 2003,
compared with net income of $27 million in the second quarter of 2002. U. S.
Steel's net loss in the first six months of 2003 was $87 million, compared with
a net loss of $56 million in the same period in 2002. The declines primarily
reflected the factors discussed above.
Operating Statistics
- --------------------
Flat-rolled shipments of 3.2 million tons for the second quarter of
2003 increased about 25 percent from the second quarter 2002, and 31 percent
from the first quarter of 2003. Flat-rolled shipments of 5.6 million tons in the
first six months of 2003 increased about 15 percent from the prior year period.
Flat-rolled shipments were favorably affected by the National Acquisition, which
contributed shipments of 624,000 tons during the second quarter. Tubular
shipments of 211,000 tons for the second quarter of 2003 decreased about 3
percent from the same period in 2002, and increased 2 percent from the first
quarter of 2003. For the first half of 2003, Tubular shipments of 417,000 tons
were up approximately 3 percent from the first half of 2002. At USSK, second
quarter 2003 shipments of 1.2 million net tons were up about 10 percent from
second quarter 2002 shipments and up slightly from shipments in the first
quarter of 2003. USSK shipments for the first six months of 2003 totaled 2.4
million net tons, an increase of 29 percent from the same period last year.
USSK's shipments included those realized under toll conversion agreements with
Sartid. USSK's shipments in the first half of 2002 were negatively affected by a
blast furnace outage in the first quarter.
Raw steel capability utilization for domestic facilities and USSK in
the second quarter of 2003 averaged 84.5 percent and 96.5 percent, respectively,
compared with 93.9 percent and 95.5 percent in the second quarter of 2002 and
91.7 percent and 97.3 percent in the first quarter of 2003. Raw steel capability
utilization for domestic facilities and USSK in the first six months of 2003
averaged 87.7 percent and 96.9 percent, respectively, compared with 93.0 percent
and 85.0 percent in the first six months of 2002. Capability utilization for
domestic facilities in the second quarter and first six months of 2003 was
negatively affected by a scheduled repair outage at Gary Works for U. S. Steel's
largest blast furnace. USSK's capability utilization in the first six months of
2002 was negatively affected by the blast furnace outage mentioned in the
preceding paragraph.
Balance Sheet
- -------------
CASH AND CASH EQUIVALENTS of $145 million at June 30, 2003, decreased
$98 million from year-end 2002. For details, see cash flow discussion.
RECEIVABLES, LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS increased $428
million from year-end 2002, primarily due to the effects of the National
Acquisition and higher prices and shipment volumes for USSK. The increase also
reflects the $55 million receivable from National as a result of the working
capital adjustment determination associated with the National Acquisition.
INVENTORIES increased $438 million from December 31, 2002, due mainly
to the addition of the National facilities.
38
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION, DEPLETION
AND AMORTIZATION increased $519 million from December 31, 2002, mainly
reflecting the addition of the National facilities.
OTHER INTANGIBLE ASSETS, NET of $48 million were acquired from National
and were comprised primarily of proprietary software.
ACCOUNTS PAYABLE of $934 million at June 30, 2003, increased $257
million from year-end 2002, mainly due to the addition of the National
facilities and increased operating levels as compared to late 2002.
PAYROLL AND BENEFITS PAYABLE increased $88 million from December 31,
2003, mainly due to obligations related to active employees at the acquired
National facilities.
LONG-TERM DEBT, LESS UNAMORTIZED DISCOUNT increased by $438 million
from year-end 2002 primarily due to the issuance of $450 million of 9 3/4%
senior notes in May 2003. For discussion, see "Liquidity."
EMPLOYEE BENEFITS increased $374 million from year-end 2002, mainly as
the result of liabilities related to active employees at the acquired National
facilities and regular benefit accruals in excess of corporate cash payments.
PREFERRED STOCK increased by $242 million from December 31, 2002, due
to an offering of 5 million shares of 7% Series B Mandatory Convertible
Preferred Stock (Series B Preferred) that was completed in February 2003.
Cash Flow
- ---------
NET CASH PROVIDED FROM OPERATING ACTIVITIES was $168 million for the
first six months of 2003, compared with net cash used in operating activities of
$107 million in the same period of 2002. The improvement resulted from increased
income after adjusting for non-cash items and lower working capital
requirements.
CAPITAL EXPENDITURES in the first six months of 2003 were $132 million,
compared with $104 million in the same period in 2002. Major domestic projects
in the first six months of 2003 included the quench and temper line project at
Lorain Tubular. Major projects at USSK in the first six months of 2003 included
a new dynamo line, the sinter plant dedusting project and the installation of
additional tin mill facilities.
U. S. Steel's domestic contract commitments to acquire property, plant
and equipment at June 30, 2003, totaled $35 million compared with $24 million at
December 31, 2002.
USSK has a commitment to the Slovak government for a capital
improvements program of $700 million, subject to certain conditions, over a
period commencing with the acquisition date of November 24, 2000, and ending on
December 31, 2010. The remaining commitments under this capital improvements
program as of June 30, 2003, and December 31, 2002, were $504 million and $541
million, respectively.
39
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Capital expenditures for 2003 are expected to be approximately $330
million, including approximately $110 million for USSK and $30 million for the
acquired National facilities. U. S. Steel broadly estimates that average annual
capital expenditures for the acquired National facilities will be between $75
million and $100 million.
DISPOSAL OF ASSETS in the first six months of 2003 consisted mainly of
proceeds from the Mining Sale and the sale of Delta.
SALE OF COAL SEAM GAS INTERESTS reflected cash received for the sale of
certain coal seam gas interests in Alabama.
ACQUISITION OF NATIONAL ASSETS resulted from $844 million paid at
closing and $28 million of transaction costs.
RESTRICTED CASH - WITHDRAWALS of $41 million in the first six months of
2003 were due primarily to funds withdrawn from a property exchange trust and
utilized for the National acquisition.
RESTRICTED CASH - DEPOSITS of $66 million in the first six months of
2003 included the deposit of $35 million from certain property sales into a
property exchange trust. The balance for 2003 and $53 million in the
corresponding 2002 period were mainly used to collateralize letters of credit to
meet financial assurance requirements.
ISSUANCE OF LONG-TERM DEBT resulted from the issuance of $450 million
of 9 3/4% senior notes in May 2003, net of deferred financing costs associated
with the notes and the new inventory facility. For discussion, see "Liquidity."
SETTLEMENT WITH MARATHON of $54 million in the first six months of 2002
reflected a cash payment made during the first quarter in accordance with the
terms of the Separation.
PREFERRED STOCK ISSUED in the first six months of 2003 reflected net
proceeds from the offering of 5 million shares of Series B Preferred.
COMMON STOCK ISSUED in the first six months of 2003 and 2002 reflected
proceeds from stock sales to the U. S. Steel Corporation Savings Fund Plan for
Salaried Employees and sales through the Dividend Reinvestment and Stock
Purchase Plan. Common stock issued in the first six months of 2002 also
reflected $192 million of net proceeds from U. S. Steel's equity offering
completed in May 2002.
DIVIDENDS PAID in the first six months of 2003 were $16 million,
compared with $9 million in the same period in 2002. Payments in both periods
reflected the quarterly dividend rate of five cents per common share established
by U. S. Steel after the Separation. Dividends paid in 2003 also included a
dividend of 1.206 cents per share for the Series B Preferred, which reflected
dividends accrued from the date of issuance through June 15, 2003.
For discussion of restrictions on future dividend payments, see
"Liquidity."
40
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Liquidity
- ---------
In November 2001, U. S. Steel entered into a five-year Receivables
Purchase Agreement with financial institutions. U. S. Steel established a wholly
owned subsidiary, U. S. Steel Receivables LLC (USSR), which is a consolidated
special-purpose, bankruptcy-remote entity that acquires, on a daily basis,
eligible trade receivables generated by U. S. Steel and certain of its
subsidiaries. USSR can sell an undivided interest in these receivables to
certain commercial paper conduits. USSR pays the conduits a discount based on
the conduits' borrowing costs plus incremental fees, certain of which are
determined by credit ratings of U. S. Steel.
On May 19, 2003, U. S. Steel entered into an amendment to the
Receivables Purchase Agreement, which increased fundings under the facility to
the lesser of eligible receivables or $500 million. Eligible receivables exclude
certain obligors, amounts in excess of defined percentages for certain obligors,
and amounts past due or due beyond a defined period. In addition, eligible
receivables are calculated by deducting certain reserves, which are based on
various determinants including concentration, dilution and loss percentages, as
well as the credit ratings of U. S. Steel. As of June 30, 2003, U. S. Steel had
$500 million of eligible receivables, none of which were sold.
In addition, on May 20, 2003, U. S. Steel entered into a new four-year
revolving credit facility that provides for borrowings of up to $600 million
secured by all domestic inventory and related assets (Inventory Facility),
including receivables other than those sold under the Receivables Purchase
Agreement. The Inventory Facility replaced a similar $400 million facility
entered into on November 30, 2001. The new facility expires in May 2007 and
contains a number of covenants that require lender consent to incur debt, or
make capital expenditures above certain limits; to sell assets used in the
production of steel or steel products or incur liens on assets; and to limit
dividends and other restricted payments if the amount available for borrowings
drops below certain levels. The Inventory Facility also contains a fixed charge
coverage ratio, calculated as the ratio of operating cash flow to cash charges
as defined in the agreement of not less than 1.25 times on the last day of any
fiscal quarter. This coverage ratio must be met if availability, as defined in
the agreement, is less than $100 million. As of June 30, 2003, $556 million was
available to U. S. Steel under the Inventory Facility.
In July 2001, U. S. Steel issued $385 million of 10 3/4% senior notes
due August 1, 2008 (10 3/4% Senior Notes), and in September 2001, U. S. Steel
issued an additional $150 million of 10 3/4% Senior Notes. As of June 30, 2003,
the aggregate principal amount of 10 3/4% Senior Notes outstanding was $535
million.
In May 2003, U. S. Steel sold $450 million of new senior notes due May
15, 2010 (9 3/4% Senior Notes). These notes have an interest rate of 9 3/4% per
annum payable semi-annually on May 15 and November 15, commencing November 15,
2003. The 9 3/4% Senior Notes were issued under U. S. Steel's outstanding
universal shelf registration statement and are not listed on any national
securities exchange. Proceeds from the sale of the 9 3/4% Senior Notes were used
to finance a portion of the purchase price for the National Acquisition.
41
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In conjunction with issuing the 9 3/4% Senior Notes, U. S. Steel
solicited the consent of the 10 3/4% Senior Note holders to conform certain
terms of the 10 3/4% Senior Notes to the terms of the 9 3/4% Senior Notes. Those
conforming changes modified the definitions of Consolidated Net Income, EBITDA
and Like-Kind Exchange, permitted dividend payments on the Series B Preferred
shares and expanded permitted investments to include loans made for the purpose
of facilitating like-kind exchange transactions. U. S. Steel received the
consent from holders of more than 90% of the principal amount of the 10 3/4%
Senior Notes and the amendments were effective May 20, 2003.
The 10 3/4% Senior Notes and the 9 3/4% Senior Notes (together the
Senior Notes) impose very similar limitations on U. S. Steel's ability to make
restricted payments. Restricted payments under the indentures include the
declaration or payment of dividends on capital stock; the purchase, redemption
or other acquisition or retirement for value of capital stock; the retirement of
any subordinated obligations prior to their scheduled maturity; and the making
of any investments other than those specifically permitted under the indentures.
In order to make restricted payments, U. S. Steel must satisfy certain
requirements, which include a consolidated coverage ratio based on EBITDA and
consolidated interest expense for the four most recent quarters. In addition,
the total of all restricted payments made since the 10 3/4% Senior Notes were
issued, excluding up to $50 million of dividends paid on common stock through
the end of 2003, cannot exceed the cumulative cash proceeds from the sale of
capital stock and certain investments plus 50% of consolidated net income from
October 1, 2001, through the most recent quarter-end treated as one accounting
period, or, if there is a consolidated net loss for the period, less 100% of
such consolidated net loss. A complete description of the requirements and
defined terms such as restricted payments, EBITDA and consolidated net income
can be found in the indenture for the 10 3/4% Senior Notes that was filed as
Exhibit 4(f) to U. S Steel's Annual Report on Form 10-K for the year ended
December 31, 2001. The amended indenture for the 10 3/4% Senior Notes and the
Officer's Certificate for the 9 3/4% Senior Notes were filed as Exhibit 4.2 and
Exhibit 4.1, respectively, to U. S. Steel's Current Report on Form 8-K dated May
20, 2003.
As of June 30, 2003, U. S. Steel met the consolidated coverage ratio
and had almost $300 million of availability to make restricted payments under
the calculation described in the preceding paragraph. Also, exclusive of any
limitations imposed, U. S. Steel can declare and (i) make payment of dividends
on the Series B Preferred and (ii) make aggregate dividend payments on common
stock of up to $12 million from July 1, 2003 through the end of 2003. In
addition, U. S. Steel has the ability to make other restricted payments of up to
$28 million as of June 30, 2003, which could also be used for dividend payments.
U. S. Steel's ability to declare and pay dividends or make other restricted
payments in the future is subject to U. S. Steel's ability to continue to meet
the consolidated coverage ratio and have amounts available under the calculation
or one of the exclusions just discussed.
The Senior Notes also impose other significant restrictions on U. S.
Steel such as the following: limits on additional borrowings, including limiting
the amount of borrowings secured by inventories or accounts receivable; limits
on sale/leasebacks; limits on the use of funds from asset sales and sale of the
stock of subsidiaries; and restrictions on U. S. Steel's ability to invest in
joint ventures or make certain acquisitions.
42
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
If these covenants are breached or if U. S. Steel fails to make
payments under its material debt obligations or the Receivables Purchase
Agreement, creditors would be able to terminate their commitments to make
further loans, declare their outstanding obligations immediately due and payable
and foreclose on any collateral, and it may also cause termination events to
occur under the Receivables Purchase Agreement and a default under the Senior
Notes. Additional indebtedness that U. S. Steel may incur in the future may also
contain similar covenants, as well as other restrictive provisions.
Cross-default and cross-acceleration clauses in the Receivables Purchase
Agreement, the Inventory Facility, the Senior Notes and any future additional
indebtedness could have an adverse effect upon U. S. Steel's financial position
and liquidity.
U. S. Steel was in compliance with all of its debt covenants at June
30, 2003.
On May 6, 2003, Moody's Investors Service reduced its ratings assigned
to U. S. Steel's senior unsecured debt from Ba3 to B1 and assigned a stable
outlook, and Fitch Ratings reduced its ratings from BB to BB- and assigned a
negative outlook. On May 7, 2003, Standard & Poor's Ratings Services reduced its
ratings assigned to U. S. Steel's senior unsecured debt from BB to BB- and
assigned a negative outlook.
U. S. Steel has utilized surety bonds, trusts and letters of credit to
provide financial assurance for certain transactions and business activities.
The total amount of active surety bonds, trusts and letters of credit currently
being used for financial assurance purposes is approximately $120 million.
Events over the last two years have caused major changes in the surety bond
market including significant increases in surety bond premiums and reduced
market capacity. These factors, together with U. S. Steel's non-investment grade
credit rating, have caused U. S. Steel to replace some surety bonds with other
forms of financial assurance. The use of other forms of financial assurance and
collateral have a negative impact on liquidity. U. S. Steel expects to use
approximately $45 million to $60 million of liquidity sources for financial
assurance purposes during 2003, depending upon the requirements of the various
authorities involved. During the first six months, U. S. Steel used $26 million
of the estimated total for 2003. These amounts include requirements for the
acquired National facilities.
43
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The very high property taxes at U. S. Steel's Gary Works facility in
Indiana continue to be detrimental to Gary Work's competitive position, both
when compared to competitors in Indiana and with other steel facilities in the
United States and abroad. U. S. Steel is a party to several property tax
disputes involving Gary Works, including claims for refunds totaling
approximately $65 million pertaining to tax years 1994-96 and 1999 and
assessments totaling approximately $133 million in excess of amounts paid for
the 2000, 2001 and 2002 tax years. In addition, interest may be imposed upon any
final assessment. The disputes involve property values and tax rates and are in
various stages of administrative appeal. U. S. Steel is vigorously defending
against the assessments and pursuing its claims for refunds. See discussion in
"Outlook" regarding recently enacted Indiana property tax legislation that will
affect U. S. Steel's tax expense in future periods. The legislation has no
impact on the property taxes for past periods that are currently being disputed.
U. S. Steel was contingently liable for debt and other obligations of
Marathon in the amount of $75 million as of June 30, 2003. In the event of the
bankruptcy of Marathon, these obligations for which U. S. Steel is contingently
liable, as well as obligations relating to Industrial Development and
Environmental Improvement Bonds and Notes in the amount of $471 million that
were assumed by U. S. Steel from Marathon, may be declared immediately due and
payable. If that occurs, U. S. Steel may not be able to satisfy such
obligations. In addition, if Marathon loses its investment grade ratings,
certain of these obligations will be considered indebtedness under the Senior
Notes indentures and for covenant calculations under the Inventory Facility.
This occurrence could prevent U. S. Steel from incurring additional indebtedness
under the Senior Notes or may cause a default under the Inventory Facility.
The following table summarizes U. S. Steel's liquidity as of June 30,
2003:
(Dollars in millions)
- ----------------------------------------------------------------------------
Cash and cash equivalents....................... $ 145
Amount available under Receivables
Purchase Agreement........................... 500
Amount available under Inventory Facility....... 556
Amounts available under USSK credit facilities.. 46
------
Total estimated liquidity..................... $1,247
44
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
U. S. Steel's liquidity has increased by $216 million since December
31, 2002, primarily reflecting the sale of the 9 3/4% Senior Notes, net proceeds
of $242 million from U. S. Steel's offering of Series B Preferred and increased
availability under the Receivables Purchase Agreement and the Inventory
Facility, partially offset by cash used for the National Acquisition.
The following table summarizes U. S. Steel's incremental contractual
obligations resulting primarily from the National Acquisition and the effect
such obligations are expected to have on U. S. Steel's liquidity and cash flow
in future periods. These obligations are in addition to those disclosed on page
44 of U. S. Steel's Annual Report on Form 10-K for the year ended December 31,
2002.
(Dollars in millions)
- --------------------------------------------------------------------------------------------------------------------------------
Payments Due by Period
2004 2006
through through Beyond
Contractual Obligations Total 2003 2005 2007 2007
- --------------------------------------------------------------------------------------------------------------------------------
Capital leases 4 2 2 - -
Operating leases 159 24 73 62 -
Capital commitments(a) 2 2 - - -
Environmental commitments(a) 6 6 - - -
Multiemployer pension obligations(b) 12 6 6 - -
Other post-retirement benefits (c) 45 45 20 (c)
---------- --------- ----------- ----------- ----------
Total contractual obligations (c) 85 126 82 (c)
- --------------------------------------------------------------------------------------------------------------------------------
(a) See Note 19 of Selected Notes to Financial Statements.
(b) Amount reflects two cash contributions to be made to the Steelworkers
Pension Trust based on the number of National's represented employees as of the
date of the acquisition, less the number of these employees estimated to
participate in the Transition Assistance Program. The table does not reflect
future cash contributions to be made to this trust based on contributory hours.
(c) Amount of contractual cash obligations is not determinable because other
post-retirement benefit cash obligations are not estimable beyond five years.
Contingent lease payments have been excluded from the above table.
Contingent lease payments relate to operating lease agreements that include a
floating rental charge, which is associated to a variable component. Future
contingent lease payments are not determinable to any degree of certainty. U. S.
Steel's annual incurred contingent lease expense is disclosed in Note 17 to the
Financial Statements in U. S. Steel's Annual Report on Form 10-K for the year
ended December 31, 2002. Additionally, recorded liabilities related to deferred
income taxes and other liabilities that may have an impact on liquidity and cash
flow in future periods are excluded from the above table.
45
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Defined benefit pension obligations have been excluded from the above
table. In 2003, U. S. Steel intends to merge its pension plan for union
employees and its pension plan for nonunion employees. Preliminary valuations
indicate that the merged plan will not require cash funding for the 2003 or
2004 plan years. Thereafter, annual funding requirements are broadly estimated
to be $75 million per year. U. S. Steel may also make voluntary contributions
in one or more future periods in order to mitigate potentially larger required
contributions in later years. Any such funding requirements could have an
unfavorable impact on U. S. Steel's debt covenants, borrowing arrangements and
cash flows. The funded status of U. S. Steel's pension plans is disclosed in
Note 12 to the Financial Statements in U. S. Steel's Annual Report on Form
10-K for the year ended December 31, 2002. Also, contributions to the trust
administered by the USWA to assist National retirees with health care costs
have been excluded from the above table as it is not possible to make an
accurate prediction of cash requirements.
The following table summarizes U. S. Steel's incremental commercial
commitments resulting primarily from the National Acquisition and the Mining
Sale, and the effect such commitments could have on U. S. Steel's liquidity
and cash flow in future periods. These commitments are in addition to those
disclosed on page 45 of U. S. Steel's Annual Report on Form 10-K for the year
ended December 31, 2002.
(Dollars in millions)
- ----------------------------------------------------------------------------------------------------------------
Scheduled Reductions by Period
2004 2006
through through Beyond
Commercial Commitments Total 2003 2005 2007 2007
- ----------------------------------------------------------------------------------------------------------------
Standby letters of credit(a) 14 - 14 - -
Funded Trusts(a) 2 - 2 - -
Guarantees of indebtedness of
unconsolidated entities(a) 7 2 3 - 2
Contingent liabilities:
- Unconditional purchase obligations(b) 733 76 271 169 217
---------- ---------- ---------- ---------- ----------
Total commercial commitments 756 78 290 169 219
- ----------------------------------------------------------------------------------------------------------------
(a) Reflects a commitment or guarantee for which future cash outflow is not
considered likely.
(b) Reflects contractual purchase commitments ("take or pay" arrangements)
primarily for purchases of certain energy and coal sources, and computer
programming services.
46
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
U. S. Steel management believes that U. S. Steel's liquidity will be
adequate to satisfy its 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, debt service for outstanding financings,
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 and other
external financing sources. However, there is no assurance that our business
will generate sufficient operating cash flow or that external financing sources
will be available in an amount sufficient to enable us to service or refinance
our indebtedness or to fund other liquidity needs. If there is a prolonged delay
in the recovery of the manufacturing sector of the U.S. economy, U. S. Steel
believes that it can maintain adequate liquidity through a combination of
deferral of nonessential capital spending, sales of non-strategic assets and
other cash conservation measures.
U. S. Steel management's opinion concerning liquidity and U. S. Steel's
ability to avail itself in the future of the financing options mentioned in the
above forward-looking statements are based on currently available information.
To the extent that this information proves to be inaccurate, future availability
of financing may be adversely affected. Factors that could affect the
availability of financing include the performance of U. S. Steel (as measured by
various factors including cash provided from operating activities), levels of
inventories and accounts receivable, the state of worldwide debt and equity
markets, investor perceptions and expectations of past and future performance,
the overall U.S. financial climate, and, in particular, with respect to
borrowings, the level of U. S. Steel's outstanding debt and credit ratings by
rating agencies.
47
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Environmental Matters, Litigation and Contingencies
- ---------------------------------------------------
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. In recent years, these expenditures have
been mainly for process changes in order to meet Clean Air Act obligations,
although ongoing compliance costs have also been significant. To the extent
these expenditures, as with all costs, are not ultimately reflected in the
prices of U. S. Steel's products and services, operating results will be
adversely affected. U. S. Steel believes that its major domestic integrated
steel competitors are confronted by substantially similar conditions and thus
does not believe that its relative position with regard to such competitors is
materially affected by the impact of environmental laws and regulations.
However, the costs and operating restrictions necessary for compliance with
environmental laws and regulations may have an adverse effect on U. S. Steel's
competitive position with regard to domestic mini-mills and some foreign steel
producers and producers of materials which compete with steel, which may not be
required to undertake equivalent costs in their operations. In addition, the
specific impact on each competitor may vary depending on a number of factors,
including the age and location of its operating facilities and its production
methods.
USSK is subject to the laws of the Slovak Republic. The environmental
laws of the Slovak Republic generally follow the requirements of the European
Union, which are comparable to domestic standards. USSK has also entered into an
agreement with the Slovak government to bring, over time, its facilities into
European Union environmental compliance.
U. S. Steel has been notified that it is a potentially responsible
party (PRP) at 22 waste sites under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) as of June 30, 2003. In addition, there
are 18 sites related to U. S. Steel where it has received information requests
or other indications that it may be a PRP under CERCLA but where sufficient
information is not presently available to confirm the existence of liability or
make any judgment as to the amount thereof. There are also 37 additional sites
related to U. S. Steel where remediation is being sought under other
environmental statutes, both federal and state, or where private parties are
seeking remediation 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 thereof, is frequently dependent
upon the outcome of 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 determinable. As
environmental remediation matters proceed toward ultimate resolution or as
additional remediation obligations arise, charges in excess of those previously
accrued may be required.
48
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In 1988, U. S. Steel and two other PRPs (Bethlehem Steel Corporation
and William Fiore) agreed to the issuance of an administrative order by the U.S.
Environmental Protection Agency (EPA) to undertake emergency removal work at the
Municipal & Industrial Disposal Co. site in Elizabeth, Pa. The cost of such
removal, which has been completed, was approximately $4.2 million, of which U.
S. Steel paid $3.4 million. The EPA indicated that further remediation of this
site would be required. In October 1991, the Pennsylvania Department of
Environmental Resources (PADER) placed the site on the Pennsylvania State
Superfund list and began a Remedial Investigation, which was issued in 1997.
After a feasibility study by the Pennsylvania Department of Environmental
Protection (PADEP) and submission of a conceptual remediation plan in 2001 by U.
S. Steel, U. S. Steel submitted a revised remedial action plan on May 31, 2002.
U. S. Steel and the PADEP signed a Consent Order and Agreement on August 30,
2002, under which U. S. Steel is responsible for remediation of this site. On
March 18, 2003, the PADEP notified U. S. Steel that the public comment period
was concluded and the Consent Order and Agreement is final.
On January 26, 1998, pursuant to an action filed by the EPA in the
United States District Court for the Northern District of Indiana titled United
States of America v. USX, U. S. Steel entered into a consent decree with the EPA
which resolved alleged violations of the Clean Water Act National Pollution
Discharge Elimination System (NPDES) permit at Gary Works and provides for a
sediment remediation project for a five mile section of the Grand Calumet River
that runs through and beyond Gary Works. Contemporaneously, U. S. Steel entered
into a consent decree with the public trustees, which resolves potential
liability for natural resource damages on the same section of the Grand Calumet
River. In 1999, U. S. Steel paid civil penalties of $2.9 million for the alleged
water act violations and $0.5 million in natural resource damages assessment
costs. In addition, U. S. Steel will pay the public trustees $1.0 million at the
end of the remediation project for future monitoring costs and U. S. Steel is
obligated to purchase and restore several parcels of property that have been or
will be conveyed to the trustees. During the negotiations leading up to the
settlement with the EPA, capital improvements were made to upgrade plant systems
to comply with the NPDES requirements. The sediment remediation project is an
approved final interim measure under the corrective action program for Gary
Works. As of July 15, 2003, project costs have amounted to $43.4 million with
another $3.9 million presently projected to complete the project, over the next
three months. Construction began in January 2002 on a Corrective Action
Management Unit (CAMU) to contain the dredged material on company property and
construction was completed in February 2003. The water treatment plant, specific
to this project, was completed in November 2002, and placed into operation in
March 2003. Phase 1 removal of PCB-contaminated sediment was completed in
December 2002. Dredging resumed in February 2003 and will continue until
dredging on the river is concluded, which is expected to occur in October 2003.
Closure costs for the CAMU are estimated to be an additional $4.9 million.
On March 11, 2003, Gary Works received a notice of violation from the
EPA alleging construction of two desulfurization facilities without proper
installation permitting. Negotiations began April 24, 2003, and the cost of
settlement of this matter is currently indeterminable.
49
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In December 1995, U. S. Steel reached an agreement in principle with
the EPA and the U.S. Department of Justice (DOJ) with respect to alleged
Resource Conservation and Recovery Act (RCRA) violations at Fairfield Works. A
consent decree was signed by U. S. Steel, the EPA and the DOJ and filed with the
United States District Court for the Northern District of Alabama (United States
of America v. USX Corporation) on December 11, 1997, under which U. S. Steel
will pay a civil penalty of $1.0 million, implement two Supplemental
Environmental Projects (SEPs) costing a total of $1.75 million and implement a
RCRA corrective action at the facility. One SEP was completed during 1998. The
second SEP was completed in 2003. As of February 22, 2000, the Alabama
Department of Environmental Management assumed primary responsibility for
regulation and oversight of the RCRA corrective action program at Fairfield
Works, with the approval of the EPA. The first Phase I RCRA Facility
Investigation (RFI) work plan was approved for the site on September 16, 2002.
Field sampling for the work plan commenced immediately after approval and will
continue through the end of 2003. The cost to complete this study is estimated
to be $770,000.
On October 23, 1998, a final Administrative Order on Consent was issued
by the EPA addressing Corrective Action for Solid Waste Management Units
throughout Gary Works. This order requires U. S. Steel to perform an RFI and a
Corrective Measure Study at Gary Works. The Current Conditions Report, U. S.
Steel's first deliverable, was submitted to the EPA in January 1997 and was
approved by the EPA in 1998. Phase I RFI work plans have been approved for the
Coke Plant, the Process Sewers, and Background Soils at the site, along with the
approval of one self-implementing interim stabilization measure and a corrective
measure. Another eight Phase I RFI work plans have been submitted for EPA
approval, thereby completing the Phase I requirement, along with two Phase II
RFI work plans and one further self-implementing interim stabilization measure.
The costs to complete these studies and corrective measures are estimated to be
$4.8 million. Until the studies are completed, it is impossible to assess what
additional expenditures will be necessary.
On February 12, 1987, U. S. Steel and the PADER entered into a Consent
Order to resolve an incident in January 1985 involving the alleged unauthorized
discharge of benzene and other organic pollutants from Clairton Works in
Clairton, Pa. That Consent Order required U. S. Steel to pay a penalty of
$50,000 and a monthly payment of $2,500 for five years. In 1990, U. S. Steel and
the PADER reached agreement to amend the Consent Order. Under the amended Order,
U. S. Steel agreed to remediate the Peters Creek Lagoon (a former coke plant
waste disposal site); to pay a penalty of $300,000; and to pay a monthly penalty
of up to $1,500 each month until the former disposal site is closed. Remediation
costs have amounted to $10.3 million with another $1.3 million presently
estimated to complete the project.
Prior to U. S. Steel's acquisition of the Granite City, Great Lakes and
Midwest facilities, the DOJ had filed against National Steel Corporation proofs
of claim asserting noncompliance allegations under various environmental
statutes, including the Clean Air Act, RCRA, the Clean Water Act, the Emergency
Planning and Community Right to Know Act, CERCLA and the Toxic Substances
Control Act at these three facilities. The EPA had conducted inspections of the
facilities and entered into negotiations with National Steel Corporation toward
resolving these allegations with a consent decree. U. S. Steel is currently
engaged in discussions with the DOJ, the EPA and the State of Illinois related
to the conditions previously noted at
50
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
these facilities. At Granite City Works, the EPA had determined that ditches and
dewatering beds currently in operation were allegedly not in compliance with
applicable waste oil management standards. Dredging of the ditches and
dewatering beds is expected to cost $1.3 million. U. S. Steel is currently
discussing with the EPA, the DOJ and the State of Illinois appropriate measures
to investigate and remediate the ditches and dewatering beds. Air emissions from
the steelmaking shop at Great Lakes are also under discussion. It has not been
determined what, if any, corrective action may be necessary to address those
emissions. Other, less significant issues are also under discussion, including
Ferrous Chloride Solution handling at Granite City and Great Lakes, Spill
Prevention Control and Countermeasures Plans at both facilities, RCRA training
at Great Lakes and other waste handling issues.
Prior to U. S. Steel's acquisition of the Great Lakes facility it had
operated under a permit for indirect discharge of wastewater to the Detroit
Water and Sewerage Department (DWSD). National had reported to the DWSD
violations of effluent limitations, including mercury, contained in the
facility's indirect discharge to the DWSD treatment plant and had entered into a
consent order with the DWSD that required improvements in plant equipment to
remedy the violations. The Great Lakes facility continues to operate under a
DWSD permit for this discharge and anticipates spending approximately $2.9
million to improve operating equipment to come into compliance with discharge
limits in the current DWSD permit.
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 U. S. Steel 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 to U. S. Steel.
51
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Outlook
- -------
Looking ahead, shipments for the Flat-rolled segment are expected to
exceed 3.8 million tons in the third quarter. The third quarter average realized
price is expected to improve slightly from the second quarter. Third quarter
natural gas prices, while higher than in last year's third quarter, are expected
to be slightly lower than in this year's second quarter. Also, costs in the
fourth quarter will be negatively impacted by approximately $35 million for
several major planned outages. For full-year 2003, Flat-rolled shipments are
expected to approximate 13.0 million net tons.
For the Tubular segment, third quarter shipments are projected to be up
moderately, and the average realized price is expected to improve slightly from
the second quarter. North American drilling activity picked up during the second
quarter in response to higher energy prices, and continued improvements are
anticipated during the remainder of 2003. Shipments for full-year 2003 are
expected to be approximately 950,000 net tons. The new quench and temper line at
Lorain Tubular commenced start-up early in the third quarter, and should reach
full production capability by the end of the third quarter.
USSK third quarter shipments are expected to be consistent with the
second quarter of 2003. Shipments for the full year, from USSK and Sartid, are
projected to be approximately 5.0 million net tons, and the third quarter
average realized price is expected to decline back to levels approaching the
first quarter due to softening markets as Europe enters its summer holiday
season. In late June, USSK started up new continuous annealing and electrolytic
tinning lines, which will more than double USSK's total annual tin capability to
375,000 net tons. Full production capability should be reached in early 2004.
Straightline sales continue to increase and higher cost inventories are
being reduced, but Straightline has not yet achieved the margins and volumes
necessary for profitability. Straightline is implementing plans to further
increase contract sales and inventory turnover rates, and to further reduce
overhead and operating costs. As a result, Straightline results should improve
in the second half.
The National Acquisition and the new labor agreement with the United
Steelworkers of America (USWA) covering all of U. S. Steel's domestic facilities
provides U. S. Steel with an opportunity to achieve a major reduction in the
cost structure of its domestic business. Near-term, U. S. Steel's operating
focus is on achieving savings from its combined operating configuration,
consolidating purchasing and raw materials sourcing, optimizing freight savings,
and expanding U. S. Steel's comprehensive supply chain management system to
support customers from the new facilities.
52
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In addition, U. S. Steel is aggressively realigning its represented and
non-represented plant workforces. The Transition Assistance Program for USWA
represented employees is underway, and eligible employees will decide by
mid-August whether they elect to retire. As of August 8, 2003, over 2,000
represented employees have accepted the retirement offer. The majority of the
employees who accepted the offer are expected to leave the workforce by the end
of October, with the remainder departing by the end of the year. U. S. Steel
also launched a domestic administrative cost reduction program, which was
initiated in May with a 20 percent reduction in executive management.
In total, savings from National operational synergies, workforce
reductions at both U. S. Steel and former National plants, and administrative
cost reduction programs are expected to exceed $400 million in annual repeatable
cost savings. U. S. Steel expects to realize significant savings in the fourth
quarter of 2003 and expects full implementation by year-end 2004. The future
costs incurred by U. S. Steel for depreciation of the assets acquired from
National and for retiree benefits for the U. S. Steel employees formerly
employed by National will be approximately $200 million lower than National's
historical costs for these items. These elements bring the total estimated
annual reduction in U. S. Steel's combined domestic cost structure by year-end
2004 to over $600 million.
In the second half of 2003, U. S. Steel will record a pre-tax charge,
broadly estimated at $500 million, in connection with the planned workforce
reductions under the Transition Assistance Program for union employees, of which
approximately $115 million for early retirement incentives is expected to have a
cash impact in 2003. The balance is pension and other postretirement benefits
curtailment losses.
U. S. Steel's underfunded benefit obligations for retiree medical and
life insurance increased from $1.8 billion at year-end 2001 to $2.6 billion at
year-end 2002. U. S. Steel estimates that its underfunded benefit obligation at
year-end 2003 will be $2.8 billion as the favorable impact of the new labor
agreement is offset by the inclusion of accruals for active employees at the
acquired National facilities, a reduction in the discount rate, payments in 2003
out of the Voluntary Employee Benefit Association (VEBA) trust that U. S. Steel
maintains for union retirees and the recognition of liabilities under the Coal
Industry Retiree Health Benefit Act of 1992. OPEB expense is expected to
increase to approximately $190 million in 2003, excluding one-time charges of
approximately $50 million connected with the anticipated early retirements under
the Transition Assistance Program for U. S. Steel union employees.
53
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Also, the funded status of the defined benefit pension plans declined
from an overfunded position of $1.2 billion at year-end 2001 to an underfunded
position of $0.4 billion at year-end 2002. With the expected workforce reduction
and certain retirement rate assumption changes, the plan, after the merger
discussed below, is expected to have a year-end 2003 underfunded position of
approximately $0.7 billion. Pension costs are expected to increase to
approximately $105 million in 2003, assuming the workforce reduction occurs at
the end of September. This amount does not include expenses for defined
contribution payments to the Steelworkers Pension Trust for former National
union employees who join U. S. Steel, one-time charges related to early
retirements under the Transition Assistance Program or charges related to the
administrative workforce reduction. Future U. S. Steel represented employees
will participate in the Steelworkers Pension Trust, and U. S. Steel anticipates
that future non-union employees will participate in a defined contribution
pension program. Costs for both of these future employee groups are not
estimable and are not included in the amount disclosed above.
During 2003, U. S. Steel intends to merge its two major defined benefit
pension plans. Pension accounting rules may require that U. S. Steel increase
the additional minimum liability that was recorded at year-end. This increase
would result in a non-cash net charge against equity, which is currently
estimated in a range of $500 million to $600 million. The actual amount of such
charge will be determined based upon facts and circumstances on the measurement
date. Therefore, the result could be materially different from the estimate
above. Such differences could range from a reversal of the $748 million net
charge against equity that was recorded in 2002 up to an additional charge
substantially greater than the range estimated above. These entries will have no
impact on income.
Cash payments for retiree medical and life insurance in 2002 and 2001
totaled $212 million and $183 million, respectively. During 2002 and 2001,
substantially all payments on behalf of union retirees were paid from the VEBA
trust. U. S. Steel expects that all payments on behalf of union retirees will
also be paid from the VEBA trust in 2003, but beginning in early 2004, corporate
funds will be used for these payments. Corporate funds used for all retiree
health and life benefits in 2004 and 2005, excluding multiemployer plan
payments, are expected to total $230 million and $260 million, respectively.
On June 18, 2003, U. S. Steel submitted an amended offer in the third
round of bidding in the privatization process for Polskie Huty Stali S.A. (PHS),
Poland's largest integrated steel producer. A senior Polish official has stated
that the Polish government is seeking an investor to (i) restructure PHS debt
which is expected to be in an amount between $350 million and $600 million, (ii)
make a capital infusion of approximately $150 million and (iii) honor the
commitments made by the Polish Government to the EU concerning PHS, the most
significant of which include annual capability reductions to approximately 8.0
million tons, personnel reductions, and making certain specified capital
investments. U. S. Steel broadly estimates the cost of capital projects required
under the EU agreement to be between $300 million and $350 million through 2006.
On July 14, 2003, U. S. Steel was advised that another bidder was granted
exclusivity to negotiate a purchase of PHS. U. S. Steel remains interested in
acquiring PHS and will continue to monitor developments closely.
54
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
A wholly owned U. S. Steel subsidiary, U. S. Steel Balkan d.o.o. (USS
Balkan), expects to purchase Serbian steel producer Sartid and six of its
subsidiaries out of bankruptcy for a purchase price of $23 million in the third
quarter of 2003. Sartid's production facilities include integrated facilities
with annual raw steel design production capability of approximately 2.4 million
net tons; however, only about a third of design capability is currently
operational.
In a related agreement, which will become effective upon the completion
of the acquisition, USS Balkan committed to future spending of up to $150
million over five years for working capital and the repair, rehabilitation,
improvement, modification and upgrade of the facilities. A portion of this
spending is subject to certain conditions related to Sartid's commercial
operations, cash flow and viability. In addition, USS Balkan has agreed to
refrain from layoffs for a period of three years. Sartid has approximately
9,000 employees. The agreement requires USS Balkan to obtain the consent of the
Serbian government prior to a sale, transfer or assignment of a controlling
interest of Sartid within five years of the closing date. USS Balkan will
conduct economic development activities over the course of three years and
spend no less than $1.5 million on these efforts, and has agreed to support
community, charitable and sport activities in a total amount of not less than
$5 million during the three-year period following closing of the transaction.
Legislation enacted in Indiana in April 2003 permits certain steel
companies and refinery operations to claim additional depreciation on older
facilities for Indiana property tax reporting. As a result of this legislation,
U. S. Steel is projected to realize a reduction in Gary Works' property tax
expenses of approximately $11 million in 2003 compared with 2002. This
reduction does not fully address the detrimental impact of property taxes on
Gary Works' competitive position, both when compared to competitors in Indiana
and with other steel facilities in the United States and abroad.
U. S. Steel continues to pursue the sale of its remaining mineral
interests that are managed by Real Estate pursuant to a letter of intent, and
the contribution of timber assets to an employee benefit plan. Both of these
transactions are targeted for completion in 2003.
55
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The preceding discussion contains forward-looking statements with
respect to market conditions, operating costs, shipments and prices, National
acquisition synergies, workforce reductions, administrative cost reductions,
the new labor agreement, the merger of U. S. Steel's two major pension plans,
potential acquisitions, tax relief and potential asset dispositions. Some
factors, among others, that could affect 2003 market conditions, costs,
shipments and prices for both domestic operations and USSK include product
demand, prices and mix, global and company steel production levels, plant
operating performance, the timing and completion of facility projects, natural
gas prices and usage, changes in environmental, tax and other laws, the
resumption of operation of steel facilities sold under the bankruptcy laws, and
U.S. and European economic performance and political developments. Domestic
steel shipments and prices could be affected by import levels and actions taken
by the U.S. Government and its agencies. Additional factors that may affect
USSK's results are foreign currency fluctuations and political factors in
Europe that include, but are not limited to, taxation, nationalization,
inflation, currency fluctuations, increased regulation, export quotas, tariffs,
and other protectionist measures. Factors that may affect expected synergies
from the National Acquisition include management's ability to successfully
integrate the acquired National operations. Factors that may affect anticipated
union workforce reductions include offer acceptance levels. Factors that may
affect expected administrative cost reductions include management's ability to
implement its cost reduction strategy. The amount of changes ultimately
measured and recorded for workforce reductions could vary materially from those
estimated depending on the census and timing of the curtailment, the
assumptions used to measure the liabilities and various other factors. Factors
that may affect the amount of net periodic benefit costs and the amount of any
additional minimum liability include among others, pension fund investment
performance, liability changes and interest rates. Cash funding requirements
for pensions and other postretirement benefits depend upon various factors such
as future asset performance, the level of interest rates used to measure ERISA
minimum funding levels, medical cost inflation, the impacts of business
acquisitions or sales, union negotiated changes and future government
regulation. Whether either of the acquisitions described above will be
implemented and the timing of such implementation will depend upon a number of
factors, many of which are beyond the control of U. S. Steel. Factors that may
impact the potential occurrence and timing of the acquisition of PHS include
actions and decisions of the Polish government (which may be influenced by
negotiations with another bidder), anti-monopoly review in several countries
and negotiation of definitive documentation. The timing of the acquisition of
Sartid will be affected by matters arising in Sartid's bankruptcy proceedings.
Consummation of the sale of the mineral interests will depend upon a number of
factors including regulatory approvals, negotiation of definitive documentation
and the ability of the purchaser to arrange financing. Contribution of the
timber assets to an employee benefit plan is contingent on and may be
influenced by factors that include regulatory approvals. In accordance with
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, cautionary statements identifying important factors, but not necessarily
all factors, that could cause actual results to differ materially from those
set forth in the forward-looking statements have been included in the Form 10-K
of U. S. Steel for the year ended December 31, 2002, and in subsequent filings
for U. S. Steel.
56
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Steel imports to the United States accounted for an estimated 21% of
the domestic steel market in the first five months of 2003, 26% for the year
2002, and 24% for the year 2001.
On July 11, 2003, a World Trade Organization (WTO) Settlement Dispute
Panel issued its ruling on challenges filed against the action regarding steel
imports taken by President Bush in March 2002 pursuant to Section 201 of the
Trade Act of 1974, finding that the Section 201 action was in violation of WTO
rules. The United States has announced that it will appeal the decision. The
U.S. International Trade Commission (ITC) announced on March 5, 2003 that it
has initiated a mid-term review of the Section 201 action. As required by
statute, the ITC will submit to the President and Congress a report on the
condition of the U.S. industry and the progress made by domestic producers to
adjust to import competition. The ITC conducted hearings in July as part of the
review. Also, on April 4, 2003, the ITC announced that, at the request of the
House Committee on Ways and Means, it was instituting a general fact finding
investigation under Section 332 of the Tariff Act of 1930 to examine the impact
of the Section 201 tariffs on the domestic steel-consuming industries. The ITC
held a hearing on the Section 332 investigation in June 2003. The ITC will
provide the results of the mid-term review and the Section 332 investigation to
the President in the same report on September 19, 2003, after which the
President will decide whether to continue, adjust or terminate the relief. At
the same time, the Bush Administration is continuing discussions at the
Organization of Economic Cooperation and Development aimed at the reduction of
inefficient steel production capacity and the elimination and limitation of
certain subsidies to the steel industry throughout the world.
On December 20, 2001, the European Commission commenced an anti-dumping
investigation concerning hot-rolled coils imported into the EU from the Slovak
Republic and five other countries. On January 20, 2003, the Commission issued a
final disclosure advising of its determinations relative to the dumping and
injury margins applicable to those imports. The Commission's findings set the
dumping margin applicable to those imports at 25.8% and the injury margin at
18.6%. On March 18, 2003, however, this case was dismissed upon the rejection,
by the EU's General Affairs and External Relations Council, of the Commission's
proposal to impose definitive anti-dumping duties. The Council's decision is
final and, accordingly, no anti-dumping duties will be imposed against hot
rolled coils shipped by USSK into the EU.
57
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Definitive measures were announced on September 27, 2002, in a separate
safeguard trade action commenced by the European Commission. In that proceeding,
which is similar to the U.S. Section 201 proceedings, quota/tariff measures were
announced relative to the import of certain steel products into the EU. USSK is
impacted by the quota/tariff measures on four products: non-alloy hot-rolled
coils, hot-rolled strip, hot-rolled sheet and cold-rolled flat products. Annual
shipment quotas were set for all four products. The shipment quotas on all
products, other than non-alloy hot-rolled coils, are country-specific. The
hot-rolled coil quota is a global quota. The annual hot-rolled coil quota was
effectively exhausted on July 29, 2003. Accordingly, a 15.7% tariff will be
imposed on hot-rolled coils shipped into the EU from that date until the quota
expires on September 28, 2003, the anniversary date of the imposition of the
measures. It is highly unlikely that Slovakia's country-specific quotas for
hot-rolled sheet, hot-rolled strip and/or cold-rolled flat products will be
exceeded prior to September 28, 2003. If such quotas are exceeded, however, a
23.4% tariff would be imposed. On September 29, 2003, new annual quotas, set at
5% above the first year quotas, will go into effect. The EU safeguard measures
are scheduled to expire on March 28, 2005. However, these measures will cease to
impact USSK at such time that Slovakia becomes a member of the EU. Slovakia has
been accepted for membership in the EU and entry is expected to occur in May
2004.
Safeguard measures similar to those in effect in the EU were imposed by
Poland (on March 8, 2003) and Hungary (on March 28, 2003). On April 30, 2003,
the Czech Republic's Trade Ministry published its decision dismissing the
safeguard proceedings commenced in that country, based upon its conclusion that
the conditions for the imposition of such measures were not met. That decision
is final and cannot be appealed. The impact on USSK of these trade actions in
the EU and Central Europe cannot be predicted at this time. However, in light of
market opportunities elsewhere; and USSK's experience operating under these
safeguard measures, it appears unlikely that these matters will have a material
adverse effect on USSK's operating profit in 2003.
58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Accounting Standards
- --------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143 "Accounting for Asset Retirement Obligations." SFAS No. 143
established a new accounting model for the recognition and measurement of
retirement obligations associated with tangible long-lived assets. SFAS No. 143
requires that an asset retirement obligation be capitalized as part of the cost
of the related long-lived asset and subsequently allocated to expense using a
systematic and rational method. U. S. Steel adopted this Statement effective
January 1, 2003. See Note 6 to Selected Notes to Financial Statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The Interpretation elaborates on the
disclosure to be made by a guarantor about obligations under certain guarantees
that it has issued. It also clarifies that at the inception of a guarantee, the
company must recognize liability for the fair value of the obligation undertaken
in issuing the guarantee. The initial recognition and measurement provisions
apply on a prospective basis to guarantees issued or modified after December 31,
2002. The disclosure requirements were adopted for the 2002 annual financial
statements. U. S. Steel is applying the remaining provisions of the
Interpretation prospectively as required.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amends SFAS No.
123. SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation. U. S. Steel
adopted the annual disclosure provisions of SFAS No. 148 for the annual
financial statements and adopted the interim provisions effective with the
second quarter of 2003. U. S. Steel is not changing to the fair value based
method of accounting for stock-based employee compensation; therefore, the
transition provisions are not applicable.
FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities," was issued in January 2003 and addresses consolidation by business
enterprises of variable interest entities that do not have sufficient equity
investment to permit the entity to finance its activities without additional
subordinated financial support from other parties or whose equity investors lack
the characteristics of a controlling financial interest. This Statement was
adopted in the first quarter of 2003 with no initial impact to U. S. Steel.
In April 2003, the FASB issued SFAS No. 149, "Accounting for Derivative
Instruments and Hedging Activities." The Statement amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. The
amendments set forth in SFAS No. 149 improve financial reporting by requiring
that contracts with comparable characteristics be accounted for similarly. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003,
except for certain outlined exceptions. This Statement was adopted with no
initial impact.
59
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 changes the accounting for certain financial instruments that, under
previous guidance, could be classified as equity or "mezzanine" equity, by now
requiring these instruments be classified as liabilities (or assets in some
circumstances) in the balance sheet. Further, SFAS No. 150 requires disclosure
regarding the terms of those instruments and settlement alternatives. The
guidance in the Statement is generally effective for all financial instruments
entered into or modified after May 31, 2003, and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. This
Statement was adopted with no initial impact.
60
UNITED STATES STEEL CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-------------------------------------
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analyses of the incremental effects on pretax income of
hypothetical 10% and 25% decreases in commodity prices for open derivative
commodity instruments as of June 30, 2003, are provided in the following
table(a):
Incremental Decrease in
Income Before Income Taxes
Assuming a Hypothetical
Price Decrease of:
(Dollars in millions) 10% 25%
- ----------------------------------------------------------------------------------------------------------------
Commodity-Based Derivative Instruments
Zinc ...................................................................... 1.8 4.5
Tin ...................................................................... 0.3 0.7
(a) With the adoption of SFAS No. 133, the definition of a
derivative instrument has been expanded to include certain
fixed price physical commodity contracts. Such instruments are
included in the above table. Amounts reflect the estimated
incremental effects on pretax income of hypothetical 10% and
25% decreases in closing commodity prices for each open
contract position at June 30, 2003. Management evaluates the
portfolio of derivative commodity instruments on an ongoing
basis and adjusts strategies to reflect anticipated market
conditions, changes in risk profiles and overall business
objectives. Changes to the portfolio subsequent to June 30,
2003, may cause future pretax income effects to differ from
those presented in the table.
61
UNITED STATES STEEL CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-------------------------------------
Interest Rate Risk
- ------------------
U. S. Steel is subject to the effects of interest rate fluctuations on
certain of its non-derivative financial instruments. A sensitivity analysis of
the projected incremental effect of a hypothetical 10% decrease in June 30,
2003, interest rates on the fair value of U. S. Steel's non-derivative financial
instruments is provided in the following table:
(Dollars in millions)
- ------------------------------------------------------------------------------------------------------------------------------
As of June 30, 2003
Incremental
Increase in
Non-Derivative Fair Fair
Financial Instruments(a) Value Value(b)
- ------------------------------------------------------------------------------------------------------------------------------
Financial assets:
Investments and
long-term receivables ............................................................. $ 22 $ -
- ------------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Long-term debt(c)(d)................................................................. $1,778 $80
- ------------------------------------------------------------------------------------------------------------------------------
(a) Fair values of cash and cash equivalents, receivables, notes payable,
accounts payable and accrued interest approximate carrying value and are
relatively insensitive to changes in interest rates due to the short-term
maturity of the instruments. Accordingly, these instruments are excluded
from the table.
(b) Reflects, by class of financial instrument, the estimated incremental
effect of a hypothetical 10% decrease in interest rates at June 30, 2003,
on the fair value of U. S. Steel's non-derivative financial instruments.
For financial liabilities, this assumes a 10% decrease in the weighted
average yield to maturity of U. S. Steel's long-term debt at June 30, 2003.
(c) Includes amounts due within one year.
(d) Fair value was based on market prices or estimated borrowing rates for
financings with similar maturities.
At June 30, 2003, U. S. Steel's portfolio of long-term debt was
comprised primarily of fixed-rate instruments. Therefore, the fair value of the
portfolio is relatively sensitive to effects of interest rate fluctuations. This
sensitivity is illustrated by the $80 million increase in the fair value of
long-term debt assuming a hypothetical 10% decrease in interest rates. However,
U. S. Steel's sensitivity to interest rate declines and corresponding increases
in the fair value of its debt portfolio would unfavorably affect U. S. Steel's
results and cash flows only to the extent that U. S. Steel elected to repurchase
or otherwise retire all or a portion of its fixed-rate debt portfolio at prices
above carrying value.
62
UNITED STATES STEEL CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
------------------------------------
Foreign Currency Exchange Rate Risk
- -----------------------------------
U. S. Steel, primarily through USSK, is subject to the risk of price
fluctuations due to the effects of exchange rates on revenues and operating
costs, firm commitments for capital expenditures and existing assets or
liabilities denominated in currencies other than U.S. dollars, in particular the
euro and Slovak koruna. U. S. Steel has not generally used derivative
instruments to manage this risk. However, U. S. Steel has made limited use of
forward currency contracts to manage exposure to certain currency price
fluctuations. At June 30, 2003, U. S. Steel had open euro forward sale contracts
for both U.S. dollars (total notional value of approximately $17.8 million) and
Slovak koruna (total notional value of approximately $37.7 million). A 10%
increase in the June 30, 2003 euro forward rates would result in a $5.2 million
charge to income.
Safe Harbor
- -----------
U. S. Steel's Quantitative and Qualitative Disclosures About Market
Risk include forward-looking statements with respect to management's opinion
about risks associated with U. S. Steel's use of derivative instruments. These
statements are based on certain assumptions with respect to market prices,
industry supply and demand for steel products and certain raw materials, and
foreign exchange rates. To the extent that these assumptions prove to be
inaccurate, future outcomes with respect to U. S. Steel's hedging programs may
differ materially from those discussed in the forward-looking statements.
63
UNITED STATES STEEL CORPORATION
CONTROLS AND PROCEDURES
------------------------------------
Disclosure Controls and Procedures
- -----------------------------------
U. S. Steel has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures as of June 30, 2003. These disclosure
controls and procedures are the controls and other procedures that were designed
to ensure that information required to be disclosed in reports that are filed
with or submitted to the SEC is:(1) accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosures and (2) recorded, processed,
summarized and reported within the time periods specified in applicable law and
regulations. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of June 30, 2003, U. S. Steel's disclosure
controls and procedures were effective.
Internal Controls
- -----------------
As of June 30, 2003, there have not been any significant changes in U.
S. Steel's internal control over financial reporting or in other factors that
could significantly affect that control.
64
UNITED STATES STEEL CORPORATION
SUPPLEMENTAL STATISTICS (UNAUDITED)
----------------------------------------
Second Quarter Six Months
Ended June 30 Ended June 30
(Dollars in millions) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
Flat-rolled Products ............................................... $ (68) $ (26) $ (108) $ (100)
Tubular Products ................................................... (4) 6 (9) 9
U. S. Steel Kosice ................................................. 67 26 131 25
Straightline ....................................................... (18) (9) (33) (17)
Real Estate ........................................................ 17 12 30 22
Other Businesses ................................................... 12 23 (24) 12
------- ------- ------- -------
Income (Loss) from Operations before items not allocated to segments 6 32 (13) (49)
ITEMS NOT ALLOCATED TO SEGMENTS:
Litigation items ............................................... - - (25) 9
Asset impairments .............................................. (11) (14) (11) (14)
Pension settlement loss ........................................ - (10) - (10)
Costs related to Fairless shutdown ............................. - - - (1)
Income from sale of coal seam gas interests .................... 34 - 34 -
Gain on sale of coal mining assets ............................. 13 - 13 -
Federal excise tax refund ...................................... - 33 - 33
Insurance recoveries related to USS-POSCO fire ................. - 6 - 18
------- ------- ------- -------
Total Income (Loss) from Operations ......................... $ 42 $ 47 $ (2) $ (14)
CAPITAL EXPENDITURES
Flat-rolled Products ............................................ $ 21 $ 6 $ 32 $ 17
Tubular Products ................................................ 16 10 38 15
U. S. Steel Kosice .............................................. 22 17 42 34
Straightline .................................................... - 2 1 5
Real Estate ..................................................... - 1 - 1
Other Businesses ................................................ 10 12 19 32
------- ------- ------- -------
Total ....................................................... $ 69 $ 48 $ 132 $ 104
OPERATING STATISTICS
Average realized price: ($/net ton)(a)
Flat-rolled Products ........................................ $ 420 $ 402 $ 420 $ 390
Tubular Products ............................................ 644 636 641 638
U. S. Steel Kosice .......................................... 369 257 355 252
Steel Shipments:(a)(b)
Flat-rolled Products ........................................ 3,202 2,571 5,638 4,902
Tubular Products ............................................ 211 217 417 405
U. S. Steel Kosice .......................................... 1,218 1,105 2,408 1,861
Raw Steel-Production:(b)
Domestic Facilities ......................................... 3,338 2,998 6,233 5,904
U. S. Steel Kosice .......................................... 1,203 1,191 2,403 2,108
Raw Steel-Capability Utilization:(c)
Domestic Facilities ......................................... 84.5% 93.9% 87.7% 93.0%
U. S. Steel Kosice .......................................... 96.5% 95.5% 96.9% 85.0%
Domestic iron ore shipments(b)(d) ............................... 5,249 5,059 7,066 7,348
Domestic coke shipments(b)(d) ................................... 1,360 1,356 2,669 2,520
------- ------- ------- -------
- --------------
(a) Excludes intersegment transfers.
(b) Thousands of net tons.
(c) Based on annual raw steel production capability of 12.8 million net
tons prior to May 20, 2003 and 19.4 million net tons thereafter for
domestic facilities and 5.0 million net tons for U. S. Steel
Kosice.
(d) Includes intersegment transfers.
65
Part II - Other Information:
- ----------------------------
Item 1. LEGAL PROCEEDINGS
Environmental Proceedings
In 1988, U. S. Steel and two other PRPs (Bethlehem Steel Corporation
and William Fiore) agreed to the issuance of an administrative order by the U.S.
Environmental Protection Agency (EPA) to undertake emergency removal work at the
Municipal & Industrial Disposal Co. site in Elizabeth, Pa. The cost of such
removal, which has been completed, was approximately $4.2 million, of which U.
S. Steel paid $3.4 million. The EPA indicated that further remediation of this
site would be required. In October 1991, the Pennsylvania Department of
Environmental Resources (PADER) placed the site on the Pennsylvania State
Superfund list and began a Remedial Investigation, which was issued in 1997.
After a feasibility study by the Pennsylvania Department of Environmental
Protection (PADEP) and submission of a conceptual remediation plan in 2001 by U.
S. Steel, U. S. Steel submitted a revised remedial action plan on May 31, 2002.
U. S. Steel and the PADEP signed a Consent Order and Agreement on August 30,
2002, under which U. S. Steel is responsible for remediation of this site. On
March 18, 2003, the PADEP notified U. S. Steel that the public comment period
was concluded and the Consent Order and Agreement is final.
On January 26, 1998, pursuant to an action filed by the EPA in the
United States District Court for the Northern District of Indiana titled United
States of America v. USX, U. S. Steel entered into a consent decree with the EPA
which resolved alleged violations of the Clean Water Act National Pollution
Discharge Elimination System (NPDES) permit at Gary Works and provides for a
sediment remediation project for a five mile section of the Grand Calumet River
that runs through and beyond Gary Works. Contemporaneously, U. S. Steel entered
into a consent decree with the public trustees, which resolves potential
liability for natural resource damages on the same section of the Grand Calumet
River. In 1999, U. S. Steel paid civil penalties of $2.9 million for the alleged
water act violations and $0.5 million in natural resource damages assessment
costs. In addition, U. S. Steel will pay the public trustees $1.0 million at the
end of the remediation project for future monitoring costs and U. S. Steel is
obligated to purchase and restore several parcels of property that have been or
will be conveyed to the trustees. During the negotiations leading up to the
settlement with the EPA, capital improvements were made to upgrade plant systems
to comply with the NPDES requirements. The sediment remediation project is an
approved final interim measure under the corrective action program for Gary
Works. As of July 15, 2003, project costs have amounted to $43.4 million with
another $3.9 million presently projected to complete the project, over the next
three months. Construction began in January 2002 on a Corrective Action
Management Unit (CAMU) to contain the dredged material on company property and
construction was completed in February 2003. The water treatment plant, specific
to this project, was completed in November 2002, and placed into operation in
March 2003. Phase 1 removal of PCB-contaminated sediment was completed in
December 2002. Dredging resumed in February 2003 and will continue until
dredging on the river is concluded, which is expected to occur in October 2003.
Closure costs for the CAMU are estimated to be an additional $4.9 million.
On March 11, 2003, Gary Works received a notice of violation from the
EPA alleging construction of two desulfurization facilities without proper
installation permitting. Negotiations began April 24, 2003, and the cost of
settlement of this matter is currently indeterminable.
66
Part II - Other Information (Continued):
- ----------------------------------------
In December 1995, U. S. Steel reached an agreement in principle with
the EPA and the U.S. Department of Justice (DOJ) with respect to alleged
Resource Conservation and Recovery Act (RCRA) violations at Fairfield Works. A
consent decree was signed by U. S. Steel, the EPA and the DOJ and filed with the
United States District Court for the Northern District of Alabama (United States
of America v. USX Corporation) on December 11, 1997, under which U. S. Steel
will pay a civil penalty of $1.0 million, implement two Supplemental
Environmental Projects (SEPs) costing a total of $1.75 million and implement a
RCRA corrective action at the facility. One SEP was completed during 1998. The
second SEP was completed in 2003. As of February 22, 2000, the Alabama
Department of Environmental Management assumed primary responsibility for
regulation and oversight of the RCRA corrective action program at Fairfield
Works, with the approval of the EPA. The first Phase I RCRA Facility
Investigation (RFI) work plan was approved for the site on September 16, 2002.
Field sampling for the work plan commenced immediately after approval and will
continue through the end of 2003. The cost to complete this study is estimated
to be $770,000.
On October 23, 1998, a final Administrative Order on Consent was issued
by the EPA addressing Corrective Action for Solid Waste Management Units
throughout Gary Works. This order requires U. S. Steel to perform an RFI and a
Corrective Measure Study at Gary Works. The Current Conditions Report, U. S.
Steel's first deliverable, was submitted to the EPA in January 1997 and was
approved by the EPA in 1998. Phase I RFI work plans have been approved for the
Coke Plant, the Process Sewers, and Background Soils at the site, along with the
approval of one self-implementing interim stabilization measure and a corrective
measure. Another eight Phase I RFI work plans have been submitted for EPA
approval, thereby completing the Phase I requirement, along with two Phase II
RFI work plans and one further self-implementing interim stabilization measure.
The costs to complete these studies and corrective measures are estimated to be
$4.8 million. Until the studies are completed, it is impossible to assess what
additional expenditures will be necessary.
On February 12, 1987, U. S. Steel and the PADER entered into a Consent
Order to resolve an incident in January 1985 involving the alleged unauthorized
discharge of benzene and other organic pollutants from Clairton Works in
Clairton, Pa. That Consent Order required U. S. Steel to pay a penalty of
$50,000 and a monthly payment of $2,500 for five years. In 1990, U. S. Steel and
the PADER reached agreement to amend the Consent Order. Under the amended Order,
U. S. Steel agreed to remediate the Peters Creek Lagoon (a former coke plant
waste disposal site); to pay a penalty of $300,000; and to pay a monthly penalty
of up to $1,500 each month until the former disposal site is closed. Remediation
costs have amounted to $10.3 million with another $1.3 million presently
estimated to complete the project.
Prior to U. S. Steel's acquisition of the Granite City, Great Lakes and
Midwest facilities, the DOJ had filed against National Steel Corporation proofs
of claim asserting noncompliance allegations under various environmental
statutes, including the Clean Air Act, RCRA, the Clean Water Act, the Emergency
Planning and Community Right to Know Act, CERCLA and the Toxic Substances
Control Act at these three facilities. The EPA had conducted inspections of the
facilities and entered into negotiations with National Steel Corporation toward
resolving these allegations with a consent decree. U. S. Steel is currently
engaged in discussions with the DOJ, the EPA and the State of Illinois related
to the conditions previously noted at these facilities. At Granite City Works,
the EPA had determined that ditches and dewatering beds currently in operation
were allegedly not in compliance with
67
Part II - Other Information (Continued):
- ----------------------------------------
applicable waste oil management standards. Dredging of the ditches and
dewatering beds is expected to cost $1.3 million. U. S. Steel is currently
discussing with the EPA, the DOJ and the State of Illinois appropriate measures
to investigate and remediate the ditches and dewatering beds. Air emissions from
the steelmaking shop at Great Lakes are also under discussion. It has not been
determined what, if any, corrective action may be necessary to address those
emissions. Other, less significant issues are also under discussion, including
Ferrous Chloride Solution handling at Granite City and Great Lakes, Spill
Prevention Control and Countermeasures Plans at both facilities, RCRA training
at Great Lakes and other waste handling issues.
Asbestos Litigation
U. S. Steel is a defendant in a large number of cases in which
approximately 14,000 claimants actively allege injury resulting from exposure to
asbestos. Almost all these cases involve multiple plaintiffs and multiple
defendants. These claims fall into three major groups: (1) claims made under
certain federal and general maritime laws by employees of the Great Lakes Fleet
or Intercoastal Fleet, former operations of U. S. Steel; (2) claims made by
persons who performed work at U. S. Steel facilities (referred to as "premises
claims"); and (3) claims made by industrial workers allegedly exposed to an
electrical cable product formerly manufactured by U. S. Steel. While U. S. Steel
has excess casualty insurance, these policies have multi-million dollar self
insured retentions and, to date, U. S. Steel has not received any payments under
these policies relating to asbestos claims. In most cases, this excess casualty
insurance is the only insurance applicable to asbestos claims.
These cases allege a variety of respiratory and other diseases based on
alleged exposure to asbestos contained in a U. S. Steel electric cable product
or to asbestos on U. S. Steel's premises; approximately 200 plaintiffs allege
they are suffering from mesothelioma. In many cases, the plaintiffs cannot
demonstrate that they have suffered any compensable loss as a result of such
exposure or that any injuries they have incurred did in fact result from such
exposure. Virtually all asbestos cases seek money damages from multiple
defendants. U. S. Steel is unable to provide meaningful disclosure about the
total amount of such damages alleged in these cases for the following reasons:
(1) many cases do not claim a specific demand for damages, or contain a demand
that is stated only as being in excess of the minimum jurisdictional limit of
the relevant court; (2) even where there are specific demands for damages, there
is no meaningful way to determine what amount of the damages would or could be
assessed against any particular defendant; (3) plaintiffs' lawyers often allege
the same amount of damages irrespective of the specific harm that has been
alleged, even though the ultimate outcome of any claim may depend upon the
actual disease, if any, that the plaintiff is able to prove and the actual
exposure, if any, to the U. S. Steel product or the duration of exposure, if
any, on U. S. Steel's premises. U. S. Steel believes the amount of any damages
alleged in the complaints initially filed in these cases is not relevant in
assessing its potential liability.
U. S. Steel aggressively pursues grounds for the dismissal of U. S.
Steel from pending cases and makes efforts to settle appropriate cases for
reasonable, and frequently nominal, amounts. For example, in 2000, U. S. Steel
settled 22 claims for an aggregate total payment of approximately $80,000; in
2001, it settled approximately 11,000 claims for an aggregate total payment of
approximately $190,000; and, in 2002, it settled approximately 1,100 claims for
an aggregate total payment of approximately $700,000. In those three years,
3,860, 1,679 and 842, respectively, new claims were filed.
68
Part II - Other Information (Continued):
- ----------------------------------------
U. S. Steel also litigates cases to verdict where it believes that
litigation is appropriate. Until March 2003, U. S. Steel was successful in all
asbestos cases that it tried to final judgment. On March 28, 2003, a jury in
Madison County, Illinois returned a verdict against U. S. Steel for $50 million
in compensatory damages and $200 million in punitive damages. The plaintiff, an
Indiana resident, alleged he was exposed to asbestos while working as a U. S.
Steel employee at Gary Works in Gary, Indiana from 1950 to 1981 and that he
suffers from mesothelioma as a result. U. S. Steel believes the plaintiff's
exclusive remedy was provided by the Indiana workers' compensation law and that
this issue and other errors at trial would have enabled U. S. Steel to succeed
on appeal. However, in order to avoid the delay and uncertainties of further
litigation and having to post an appeal bond equal to the amount of the verdict
and to allow U. S. Steel to actively pursue its current acquisition activities
and other strategic initiatives, U. S. Steel settled this case and the
settlement was reflected in financial results for the first quarter of 2003.
Management views the Madison County verdict as aberrational and
continues to believe that it is unlikely that the resolution of the pending
asbestos actions against U. S. Steel would have a material adverse effect on U.
S. Steel's financial condition. Among the factors considered in reaching this
conclusion were: (1) that U. S. Steel had been subject to a total of
approximately 34,000 asbestos claims over the last 12 years that had been
administratively dismissed or were inactive due to the failure of the claimants
to present any medical evidence supporting their claims; (2) that over the last
several years, the total number of pending claims had remained steady; (3) that
it had been many years since U. S. Steel employed maritime workers or
manufactured electrical cable; and (4) U. S. Steel's history of trial outcomes,
settlements and dismissals, including such matters since the March 28 jury
decision. Management concluded the recent verdict in Madison County, Illinois
was an aberration and that the likelihood of similar results is remote, although
not impossible.
This statement of belief is a forward-looking statement. Predictions as
to the outcome of pending litigation are subject to substantial uncertainties
with respect to (among other things) factual and judicial determinations, and
actual results could differ materially from those expressed in this
forward-looking statement. U. S. Steel does not know whether the jury verdict
described above will have any impact upon the number of claims filed against U.
S. Steel in the future or on the amount of future settlements.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on April 29, 2003.
At least 94.6 percent of the votes cast by U. S. Steel shareholders
approved the elections of J. Gary Cooper, Frank J. Lucchino, Seth E. Schofield
and John P. Surma to serve three-year terms as Class II directors. Continuing as
Class III directors for a term expiring in 2004 are Robert J. Darnall, Roy G.
Dorrance, John G. Drosdick and Charles R. Lee. Continuing as Class I directors
for a term expiring in 2005 are Dr. Shirley Ann Jackson, Dan D. Sandman, Thomas
J. Usher and Douglas C. Yearley.
Stockholders also elected PricewaterhouseCoopers LLC (PwC) as independent
accountant with a favorable vote of approximately 94.4 percent.
69
Part II - Other Information (Continued):
- ----------------------------------------
Stockholders approved an amendment to U. S. Steel's certificate of
incorporation to increase the authorized shares of common stock to 400 million
shares and preferred stock to 40 million shares. The results of the vote were as
follows:
------------------------------ -----------------
Number
of Votes
------------------------------ -----------------
------------------------------ -----------------
For 58,365,327
------------------------------ -----------------
Against 16,128,012
------------------------------ -----------------
Abstained 667,805
------------------------------ -----------------
Broker Non-votes 17,740,369
------------------------------ -----------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Credit Agreement dated as of May 20, 2003 among United
States Steel Corporation, the Lenders Party thereto, the
LC Issuing Banks Party thereto, JPMorgan Chase Bank, as
Administrative Agent, Collateral Agent, Co-Syndication
Agent and Swingline Lender, and General Electric Capital
Corporation, as Co-Collateral Agent and Co-Syndication
Agent
10.2 Security Agreement dated as of May 20, 2003 among United
States Steel Corporation and JPMorgan Chase Bank, as
Collateral Agent
10.3 Intercreditor Agreement dated as of May 20, 2003 by and
among JPMorgan Chase Bank, as a Funding Agent, The Bank of
Nova Scotia, as a Funding Agent and as Receivables
Collateral Agent, JPMorgan Chase Bank, as Lender Agent, U.
S. Steel Receivables LLC, as Transferor, and United States
Steel Corporation, as Originator, as Initial Servicer and
as Borrower
12.1 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
12.2 Computation of Ratio of Earnings to Fixed Charges
31.1 Certification of Chief Executive Officer required by Item
307 of Regulation S-K as promulgated by the Securities
and Exchange Commission and pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer required by Item
307 of Regulation S-K as promulgated by the Securities
and Exchange Commission and pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
70
Part II - Other Information (Continued):
- ----------------------------------------
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K
Form 8-K dated April 1, 2003, reporting under Item 5. Other
Events, the filing of the Form of Purchase and Sale Agreement of a
Legal Entity between Sartid a.d. in bankruptcy and U. S. Steel
Balkan d.o.o., and the filing of the April 1, 2003 press release
titled "U. S. Steel to Acquire Serbian Steel Company."
* Form 8-K dated April 9, 2003, reporting under Item 9. Regulation
FD Disclosure, that U. S. Steel is furnishing information for the
April 9, 2003 press release titled "U. S. Steel and USWA Reach
Progressive New Labor Agreement for U. S. Steel and National Steel
Represented Facilities."
Form 8-K dated April 11, 2003, reporting under Item 5. Other
Events, the filing of the April 11, 2003 press release titled "U.
S. Steel Confirms Bid for National Steel Assets."
Form 8-K dated April 21, 2003, reporting under Item 5. Other
Events, the filing of the Asset Purchase Agreement dated as of
April 21, 2003 by and among United States Steel Corporation and
National Steel Corporation and certain subsidiaries of National
Steel Corporation, and the filing of the April 21, 2003 press
release titled "U. S. Steel Receives Bankruptcy Court Approval for
Purchase of National Steel Assets."
Form 8-K dated April 29, 2003, reporting under Item 5. Other
Events, the filing of the April 29, 2003 U. S. Steel Earnings
Release.
* Form 8-K dated May 6, 2003, reporting under Item 9. Regulation FD
Disclosure, that U. S. Steel is furnishing information for the May
6, 2003 press release titled "U. S. Steel Announces Offering of
Senior Notes."
Form 8-K dated May 6, 2003, reporting under Item 5. Other Events,
that U. S. Steel was informed of downgrades to its senior
unsecured debt ratings by Fitch Ratings, Moody's Investors Service
and Standard & Poor's Ratings Services.
* Form 8-K dated May 13, 2003, reporting under Item 9. Regulation FD
Disclosure, that U. S. Steel is furnishing information for the May
13, 2003 press release titled "U. S. Steel Increases Consent Fee
Relating to Its 10 3/4% Senior Notes Due August 1, 2008."
* Form 8-K dated May 14, 2003, reporting under Item 9. Regulation FD
Disclosure, that U. S. Steel is furnishing information for the May
14, 2003 press release titled "United States Steel Corporation
Prices $450 Million 9 3/4% Senior Notes Due 2010."
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Part II - Other Information (Continued):
- ----------------------------------------
Form 8-K dated May 20, 2003, reporting under Item 2. Acquisition
or Disposition of Assets, that U. S. Steel completed the
acquisition of substantially all of the integrated steel assets of
National Steel Corporation and under Item 5. Other Events, that U.
S. Steel completed the sale of $450 million of 9-3/4% Senior Notes
due 2010.
Form 8-K dated June 30, 2003, reporting under Item 2. Acquisition
or Disposition of Assets, that U. S. Steel completed the sale of
the mines and related assets of U. S. Steel Mining Company, LLC.
* Form 8-K dated July 1, 2003, reporting under Item 9. Regulation FD
Disclosure, that U. S. Steel is furnishing information for the
July 1, 2003 press release titled "U. S. Steel Completes Sale of
Mining Company Assets."
* Form 8-K dated August 4, 2003, reporting under Item 12. Results of
Operations and Financial Condition, that U. S. Steel is furnishing
information in the August 4, 2003 U. S. Steel Earnings Release.
-----------------------------------------------------------------
* Reports submitted to the Securities and Exchange Commission
under Item 9 and Item 12. Pursuant to General Instruction B of
Form 8-K, the reports submitted under Items 9 and 12 are not
deemed to be "filed" for the purpose of Section 18 of the
Securities Exchange Act of 1934 and are not subject to the
liabilities of that section. U. S. Steel is not incorporating, and
does not intend to incorporate, by reference these reports into a
filing under the Securities Act or the Exchange Act.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned chief accounting officer thereunto duly authorized.
UNITED STATES STEEL CORPORATION
By /s/ Larry G. Schultz
--------------------
Larry G. Schultz
Vice President & Controller
August 12, 2003
WEB SITE POSTING
This Form 10-Q will be posted on the U. S. Steel web site,
www.ussteel.com, within a few days of its filing.
72