1
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, 2002
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.....
Common stock outstanding at July 31, 2002 - 101,827,613 shares
2
UNITED STATES STEEL CORPORATION
SEC FORM 10-Q
QUARTER ENDED JUNE 30, 2002
--------------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Statement of Operations 3
Balance Sheet 4
Statement of Cash Flows 5
Selected Notes to Financial Statements 6
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends and Ratio of
Earnings to Fixed Charges 21
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 22
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 42
Supplemental Statistics 45
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 46
Item 4. Submission of Matters to a Vote of Security Holders 49
Item 6. Exhibits and Reports on Form 8-K 49
3
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 2002 2001 2002 2001
amounts)
------------------------------------------------------------------------------
REVENUES AND OTHER INCOME:
Revenues $1,541 $1,532 $2,750 $2,895
Revenues from related parties 220 201 442 348
Income (loss) from investees 7 (7) 9 40
Net gains on disposal of assets 4 10 5 16
Other income 35 1 35 2
------ ------ ------ ------
Total revenues and other income 1,807 1,737 3,241 3,301
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of revenues 1,571 1,617 2,907 3,174
Selling, general and administrative expenses 100 68 171 103
Depreciation, depletion and amortization 89 79 177 152
------ ------ ------ ------
Total costs and expenses 1,760 1,764 3,255 3,429
------ ------ ------ ------
INCOME (LOSS) FROM OPERATIONS 47 (27) (14) (128)
Net interest and other financial costs 19 48 53 36
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES 28 (75) (67) (164)
Provision (credit) for income taxes 1 (45) (11) (143)
------ ------ ------ ------
NET INCOME (LOSS) $ 27 $ (30) $ (56) $ (21)
====== ====== ====== ======
COMMON STOCK DATA:
Net income (loss), per share
- Basic and diluted $ .28 $(.34) $(.60) $(.24)
Weighted average shares, in thousands
- Basic 95,670 89,223 92,636 89,223
- Diluted 95,675 89,223 92,636 89,223
Dividends paid per share:
United States Steel Corporation Common Stock $ .05 - $ .10 -
USX - U. S. Steel Group Common Stock - $ .10 - $.35
Selected notes to financial statements appear on pages 6-20.
4
UNITED STATES STEEL CORPORATION
BALANCE SHEET (Unaudited)
-------------------------------
June 30 December 31
(Dollars in millions) 2002 2001
--------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 28 $ 147
Receivables, less allowance of $66 and $58 977 671
Receivables from related parties, less
allowance of $117 and $107 142 159
Inventories 919 870
Deferred income tax benefits 212 216
Other current assets 22 10
------ ------
Total current assets 2,300 2,073
Investments and long-term receivables,
less allowance of $38 and $39 335 340
Long-term receivables from related parties,
less allowance of $42 and $36 6 14
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$7,015 and $6,866 3,031 3,084
Pension asset 2,809 2,745
Other noncurrent assets 133 81
------ ------
Total assets $8,614 $8,337
====== ======
LIABILITIES
Current liabilities:
Accounts payable $ 703 $ 559
Accounts payable to related parties 99 135
Payroll and benefits payable 250 239
Accrued taxes 244 248
Accrued interest 42 45
Long-term debt due within one year 7 32
------ ------
Total current liabilities 1,345 1,258
Long-term debt, less unamortized discount 1,439 1,434
Deferred income taxes 733 732
Employee benefits 2,033 2,008
Long-term payable to related parties 34 33
Deferred credits and other liabilities 360 366
------ ------
Total liabilities 5,944 5,831
------ ------
Contingencies and commitments (See Note 16) - -
STOCKHOLDERS' EQUITY
Common stock issued - 101,756,987 shares and
89,197,740 shares 102 89
Additional paid-in capital 2,680 2,475
Retained deficit (65) -
Accumulated other comprehensive loss (41) (49)
Deferred compensation (6) (9)
------ ------
Total stockholders' equity 2,670 2,506
------ ------
Total liabilities and stockholders' equity $8,614 $8,337
====== ======
Selected notes to financial statements appear on pages 6-20.
5
UNITED STATES STEEL CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
Six Months Ended
June 30
(Dollars in millions) 2002 2001
----------------------------------------------------------------------
INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss $(56) $(21)
Adjustments to reconcile to net cash provided
from operating activities:
Depreciation, depletion and amortization 177 152
Pensions and other postretirement benefits (21) (51)
Deferred income taxes (2) 56
Net gains on disposal of assets (5) (16)
Income from equity investees (9) (40)
Changes in:
Current receivables
- sold 255 -
- repurchased (255) -
- operating turnover (310) (48)
- income taxes - 41
- provision for doubtful accounts 18 71
Inventories (49) 57
Current accounts payable and accrued expenses 186 75
All other - net (36) (37)
------ ------
Net cash provided from (used in) operating activities (107) 239
------ ------
INVESTING ACTIVITIES:
Capital expenditures (104) (141)
Acquisition of U. S. Steel Kosice - (14)
Disposal of assets 8 9
Restricted cash - withdrawals 2 3
- deposits (53) (2)
Investees - investments (5) (1)
- loans and advances (3) -
- repayments of loans and advances 7 -
All other - net - 10
------ ------
Net cash used in investing activities (148) (136)
------ ------
FINANCING ACTIVITIES:
Net change in attributed portion of Marathon
consolidated debt and other financial obligations - (26)
Revolving credit arrangements - net 10 -
Repayment of long-term debt (30) (6)
Settlement with Marathon (54) -
Common stock issued 218 -
Dividends paid (9) (35)
------ ------
Net cash provided from (used in) financing activities 135 (67)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1 (1)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (119) 35
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 147 219
------ ------
CASH AND EQUIVALENTS AT END OF PERIOD $28 $254
====== ======
Cash provided from (used in) operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(64) $(93)
Income taxes refunded from (paid to) tax authorities (3) 8
Income tax settlements received from Marathon - 379
Selected notes to financial statements appear on pages 6-20.
6
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished 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 2002 classifications.
Additional information is contained in the United States Steel
Corporation Annual Report on Form 10-K for the year ended December
31, 2001.
On January 1, 2002, United States Steel Corporation (U. S. Steel)
adopted Statement of Financial Accounting Standards (SFAS) No. 141
"Business Combinations." SFAS No. 141 requires that all business
combinations be accounted for under the purchase method of accounting
and established specific criteria for the recognition of intangible
assets separately from goodwill. This Statement also requires that
the excess of fair value of acquired assets over cost in a business
combination (negative goodwill) be recognized immediately as an
extraordinary gain, rather than being deferred and amortized. There
was no financial statement impact related to the initial adoption of
SFAS No. 141 and the guidance will be applied on a prospective basis.
On January 1, 2002, U. S. Steel adopted SFAS No. 142 "Goodwill
and Other Intangible Assets" which addresses the accounting for
goodwill and other intangible assets after an acquisition. The most
significant changes made by SFAS No. 142 are that 1) goodwill and
intangible assets with indefinite lives will no longer be amortized,
but must be tested for impairment at least annually; and 2) the
amortization period for intangible assets with finite lives will no
longer be limited to forty years. SFAS No. 142 requires transitional
disclosure of what reported net income and the associated per share
amount would have been in all periods presented had SFAS No. 142 been
in effect. There was no impact to net income or the related per
share amount for any period presented in the financial statements.
Also adopted on January 1, 2002, was SFAS No. 144 "Accounting
for Impairment or Disposal of Long-Lived Assets." This Statement
establishes a single accounting model for long-lived assets to be
disposed of by sale and provides additional guidance on assets to be
held and used and assets to be disposed of other than by sale. There
was no financial statement impact related to the adoption of this
Statement and the guidance will be applied on a prospective basis.
7
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
1. (Continued)
On April 30, 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
the Extinguishment of Debt," and the criteria in Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" will now be used to classify gains and losses on the
extinguishment of debt. SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking Fund Requirements" amended SFAS No. 4 and is no
longer necessary because SFAS No. 4 has been rescinded. SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers" did not apply to
U. S. Steel. SFAS No. 13, "Accounting for Leases" is amended to
require certain lease modifications that have economic effects
similar to sale-leaseback transactions to be accounted for in the
same manner as sale-leaseback transactions. SFAS No. 145 also makes
technical corrections to existing pronouncements. While these
corrections are not substantive in nature, in some instances, they
may change accounting practice. Generally, SFAS No. 145 is effective
for transactions occurring after May 15, 2002. There was no
financial statement implication related to the adoption of this
Statement.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes 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 will
adopt this Statement effective January 1, 2003. The transition
adjustment resulting from the adoption of SFAS No. 143 will be
reported as a cumulative effect of a change in accounting principle.
At this time, U. S. Steel has not completed its assessment of the
effect of the adoption of this Statement on either its financial
position or results of operations.
SFAS No. 146, "Accounting for Exit or Disposal Activities" was
issued in July of 2002. SFAS No. 146 addresses significant issues
regarding the recognition, measurement and reporting of costs that
are associated with exit and disposal activities, including
restructuring activities. The scope of SFAS No. 146 includes (1)
costs to terminate contracts that are not capital leases; (2) costs
to consolidate facilities or relocate employees; and (3) termination
benefits provided to employees who are involuntarily terminated under
the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract.
The provisions of this Statement will be effective for exit or
disposal activities initiated after December 31, 2002, with early
application encouraged.
8
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. U. S. Steel is engaged domestically in the production, sale and
transportation of steel mill products, coal, coke, and taconite
pellets (iron ore); the management of mineral resources; the
management and development of real estate; and engineering and
consulting services and, through U. S. Steel Kosice in the Slovak
Republic, in the production and sale of steel mill products and coke
primarily for the Central European market. Prior to December 31,
2001, the businesses of U. S. Steel comprised an operating unit of
USX Corporation, now named Marathon Oil Corporation (Marathon).
Marathon had two outstanding classes of common stock: USX-Marathon
Group common stock, which was intended to reflect the performance of
Marathon's energy business, and USX-U. S. Steel Group common stock
(Steel Stock), which was intended to reflect the performance of
Marathon's steel business. On December 31, 2001, U. S. Steel was
capitalized through the issuance of 89.2 million shares of common
stock to the holders of Steel Stock in exchange for all outstanding
shares of Steel Stock on a one-for-one basis (the Separation).
The accompanying consolidated balance sheets as of June 30, 2002,
and December 31, 2001, the statements of operations for the quarter
and six months ended June 30, 2002, and the statement of cash flows
for the six months ended June 30, 2002, represent U. S. Steel's
financial results on a stand-alone basis, while the statements of
operations for the quarter and six months ended June 30, 2001, and the
statement of cash flows for the six months ended June 30, 2001,
represent a carve-out presentation of the businesses comprising
U. S. Steel and are not intended to be a complete presentation of the
financial results or cash flows of U. S. Steel on a stand-alone basis.
The statement of operations for the periods of 2001 contains
certain transactions related to interest and other financial costs
that were attributed to U. S. Steel by Marathon based on U. S.
Steel's cash flows and its capital structure. Corporate general and
administrative costs were allocated to U. S. Steel during the periods
of 2001 based upon utilization or other methods that management
believed to be reasonable and which considered certain measures of
business activities, such as employment, investments and revenues.
Income taxes were allocated to U. S. Steel during the periods of 2001
in accordance with Marathon's tax allocation policy. In general,
such policy provided that the consolidated provision and related tax
payments or refunds be allocated based principally upon the financial
income, taxable income, credits, preferences and other amounts
directly related to U. S. Steel.
Effective January 1, 2002, net pension and other postretirement
costs associated with active employees at our operating locations are
reflected in cost of revenues. Net costs and credits associated with
corporate headquarters personnel and all retirees are reflected in
selling, general and administrative expenses. Prior year data has
been reclassified to conform to the current year presentation, which
resulted in a decrease in cost of revenues and an increase in
selling, general and administrative expenses of $38 million and
$80 million for the second quarter and six months of 2001,
respectively.
9
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. Selling, general and administrative expenses for the second
quarter and six months of 2002 included a pretax settlement charge of
$10 million related to retirements of personnel covered under the non
tax-qualified pension plan and the executive management supplemental
pension program. Also included in these same periods of 2002 is the
$14 million pretax charge related to reserving Republic Technologies
International Holdings, LLC (Republic) receivables, as discussed in
Note 8.
Selling, general and administrative expenses for the second
quarter and six months of 2001 included $8 million of costs,
primarily professional fees, related to the Separation.
4. On March 1, 2001, U. S. Steel completed the purchase of the tin
mill products business of LTV Corporation (LTV), which is now
operated as East Chicago Tin. In this noncash transaction, U. S.
Steel assumed approximately $66 million of certain employee-related
obligations from LTV. The acquisition was accounted for using the
purchase method of accounting. Results of operations for 2001
included the operations of East Chicago Tin from the date of
acquisition.
On March 23, 2001, Transtar, Inc. (Transtar) completed a
reorganization with its two voting shareholders, U. S. Steel and
Transtar Holdings, L.P. (Holdings), an affiliate of Blackstone
Capital Partners L.P. As a result of this transaction, U. S. Steel
became sole owner of Transtar and certain of its subsidiaries.
Holdings became owner of the other subsidiaries of Transtar. Because
the reorganization involved the sale of certain subsidiaries to
Holdings, a noncontrolling shareholder, Transtar recorded a gain by
comparing the carrying value of the businesses sold to their fair
value. U. S. Steel recorded $70 million and $(2) million in income
(loss) from investees in the first and second quarters of 2001,
respectively, to reflect its share of the gain and subsequent
downward adjustment of the gain recognized by Transtar as a result of
the reorganization. Concurrently, U. S. Steel accounted for the
change in ownership of Transtar using the step-acquisition purchase
method of accounting. Also, in the first quarter of 2001, in
connection with this transaction, U. S. Steel recognized a favorable
deferred tax adjustment of $33 million related to its investment in
the stock of Transtar that was no longer required when U. S. Steel
acquired 100 percent of Transtar. U. S. Steel previously accounted
for its investment in Transtar under the equity method of accounting.
The following unaudited pro forma data for U. S. Steel includes
the results of operations of the above acquisitions giving effect to
them as if they had been consummated at the beginning of the period
presented. The pro forma results exclude the $68 million gain and
$33 million deferred tax benefit recorded as a result of the Transtar
transaction. The 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.
Six
Months Ended
(In millions, except per share amounts) June 30, 2001
----------------------------------------------------------------
Revenues and other income $3,279
Net loss (124)
Net loss per common share (basic and diluted) (1.39)
10
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. Total comprehensive income (loss) was $35 million for the second
quarter of 2002, $(31) million for the second quarter of 2001,
$(48) million for the six months of 2002 and $(24) million for the
six months of 2001.
6. 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.
7. During the first quarter of 2002, following the Separation,
U. S. Steel established a new internal reporting structure, which
resulted in a change in reportable segments. In addition, U. S.
Steel has 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. Prior year segment data has been conformed to the
current year presentation.
U. S. Steel has three reportable segments: Flat-rolled Products
(Flat-rolled), Tubular Products (Tubular) and U. S. Steel Kosice
(USSK).
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, converter, container, industrial and
construction markets.
The Tubular segment includes the operating results of U. S.
Steel's domestic tubular production facilities and an equity investee
involved in the production of tubular goods. These operations
produce and sell both seamless and electric resistance weld tubular
products and primarily serve customers in the oil, gas and
petrochemicals markets.
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 equity investees, primarily located in
Central Europe. 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 European
construction, appliance, transportation, service center, container,
and oil, gas and petrochemicals markets.
All other U. S. Steel businesses not included in U. S. Steel's
reportable segments are reflected in Other Businesses. These
businesses are involved in the production and sale of coal, coke and
taconite pellets (iron ore); transportation services; steel mill
products distribution; the management of mineral resources; the
management and development of real estate; and engineering and
consulting services.
11
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 provision
(credit) for income taxes, or special items. 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 2002 and
2001 are:
Total
Flat- Reportable
(In millions) Rolled Tubular USSK Segments
------------------------------------------------------------------------
Second Quarter 2002
------------------
Revenues and other income:
Customer $1,063 $143 $300 $1,506
Intersegment 49 - - 49
Equity in earnings (losses) of
unconsolidated investees 2 - - 2
Other - - 2 2
------ ------ ------ ------
Total revenues and other income $1,114 $143 $302 $1,559
====== ====== ====== ======
Income (loss) from operations $(26) $6 $26 $6
====== ====== ====== ======
Second Quarter 2001
------------------
Revenues and other income:
Customer $ 958 $217 $283 $1,458
Intersegment 64 - 2 66
Equity in earnings (losses) of
unconsolidated investees (10) 1 1 (8)
Other - - - -
------ ------ ------ ------
Total revenues and other income $1,012 $218 $286 $1,516
====== ====== ====== ======
Income (loss) from operations $(143) $35 $41 $(67)
====== ====== ====== ======
12
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 2002
------------------
Revenues and other income:
Customer $1,506 $255 $ - $1,761
Intersegment 49 267 (316) -
Equity in earnings (losses) of
unconsolidated investees 2 (1) 6 7
Other 2 4 33 39
------ ------ ------ ------
Total revenues and other income $1,559 $525 $(277) $1,807
====== ====== ====== ======
Income (loss) from operations $6 $26 $15 $47
====== ====== ====== ======
Second Quarter 2001
------------------
Revenues and other income:
Customer $1,458 $275 $ - $1,733
Intersegment 66 240 (306) -
Equity in earnings (losses) of
unconsolidated investees (8) 1 - (7)
Other - 11 - 11
------ ------ ------ ------
Total revenues and other income $1,516 $527 $(306) $1,737
====== ====== ====== ======
Income (loss) from operations $(67) $48 $(8) $(27)
====== ====== ====== ======
The following is a schedule of reconciling items for the second
quarter of 2002 and 2001:
Revenues Income (Loss)
And From
Other Income Operations
(In millions) 2002 2001 2002 2001
-------------------------------------------------------------------------
Elimination of intersegment revenues $(316) $(306) * *
------ ------
Special Items:
Federal excise tax refund 33 - $ 33 $ -
Asset impairment - receivables - - (14) -
Pension settlement - - (10) -
Insurance recoveries related to USS-POSCO fire 6 2 6 2
Adjustment to gain on Transtar reorganization - (2) - (2)
Costs related to Separation - - - (8)
------ ------ ------ ------
39 - 15 (8)
------ ------ ------ ------
Total reconciling items $(277) $(306) $ 15 $(8)
====== ====== ====== ======
* Elimination of intersegment revenues is offset by the elimination
of intersegment cost of revenues within income (loss) from operations
at the corporate consolidation level.
13
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
The results of segment operations for the six months of 2002
and 2001 are:
Total
Flat- Reportable
(In millions) rolled Tubular USSK Segments
---------------------------------------------------------------------
Six Months 2002
------------------
Revenues and other income:
Customer $1,989 $267 $501 $2,757
Intersegment 87 - - 87
Equity in earnings (losses) of
unconsolidated investees (9) - 1 (8)
Other (1) - 3 2
------ ------ ------ ------
Total revenues and other income $2,066 $267 $505 $2,838
====== ====== ====== ======
Income (loss) from operations $(100) $9 $25 $(66)
====== ====== ====== ======
Six Months 2001
------------------
Revenues and other income:
Customer $1,857 $428 $530 $2,815
Intersegment 124 - 2 126
Equity in earnings (losses) of
unconsolidated investees (17) 1 1 (15)
Other - - 1 1
------ ------ ------ ------
Total revenues and other income $1,964 $429 $534 $2,927
====== ====== ====== ======
Income (loss) from operations $(285) $61 $82 $(142)
====== ====== ====== ======
14
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 2002
------------------
Revenues and other income:
Customer $2,757 $435 $ - $3,192
Intersegment 87 455 (542) -
Equity in earnings (losses) of
unconsolidated investees (8) (1) 18 9
Other 2 5 33 40
------ ------ ------ ------
Total revenues and other income $2,838 $894 $(491) $3,241
====== ====== ====== ======
Income (loss) from operations $(66) $17 $35 $(14)
====== ====== ====== ======
Six Months 2001
------------------
Revenues and other income:
Customer $2,815 $502 $ (74) $3,243
Intersegment 126 369 (495) -
Equity in earnings (losses) of
unconsolidated investees (15) (15) 70 40
Other 1 17 - 18
------ ------ ------ ------
Total revenues and other income $2,927 $873 $(499) $3,301
====== ====== ====== ======
Income (loss) from operations $(142) $26 $(12) $(128)
====== ====== ====== ======
The following is a schedule of reconciling items for the six months of
2002 and 2001:
Revenues Income (Loss)
And From
Other Income Operations
(In millions) 2002 2001 2002 2001
---------------------------------------------------------------------------
Elimination of intersegment revenues $(542) $(495) * *
------ ------
Special Items:
Federal excise tax refund 33 - $ 33 $ -
Pension settlement - - (10) -
Insurance recoveries related to USS-POSCO fire 18 2 18 2
Gain on Transtar reorganization - 68 - 68
Asset impairment - receivables - (74) (14) (74)
Costs related to Separation - - - (8)
Costs related to Fairless shutdown - - (1) -
Reversal of litigation accrual - - 9 -
------ ------ ------ ------
51 (4) 35 (12)
------ ------ ------ ------
Total reconciling items $(491) $(499) $ 35 $(12)
====== ====== ====== ======
* Elimination of intersegment revenues is offset by the elimination
of intersegment cost of revenues within income (loss) from operations
at the corporate consolidation level.
15
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. U. S. Steel has a 16% investment in Republic which was accounted
for under the equity method of accounting until the first quarter of
2001 when investments in and advances to Republic were reduced to
zero. On April 2, 2001, Republic filed a voluntary petition with the
U.S. Bankruptcy Court to reorganize its operations under Chapter 11 of
the U.S. Bankruptcy Code. In the first quarter of 2001 as a result of
Republic's petition, U. S. Steel recorded a pretax charge reflected as
a reduction in revenues of $74 million for potentially uncollectible
trade receivables and recognized certain debt obligations of $14
million which had been previously assumed by Republic. As a result of
further deterioration of Republic's financial condition during the
balance of 2001, an additional charge of $68 million was recorded in
the fourth quarter of 2001 to reserve the remaining balance of pre-
petition trade receivables and to reserve a portion of other
receivables established for retiree medical claim payments made by
U. S. Steel that were to be subsequently reimbursed by Republic.
These retiree medical cost reimbursements are the subject of a pending
request for treatment as administrative expenses in the bankruptcy
proceedings. On July 11, 2002, after a protracted auction proceeding,
the Bankruptcy Court issued an order approving the sale of
substantially all of Republic's assets which sale appears to have not
produced sufficient cash proceeds to satisfy all administrative
claims. As a result of this and other recent developments, U. S.
Steel has reassessed the likelihood of collecting the retiree medical
cost reimbursements from Republic, even if U. S. Steel prevails in its
claim for treatment as administrative expenses and has recorded a
pretax charge of $14 million to reserve the remaining balance of these
receivables. This charge is included in selling, general and
administrative expenses.
9. Revenues 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.
Current receivables from related parties at June 30, 2002,
include $33 million due from Marathon for tax settlements in
accordance with the tax sharing agreement, billings under the shared
services agreement and contractual reimbursements related to the
retirement of participants in the non-qualified employee benefit
plans. Current receivables from related parties at December 31, 2001,
include $28 million due from Marathon for tax settlements in
accordance with the tax sharing agreement.
Under an agreement with PRO-TEC Coating Company (PRO-TEC), U. S.
Steel provides exclusive marketing, selling and customer service
functions, including invoicing and receivables collection, for
substantially all of the products produced by PRO-TEC. U. S. Steel,
as PRO-TEC's exclusive sales agent, is responsible for credit risk
related to those receivables. Accounts payable to related parties
includes $52 million and $37 million at June 30, 2002, and December
31, 2001, respectively, related to this agreement with PRO-TEC.
16
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. (Continued)
In addition, current accounts payable to related parties reflect
the purchase of semi-finished steel products and outside processing
services from equity and certain other investees and the net present
value of the first $37.5 million installment of contingent
consideration payable to VSZ related to the acquisition of USSK.
Accounts payable to related parties at December 31, 2001, included
$54 million to Marathon that was paid in the first quarter of 2002 in
accordance with the terms of the Separation.
The long-term payable to related parties reflects the net present
value of the second $37.5 million installment of contingent
consideration payable to VSZ related to the acquisition of USSK.
10. 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
2002 2001
--------- ---------
Raw materials $150 $184
Semi-finished products 422 388
Finished products 233 202
Supplies and sundry items 114 96
---- ----
Total $919 $870
==== ====
Costs of revenues increased by $1 million and were reduced by
$16 million in the six months of 2002 and 2001, respectively, as a
result of liquidations of LIFO inventory pools.
11. The credit for income taxes in the six months of 2002 reflected a
tax benefit for pretax losses at the estimated annual effective tax
rate for 2002 of approximately 24%. The tax credit 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 has fulfilled all of the necessary conditions for
claiming the tax credit for 2000 and 2001 and anticipates meeting such
requirements in 2002. As a result of claiming these tax credits and
certain tax planning strategies to reinvest earnings in foreign
operations, virtually no income tax provision is recorded for USSK
income.
17
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
11. (Continued)
In the six months of 2001, effective tax rates were applied to
U. S. Steel's domestic and foreign operations separately. As a
result, the credit for income taxes reflected an estimated annual
effective tax rate of approximately 34% for U. S. Steel's domestic
operations, and virtually no tax provision for USSK's income as
discussed in the preceding paragraph. The tax credit also included a
$33 million deferred tax benefit related to the Transtar
reorganization. In addition, net interest and other financial costs
in the six months of 2001, included a favorable adjustment of
$67 million and the credit for income taxes included an unfavorable
adjustment of $15 million, both of which were related to prior years'
taxes.
12. Net income (loss) per common share for the second quarter and six
months of 2002 is based on the weighted average number of common
shares outstanding during the quarter. Net loss per common share for
the second quarter and six months of 2001 is based on outstanding
common shares at December 31, 2001, the date of the Separation.
Diluted net income per share assumes the exercise of stock
options, provided the effect is dilutive. As of June 30, 2002,
the potential common stock related to employee options to purchase
6.2 million shares of common stock have been excluded from the
computation of diluted net income (loss) per share because their
effect was antidilutive.
13. At June 30, 2002, U. S. Steel had no borrowings against its
Inventory Facility that provides for borrowings of up to $400 million.
At June 30, 2002, $252 million was available under this facility.
At June 30, 2002, USSK had no borrowings against its $10 million
short-term credit facility and $10 million in borrowings against its
$40 million long-term facility.
At June 30, 2002, in the event of a change in control of U. S.
Steel, debt obligations totaling $984 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
$91 million or provide a letter of credit to secure the remaining
obligation.
14. On November 28, 2001, U. S. Steel entered into a five-year
Receivables Purchase Agreement to sell a revolving interest in
eligible trade receivables generated by U. S. Steel and certain of its
subsidiaries through a commercial paper conduit program. Qualifying
accounts receivables are sold, on a daily basis, without recourse, to
U. S. Steel Receivables LLC (USSR), a consolidated wholly owned
special purpose entity. USSR then sells an undivided interest in
these receivables to certain conduits. The conduits issue commercial
paper to finance the purchase of their interest in the receivables.
U. S. Steel has agreed to continue servicing the sold receivables at
market rates. Because U. S. Steel receives adequate compensation for
these services, no servicing asset or liability has been recorded.
18
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
14. (Continued)
Sales of accounts receivable are reflected as a reduction of
receivables in the balance sheet and the proceeds received are
included in cash flows from operating activities in the statement of
cash flows. Under the facility, USSR may sell interests in the
receivables up to the lesser of a funding base, comprised of eligible
receivables, or $400 million. Generally, the facility provides that
as payments are collected from the sold accounts receivables, USSR may
elect to have the conduits reinvest the proceeds in new eligible
accounts receivable.
During the six months ended June 30, 2002, USSR sold and
subsequently repurchased $255 million of revolving interest in
accounts receivable to the conduits. As of June 30, 2002,
$396 million was available to be sold under this facility. The net
book value of U. S. Steel's retained interest in the receivables
represents the best estimate of the fair market value due to the short-
term nature of the receivables.
USSR pays the conduits a discount based on the conduits'
borrowing costs plus incremental fees. During the six months ended
June 30, 2002, U. S. Steel incurred costs of $2 million on the sale of
its receivables. These costs are included in net interest and other
financial costs in the statement of operations.
The table below summarizes cash flows from and paid to USSR:
Six Months
Ended
(In millions) June 30, 2002
------------------------------------------------------------------
Proceeds from:
Collections reinvested $2,338
Securitizations -
Servicing fee 3
The table below summarizes the trade receivables for USSR:
(In millions) June 30, 2002
------------------------------------------------------------------
Balance of accounts receivable, net, purchased by $588
USSR
Revolving interest sold to conduits -
----
Accounts receivable - net, included in the
Balance Sheet of U. S. Steel $588
====
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 collectability of the
receivables, and failure to extend the commitments of the commercial
paper conduits' liquidity providers which currently terminate on
November 27, 2002.
19
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
15. In the second quarter of 2002, U. S. Steel sold 10,925,000 shares
of its common stock in a public equity offering for net proceeds of
$192 million. The net proceeds were used primarily to repurchase
receivables previously sold under the Receivables Purchase Agreement.
16. 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. Certain of these matters are discussed below. The
ultimate resolution of these contingencies could, individually or in
the aggregate, be material to U. S. Steel's 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 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. At June 30, 2002, and December 31, 2001, accrued
liabilities for remediation totaled $141 million and $138 million,
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.
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 2002 and 2001
and for the years 2001 and 2000, such capital expenditures totaled
$7 million, $6 million, $15 million and $18 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.
Guarantees of the liabilities of unconsolidated entities of U. S.
Steel totaled $31 million at June 30, 2002, and $32 million at
December 31, 2001. 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, 2002, the largest guarantee for a
single affiliate was $22 million.
U. S. Steel was contingently liable for debt and other
obligations of Marathon in the amount of $334 million at June 30,
2002, compared to $359 million at December 31, 2001. Marathon paid a
portion of this debt in July 2002. As of July 31, 2002, U. S. Steel
is contingently liable for debt and other obligations of Marathon in
the amount of $175 million. Marathon is not limited by agreement with
U. S. Steel as to the amount of indebtedness that it may incur. In
the event of the bankruptcy of Marathon, these obligations for which
U. S. Steel is contingently liable, as well as obligations for
industrial development and environmental liabilities and notes that
were assumed by U. S. Steel from Marathon, may be declared immediately
due and payable. If such event occurs, U. S. Steel may not be able to
satisfy such obligations.
20
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
16. (Continued)
U. S. Steel is contingently liable to its Chairman, Chief
Executive Officer and President for a $3 million retention bonus. The
bonus is payable on the third anniversary of the Separation and is
subject to certain performance measures.
U. S. Steel's domestic contract commitments to acquire property,
plant and equipment at June 30, 2002, totaled $18 million compared
with $28 million at December 31, 2001.
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. USSK is required to report
periodically to the Slovak government on its status toward meeting
this commitment. The first reporting period ends on December 31,
2003. The remaining commitments under this capital improvements
program as of June 30, 2002, and December 31, 2001, were $600 million
and $634 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 $86 million, which declines over the duration of the agreement, may
be required.
U. S. Steel has the option, under certain lease agreements
covering locomotives and freight cars, to renew the leases or to
purchase the equipment during or at the end of the terms of the leases.
If U. S. Steel does not exercise the purchase options by the end of
the terms of the leases, U. S. Steel guarantees a residual value of the
equipment as determined at the lease inception date of each agreement
(approximately $29 million at June 30, 2002).
17. On April 10, 2002, U. S. Steel announced that it had signed a
letter of intent to sell all of the coal and related assets associated
with U. S. Steel Mining Company's West Virginia and Alabama mines.
The sale, which involves cash consideration and is subject to several
contingencies, is expected to result in a pretax gain, excluding an
extraordinary loss resulting from 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, which
were broadly estimated to be $79 million at June 30, 2002. A
definitive agreement on the sale is expected before the end of the
year.
21
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
------------------- --------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
(a) (b) (c) 1.05 2.10 5.15 4.72
==== ==== ==== ==== ==== ==== ====
(a) Earnings did not cover combined fixed charges and preferred stock
dividends by $66 million.
(b) Earnings did not cover combined fixed charges and preferred stock
dividends by $202 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
------------------- --------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
(a) (b) (c) 1.13 2.33 5.89 5.39
==== ==== ==== ==== ==== ==== ====
(a) Earnings did not cover fixed charges by $66 million.
(b) Earnings did not cover fixed charges by $196 million.
(c) Earnings did not cover fixed charges by $586 million.
22
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
from Marathon Oil Corporation (Marathon), formerly USX Corporation (the
Separation), United States Steel Corporation (U. S. Steel) established a
new internal financial reporting structure, which resulted in a change
in reportable segments. 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. Reported results for the second quarter
and first six months of 2001 have been conformed to the current year
presentation.
U. S. Steel now has three reportable operating segments: Flat-
rolled Products (Flat-rolled), Tubular Products (Tubular), and
U. S. Steel Kosice (USSK).
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, converter, container, industrial, and construction
markets.
The Tubular segment includes the operating results of U. S. Steel's
domestic tubular production facilities and an equity investee involved
in the production of tubular goods. These operations produce and sell
both seamless and electric resistance weld tubular products and
primarily serve customers in the oil, gas and petrochemicals markets.
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 equity investees, primarily located in Central
Europe. 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 European construction,
appliance, transportation, service center, container, and oil, gas and
petrochemicals markets.
All other U. S. Steel businesses not included in reportable segments
are reflected in Other Businesses. These businesses are involved in the
production and sale of coal, coke and taconite pellets (iron ore);
transportation services; steel mill products distribution
("Straightline"); the management of mineral resources; the management
and development of real estate; and engineering and consulting services.
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
uncertain. 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 additional risk factors affecting the businesses of U. S. Steel, see
Supplementary Data -- Disclosures About Forward-
23
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Looking Statements in the U. S. Steel Annual Report on Form 10-K for the
year ended December 31, 2001.
Results of Operations
---------------------
Revenues and other income was $1,807 million in the second quarter
of 2002 compared with $1,737 million in the same quarter last year. The
$70 million increase primarily reflected higher shipments and average
realized prices for domestic sheet products and a $33 million federal
excise tax refund, which was included in second quarter 2002 other
income, partially offset by lower domestic shipments of tubular and
plate products. Revenues and other income in the first six months of
2002 totaled $3,241 million compared with $3,301 million in the first
six months of 2001. The decrease primarily reflected reduced domestic
tubular and plate shipment volumes; lower average realized prices for
domestic sheet and tubular products; lower average realized prices for
USSK; lower trade shipments of coke; and lower income from investees
which, in the first six months of 2001, included a gain of $68 million
on the Transtar reorganization. These declines were partially offset by
increased domestic sheet shipments, the absence of the $74 million
receivables impairment, which was included in the first six months of
2001, and the federal excise tax refund in the first six months of 2002.
Income (Loss) from operations for U. S. Steel for the second
quarter and first six months of 2002 and 2001 is set forth in the
following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2002 2001 2002 2001
---------------------------------------------------------------------------
Flat-rolled $(26) $(143) $(100) $(285)
Tubular 6 35 9 61
USSK 26 41 25 82
------ ------ ------ ------
Total income (loss) from reportable segments 6 (67) (66) (142)
Other Businesses:
Coal, Coke and Iron Ore 11 14 (3) (18)
Straightline (10) - (17) -
All Other 25 34 37 44
------ ------ ------ ------
Income (Loss) from operations before 32 (19) (49) (116)
special items
Special Items:
Federal excise tax refund 33 - 33 -
Insurance recoveries related to USS-POSCO fire 6 2 18 2
Asset impairments - receivables (14) - (14) (74)
Pension settlement loss (10) - (10) -
Costs related to Fairless shutdown - - (1) -
Reversal of litigation accrual - - 9 -
Costs related to Separation - (8) - (8)
Gain (adj. to gain) on Transtar reorganization - (2) - 68
------ ------ ------ ------
Total income (loss) from operations $47 $(27) $(14) $(128)
====== ====== ====== ======
24
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Segment loss for Flat-rolled
Segment loss for Flat-rolled was $26 million in the second quarter
of 2002 compared with a loss of $143 million in the same quarter of
2001. The decreased quarterly loss was mainly due to improved operating
efficiencies, higher average realized prices, lower energy costs and
increased shipments. Flat-rolled had a loss of $100 million in the
first six months of 2002 compared with a loss of $285 million in the
first six months last year. The decreased loss primarily resulted from
improved operating efficiencies, lower energy costs and higher
shipments.
Segment income for Tubular
Segment income for Tubular was $6 million in the second quarter of
2002, a decline of $29 million compared with the second quarter of 2001.
Tubular reported income of $9 million for the first six months of 2002
compared with income of $61 million in the first half of 2001. The
declines resulted from lower shipments, less favorable product mixes and
lower average realized prices.
Segment income for USSK
Segment income for USSK was $26 million in the second quarter of
2002 compared with income of $41 million in the second quarter of 2001.
The change was primarily due to unfavorable cost effects due to foreign
exchange rate changes, higher freight costs and costs associated with
the start-up of conversion operations at Sartid in Serbia, partially
offset by an improved product mix and higher average realized prices due
to favorable exchange rate effects. Income for USSK for the first six
months of 2002 was $25 million compared with income of $82 million in
the same period last year. The decrease was primarily due to lower
average realized steel prices, higher freight costs and costs associated
with the start-up of conversion operations at Sartid. Income for the
first six months of 2002 was also adversely affected by delays in
restarting operations in January 2002 following a blast furnace outage.
Income for Other Businesses
Income for Other Businesses in the second quarter of 2002 was
$26 million compared with income of $48 million in the second quarter of
2001. The decrease resulted mainly from lower results for real estate
operations and losses for Straightline, which began operations on
October 30, 2001. Other Businesses recorded income of $17 million in
the first half of 2002 compared with income of $26 million in the first
half of 2001. The decline was primarily due to lower trade shipments of
coke, lower results for real estate operations and Straightline's loss,
partially offset by higher income from iron ore operations as a result
of higher shipment levels and lower energy costs and the absence of
U. S. Steel's share of losses of Republic Technologies International
Holdings, LLC (Republic), which was included in the first half of 2001.
Net Periodic Pension Credit
Net periodic pension credits, which are primarily noncash, included
in income (loss) from operations were $20 million and $49 million for
the second quarter and first six months of 2002, respectively, compared
to $31 million and $72 million for
25
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
the corresponding periods of 2001. The decreases in the net periodic
pension credits in the 2002 periods were due primarily to lower expected
returns on assets due to lower market related values, and higher
settlement charges related to the non tax-qualified pension plan and
executive management supplemental pension program.
Selling, General and Administrative Expenses
Selling, general and administrative expenses included in income
(loss) from operations were $100 million and $171 million for the second
quarter and first six months of 2002, respectively, compared to $68
million and $103 million for the same periods of 2001. The increases in
costs in the 2002 periods were primarily due to the decrease in net
periodic pension credits as previously discussed, the impairment of
retiree medical cost reimbursements receivable from Republic, increased
legal expenses primarily due to the Section 201 trade cases, and the
continuing expansion of Straightline. Also contributing to the
increases in 2002 were higher retiree medical costs primarily due to
decreases in the discount rate, higher escalation rates for medical
expenses, and the effects of the Fairless shutdown.
Special items:
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 a pretax gain of $33 million, which is included in
other income on the statement of operations. Of the $33 million
recognized, $10 million represents the interest component of the gain.
The refund resulted from a 1998 federal district court decision that
found such taxes to be unconstitutional.
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.
Asset impairments - receivables were for charges related to
reserves established against receivables from Republic. The charge in
the second quarter and first six months of 2002 related to reserves
against retiree medical cost reimbursements owed by Republic, and the
charge in the first six months of 2001 related to reserves against trade
receivables.
Pension settlement loss is related to retirements of personnel
covered under the non tax-qualified pension plan and the executive
management supplemental pension program.
Costs related to Fairless shutdown resulted from the permanent
shutdown of the cold-rolling and tin mill facilities at Fairless Works
in the fourth quarter of 2001.
Reversal of litigation accrual represents the reversal in the first
quarter of 2002 of a prior litigation accrual as a result of a final
court ruling in U. S. Steel's favor.
Costs related to Separation represent U. S. Steel's share of
professional fees and expenses and certain other costs directly
attributable to the Separation.
26
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Gain (adjustment to gain) on Transtar reorganization represents
U. S. Steel's share of the gain and subsequent downward adjustment of
the gain recognized by Transtar in 2001.
Net interest and other financial costs were $19 million in the
second quarter of 2002 compared with $48 million during the same period
in 2001. Net interest and other financial costs in the first six months
of 2002 were $53 million compared with $36 million in the same period
last year. Last year's first six months included a favorable adjustment
to interest of $67 million that was related to prior years' taxes.
Excluding this favorable adjustment, net interest and other financial
costs in the first six months of 2002 decreased $50 million from the
first six months of 2001. The decreases in the 2002 periods primarily
reflect lower average debt levels following the December 31, 2001 value
transfer of $900 million from Marathon and favorable 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 net gains of approximately $13 million in the second
quarter and first six months of 2002 versus net losses of $3 million and
$7 million for the second quarter and first six months of 2001,
respectively.
The provision for income taxes in the second quarter of 2002 was $1
million compared with a credit for income taxes of $45 million in the
second quarter last year. The credit for income taxes in the first six
months of 2002 was $11 million compared with a credit of $143 million in
the same period in 2001. The credit for income taxes in the first six
months of 2002 reflected a tax benefit for pretax losses at the
estimated annual effective tax rate for 2002 of approximately 24
percent. The tax credit 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
percent 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 percent of USSK's tax liability for years 2000 through 2004
and 50 percent for the years 2005 through 2009. Management believes that
USSK has fulfilled all of the necessary conditions for claiming the tax
credit for 2000 and 2001 and anticipates meeting such requirements for
2002. As a result of claiming these tax credits and certain tax planning
strategies to reinvest earnings in foreign operations, virtually no
income tax provision is recorded for USSK income.
In the first six months of 2001, effective tax rates were applied
to U. S. Steel's domestic and foreign operations separately. As a
result, the credit for income taxes reflected an estimated annual
effective tax rate of approximately 34 percent for U. S. Steel's
domestic operations, and virtually no tax provision for USSK's income as
discussed in the preceding paragraph. The tax credit in the first six
months of 2001 also included a $33 million deferred tax benefit
associated with the Transtar reorganization and an unfavorable
adjustment of $15 million related to the settlement of prior years'
taxes.
27
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net income was $27 million in the second quarter of 2002 compared
with a net loss of $30 million in the second quarter of 2001. The net
loss in the first six months of 2002 was $56 million compared to a net
loss of $21 million in the same period in 2001. The changes primarily
reflected the factors discussed above.
Operating Statistics
--------------------
Flat-rolled shipments of 2.6 million tons for the second quarter of
2002 increased about 12 percent from the second quarter 2001 and 10
percent from the first quarter of 2002. Tubular shipments of 217,000
tons for the second quarter of 2002 decreased about 31 percent from the
same period in 2001 but improved approximately 15 percent from the first
quarter of 2002. At USSK, second quarter 2002 shipments of 1.1 million
tons reflected improvements of 3 percent and 46 percent, respectively,
compared to the second quarter of 2001 and the first quarter of 2002.
Raw steel capability utilization for domestic facilities and USSK
in the second quarter of 2002 averaged 93.9 percent and 95.5 percent,
respectively, compared with 82.1 percent and 90.7 percent in the second
quarter of 2001 and 92.1 percent and 74.4 percent in the first quarter
of 2002. Raw steel capability utilization for domestic facilities and
USSK in the first six months of 2002 averaged 93.0 percent and 85.0
percent, respectively, compared with 82.6 percent and 84.0 percent in
the first six months of 2001.
Balance Sheet
-------------
Cash and Cash Equivalents of $28 million at June 30, 2002 decreased
$119 million from year-end 2001 primarily due to working capital
increases, capital expenditures, payment of a $54 million cash
settlement to Marathon in accordance with the terms of the Separation
and $53 million of restricted cash deposits, partially offset by cash
generated from common stock issued.
Receivables, less allowance for doubtful accounts increased $306
million from year-end 2001 primarily due to increases in trade accounts
receivable resulting from increasing sales levels during the second
quarter of 2002.
Other noncurrent assets increased $52 million from December 31,
2001 due mainly to an increase in restricted cash deposits used to
collateralize letters of credit to provide financial assurance.
Accounts payable of $703 million at June 30, 2002 increased $144
million from year-end 2001, mainly due to an increase in trade payables
resulting from increased operating levels.
Accounts Payable to related parties at June 30, 2002 decreased by
$36 million from December 31, 2001 due primarily to the payment of a
cash settlement to Marathon during the first quarter of 2002 in
accordance with the terms of the Separation.
Additional paid-in capital increased by $205 million from December
31, 2001 due primarily to an equity offering of 10,925,000 common shares
that was completed in May 2002 for net proceeds of $192 million.
28
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Cash Flow
---------
Net cash used in operating activities was $107 million for the
first six months of 2002 compared with cash provided from operating
activities of $239 million in the same period of 2001. The net loss
incurred during the first six months of 2002 coupled with increased
working capital demands, as production and sales volumes increased,
resulted in a net cash usage for the period. Cash provided from
operating activities in the 2001 period was favorably impacted by an
income tax settlement of $379 million with Marathon in accordance with
Marathon's tax allocation policy.
Capital expenditures in the first six months of 2002 were
$104 million compared with $141 million in the same period in 2001.
Major projects in the first six months of 2002 include the quench and
temper line project at Lorain Tubular and various projects at USSK,
including the sinter plant dedusting project, the upgrade of a hot strip
mill reheat furnace, the addition of tin mill facilities and the vacuum
degassing facility.
U. S. Steel's domestic contract commitments to acquire property,
plant and equipment at June 30, 2002, totaled $18 million.
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. USSK is required to report
periodically to the Slovak government on its status toward meeting this
commitment. The first reporting period ends on December 31, 2003. The
remaining commitment under this capital improvements program as of
June 30, 2002 was $600 million.
Restricted cash - deposits of $53 million in the first six months
of 2002 were mainly used to collateralize letters of credit to provide
financial assurance.
Net change in attributed portion of Marathon consolidated debt and
other financial obligations in the first six months of 2001 reflects a
decrease of $26 million in the amount of debt and other financial
obligations attributed to U. S. Steel by Marathon. Prior to the
Separation, debt and certain other financial obligations that were
centrally managed by Marathon were attributed to U. S. Steel based on
U. S. Steel's cash flows and capital structure. The decrease was
primarily due to U. S. Steel's positive cash provided from operations,
which included the $379 million tax settlement with Marathon, partially
offset by cash used for capital expenditures and dividend payments.
Repayment of long-term debt in the first six months of 2002 was
mainly on the USSK loan.
Settlement with Marathon in the first six months of 2002 reflected
a $54 million cash payment made during the first quarter of 2002 in
accordance with the terms of the Separation.
Common stock issued in the first half of 2002 reflects $192 million
of net proceeds from U. S. Steel's equity offering completed in May
2002, 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.
29
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Dividends paid in the first six months of 2002 were $9 million,
reflecting the quarterly dividend rate of five cents per share
established by U. S. Steel after the Separation. Dividends paid in the
first six months of 2001 resulted from quarterly dividend rates of 25
cents per share and 10 cents per share in the first and second quarters,
respectively, paid to USX-U. S. Steel Group common shareholders.
Dividends paid in the first half of 2001 also included quarterly
dividends on the 6.50% Cumulative Convertible Preferred Stock that was
retired by Marathon as part of the Separation.
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, United States Steel Receivables LLC (USSR),
which is a 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. Fundings under
the facility are limited to the lesser of eligible receivables or
$400 million. As of July 31, 2002, U. S. Steel had $377 million of
eligible receivables, $20 million of which were sold.
In addition, U. S. Steel entered into a three-year revolving credit
facility expiring December 31, 2004, that provides for borrowings of up
to $400 million secured by all domestic inventory and related assets
(Inventory Facility), including receivables other than those sold under
the Receivables Purchase Agreement. As of July 31, 2002, $245 million
was available to U. S. Steel under the Inventory Facility.
USSK has bank credit facilities aggregating $50 million. At July
31, 2002, $14 million was available under these facilities.
U. S. Steel had Senior Notes outstanding in the aggregate principal
amount of $535 million as of June 30, 2002. The Senior Notes impose
significant restrictions on U. S. Steel such as the following:
restrictions on payments of dividends; 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 our ability to invest in joint ventures or make certain
acquisitions. The Inventory Facility imposes additional restrictions on
U. S. Steel including the following: effective September 30, 2002,
U. S. Steel must meet an interest expense coverage ratio of at least 2
to 1 through March 30, 2003 and 2.5 to 1 thereafter and a debt to EBITDA
leverage ratio of no more than 6 to 1 through December 30, 2002, 5.5 to
1 through March 30, 2003, 5 to 1 through June 29, 2003, 4.5 to 1 through
September 29, 2003, 4 to 1 through March 30, 2004 and 3.75 to 1
thereafter; limitations on capital expenditures; and restrictions on
investments. If these covenants are breached or if U. S. Steel fails to
make payments under our 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-
30
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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 our financial
position and liquidity.
On July 2, 2002, U. S. Steel initiated an exchange offer for the
Senior Notes. The offer expired on August 5, 2002, and 100 percent of
the notes were tendered for exchange. The new notes received in the
exchange are identical in all material aspects to the tendered notes
except that the new notes have been registered under the Securities Act
of 1933 as amended.
U. S. Steel has utilized surety bonds to provide financial
assurance for certain transactions and business activities. The total
amount of active surety bonds currently being used for financial
assurance purposes is approximately $134 million, $70 million of which
is expected to be terminated in the third quarter of 2002. Recent
events have caused major changes in the surety bond market including
significant increases in surety bond premiums and reduced market
capacity. These factors, together with our 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. During
the first six months of 2002, U. S. Steel has used $54 million of
liquidity sources to provide financial assurance and expects to use an
additional amount of approximately $30 million during the second half of
2002.
U. S. Steel was contingently liable for debt and other obligations
of Marathon in the amount of $334 million as of June 30, 2002. Marathon
paid a portion of this debt in July 2002. As of July 31, 2002,
U. S. Steel is contingently liable for debt and other obligations of
Marathon in the amount of $175 million. Marathon is not limited by
agreement with U. S. Steel as to the amount of indebtedness that it may
incur. 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 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 indenture 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, 2002:
(Dollars in millions)
------------------------------------------------------------------------
Cash and cash equivalents....................... $28
Amount available under Receivables
Purchase Agreement........................... 396
Amount available under Inventory Facility....... 252
Amounts available under USSK credit facilities.. 39
----
Total estimated liquidity..................... $715
31
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
U. S. Steel's liquidity has improved significantly since March 31,
2002, primarily reflecting $192 million of net proceeds from an equity
offering of 10,925,000 newly issued common shares which was completed in
May 2002. These proceeds and the $33 million federal excise tax refund
were primarily used to repurchase receivables previously sold under the
Receivables Purchase Agreement.
The following table summarizes U. S. Steel's contractual
obligations at June 30, 2002, and the effect such obligations are
expected to have on its liquidity and cash flow in future periods.
(Dollars in millions)
------------------------------------------------------------------------
Payments Due by Period
----------------------------------------------
Last 6 2003 2005
Months through through Beyond
Contractual Obligations Total of 2002 2004 2006 2006
------------------------------------------------------------------------
Long-term debt $1,362 $- $50 $40 $1,272
Capital leases 84 1 12 11 60
Operating leases 380 40 109 69 162
Capital commitments(a) 618 74 255 162 127
Environmental commitments(a) 141 16 - - 125(b)
Usher Separation bonus(a) 3 - 3 - -
Additional consideration
for USSK purchase 75 38 37 - -
Other post-retirement
benefits (c) 40 160 400 (c)
------ ------ ------ ------ ------
Total contractual
obligations (d) $209 $626 $682 (d)
-----------------------------------------------------------------------
(a) See Note 16 to the Financial Statements.
(b) Timing of potential cash outflows is not determinable.
(c) U. S. Steel accrues an annual cost for these benefit obligations
under plans covering its active and retiree populations in
accordance with generally accepted accounting principles. These
obligations will require corporate cash in future years to the
extent that trust assets are restricted or insufficient and to the
extent that company contributions are required by law or union labor
agreement. Amounts in the year 2002 through 2004 reflect our
current estimate of corporate cash outflows and are net of the use
of significant funds available from a Voluntary Employee Benefit
Agreement (VEBA) trust. The accuracy of this forecast of future
cash flows depends on various factors such as actual asset returns,
the mix of assets within the asset trusts, medical escalation and
discount rates used to calculate obligations, the availability of
surplus pension assets allowable for transfer to pay retiree medical
claims and company decisions or VEBA restrictions that impact the
timing of the use of trust assets. As such, it is impossible at
this time to make an accurate prediction of cash requirements beyond
five years.
(d) Amount of contractual cash obligations is not determinable
because other post-retirement benefit cash obligations are not
estimable beyond five years, as discussed in (c) above.
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
32
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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 the Form 10-K for the year ended December 31,
2001. 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.
Pension obligations have been excluded from the above table.
U. S. Steel does not currently anticipate any required cash
contributions to its major pension plans during 2002 or 2003. However,
the sharp decline in the value of the equity holdings of the company's
major pension trusts thus far during 2002 and market performance from
now until the end of 2002 will likely have an impact on future funding
needs of the main pension plan for union employees, including any
required minimum contributions or voluntary company contributions in
accordance with our annual long-range study of the plan's needs. Future
funding requirements are dependent upon factors such as funded status,
regulatory requirements for funding purposes that necessitate different
and more restrictive assumptions for measuring obligations than those
used for accounting, and the level and timing of asset returns as
compared with the level and timing of expected benefit disbursements.
As such, until year-end 2002 asset and benefit obligation levels are
known and fully assessed, it is impossible to make an accurate
prediction of minimum cash funding requirements beyond 2003.
U. S. Steel's funded status is disclosed in Note 12 to the Financial
Statements in the Form 10-K for the year ended December 31, 2001.
The following table summarizes U. S. Steel's commercial commitments
at June 30, 2002, and the effect such commitments could have on its
liquidity and cash flow in future periods.
(Dollars in millions)
---------------------------------------------------------------------------
Scheduled Reductions by Period
----------------------------------------------
Last 6 2003 2005
Months of through through Beyond
Commercial Commitments Total 2002 2004 2006 2006
---------------------------------------------------------------------------
Standby letters of credit(a) $53 $11 $42 $- $-
Surety bonds(a) 134 70 46 - 18(b)
Clairton 1314B partnership(a) 150 - - - 150(b)
Guarantees of indebtedness of 31 3 12 - 16
unconsolidated entities(a)(c)
Contingent liabilities:
- Marathon obligations(a)(c) 334 173 44 48 69
- Unconditional purchase
obligations 764 71 232 291 170
------ ------ ------ ------ ------
Total commercial commitments $1,466 $328 $376 $339 $423
--------------------------------------------------------------------------
(a) Reflects a commitment or guarantee for which future cash outflow is
not considered likely.
(b) Timing of potential cash outflows is not determinable.
(c) See Note 16 to the Financial Statements.
33
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 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, 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.
34
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 all of its domestic competitors are subject to similar
environmental laws and regulations. However, the specific impact on
each competitor may vary depending on a number of factors, including the
age and location of its operating facilities, production processes and
the specific products and services it provides. To the extent that
competitors are not required to undertake equivalent costs in their
operations, the competitive position of U. S. Steel could be adversely
affected.
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.
In addition, U. S. Steel expects to incur capital and operating
expenditures to meet environmental standards under the Slovak Republic's
environmental laws for its USSK operation.
U. S. Steel has been notified that it is a potentially responsible
party (PRP) at 20 waste sites under the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA) as of June 30, 2002.
In addition, there are 15 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 36 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.
35
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
At the former Duluth, Minnesota Works, U. S. Steel spent
approximately $11.5 million through June 30, 2002. The Duluth Works was
listed by the Minnesota Pollution Control Agency under the Minnesota
Environmental Response and Liability Act on its Permanent List of
Priorities. The Environmental Protection Agency (EPA) has consolidated
and included the Duluth Works site with the other sites on the EPA's
National Priorities List. The Duluth Works cleanup has proceeded since
1989. U. S. Steel is conducting an engineering study of the estuary
sediments. Depending upon the method and extent of remediation at this
site, future costs are presently unknown and indeterminable. Sampling
of the sediments is likely to begin in the fourth quarter of 2002,
barring delays due to further comments from a state agency. Sampling
will continue for a minimum of one and a half years due to seasonal
constraints. Analysis and assessment of the samples is expected to take
up to one year.
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 section
of the Grand Calumet River that runs through 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 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 June 30, 2002, project costs have amounted to $10.2 million with
another $28.2 million presently projected to complete the project, over
the next two years. Construction began in January 2002 on a Corrective
Action Management Unit (CAMU) to contain the dredged material on company
property north of the river between Bridge Street and the former
American Juice factory. Removal of PCB-contaminated sediment is
expected to start in October 2002 at the river's headwaters. Closure
costs for the CAMU are estimated to be an additional $4.9 million.
At Gary Works, U. S. Steel has agreed to close three hazardous
waste disposal sites located on plant property. The D2 disposal site
and a nearby refuse area will be closed collectively. A CAMU for the
West End Maintenance Area of Gary Works will include wastes from the D5
and T2 disposal sites. Total costs to close D2, D5, T2 and the refuse
area are estimated to be $18.8 million.
In October 1996, U. S. Steel was notified by the Indiana Department
of Environmental Management (IDEM) acting as lead trustee, that IDEM and
the U.S. Department of the Interior had concluded a preliminary
investigation of potential injuries to natural resources related to
releases of hazardous substances from various municipal and industrial
sources along the east branch of the Grand Calumet
36
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
River and Indiana Harbor Canal. The public trustees completed a
preassessment screen pursuant to federal regulations and have determined
to perform a Natural Resources Damages Assessment. U. S. Steel was
identified as a PRP along with 15 other companies owning property along
the river and harbor canal. U. S. Steel and eight other PRPs have
formed a joint defense group. In 2000, the trustees concluded their
assessment of sediment injuries, which includes a technical review of
environmental conditions. The PRP joint defense group has proposed
terms for the settlement of this claim which have been endorsed by
representatives of the trustees and the EPA to be included in a consent
decree that U. S. Steel expects to resolve this claim. No formal legal
proceedings have been filed in this matter.
On October 23, 1998, a final Administrative Order on Consent was
issued by EPA addressing Corrective Action for Solid Waste Management
Units throughout Gary Works. This order requires U. S. Steel to perform
a RCRA Facility Investigation (RFI) and a Corrective Measure Study at
Gary Works. The Current Conditions Report, U. S. Steel's first
deliverable, was submitted to EPA in January 1997 and was approved by
EPA in 1998. The First Phase 1 RFI Work Plan, for facility-wide
groundwater issues, was approved and sampling began in 2001. Phase 1
Sampling and Analysis Plans for the Process Sewers, Sheet and Tin, East
Lake/East End, the West End and the Coke Plant areas have been submitted
to EPA and are expected to be approved by EPA in 2002. The costs of
these studies are minimal and, until they are complete, it is impossible
to assess whether any additional expenditures will be necessary.
On October 21, 1994, and again on December 30, 1994, IDEM issued
notices of violation (NOVs) relating to Gary Works alleging various
violations of air pollution requirements. In early 1996, U. S. Steel
paid a $6 million penalty and agreed to install additional pollution
control equipment and to implement environmental protection programs
over a period of several years. A substantial portion of these programs
has been implemented, with expenditures through June 30, 2002 of
approximately $103 million. The cost to complete these programs is
presently indeterminable. On March 8, 1999, U. S. Steel entered into an
agreed order with IDEM to resolve outstanding air issues. U. S. Steel
paid a penalty of $207,400 and installed equipment at the No. 8 Blast
Furnace and the No. 1 BOP to reduce air emissions.
On November 30, 1999, IDEM issued an NOV alleging various air
violations at Gary Works, including opacity violations at the No. 1 BOP
and pushing violations at the four Coke Batteries. An agreed order is
being negotiated. Because IDEM has not yet determined the merits of the
defenses raised by U. S. Steel, the cost of a settlement of this matter
is presently indeterminable. The opacity problem has been corrected.
U. S. Steel and IDEM met on January 13, 2000, to discuss the NOV.
U. S. Steel supplied additional documentation to IDEM concerning alleged
violations and is waiting for IDEM's response.
On February 12, 1987, U. S. Steel and the Pennsylvania Department
of Environmental Resources (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
37
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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 $10.2 million with another $0.9 million presently estimated
to complete the project.
In December 1995, U. S. Steel reached an agreement in principle
with the EPA and the Department of Justice (DOJ) with respect to alleged
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 million, implement two SEPs
costing a total of $1.75 million and implement a RCRA corrective action
at the facility. One SEP was completed during 1998 at a cost of
$250,000. The second SEP is under way. 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 RFI work plan for the site was submitted for agency approval in
the first quarter of 2001. (Phase 1 sampling under the first RFI work
plan is expected to be completed in two and a half (2-1/2) years. At
that time the results would be analyzed to determine what, if any, phase
2 sampling may be required to begin the corrective measures study
segment of the process.)
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 EPA to undertake emergency removal work at
the Municipal & Industrial Disposal Co. site in Elizabeth Township, 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 PADER placed the site on the Pennsylvania State Superfund list
and began a Remedial Investigation (RI), which was issued in 1997.
After a feasibility study by Pennsylvania Department of Environmental
Protection (PADEP) and U. S. Steel's submission of a conceptual
remediation plan in 2001, U. S. Steel submitted a revised conceptual
remediation plan on May 31, 2002, and continued to negotiate with the
PADEP toward a final resolution of U. S. Steel's liability at this site.
Those negotiations resulted in tentative agreement between U. S. Steel
and the PADEP on the terms of a Consent Order and Agreement under which
U. S. Steel will be solely responsible for the remediation of the site.
U. S. Steel estimates its future liability at the site to be $7.1
million.
U. S. Steel is involved in the investigation and remediation of two
former facilities in Worcester, MA. At one, required environmental
reports have been submitted to the Massachusetts Department of
Environmental Protection (MADEP). Based on these reports MADEP has
determined that at this time no remedial alternatives are feasible and,
therefore, no remediation is currently required. The site must be
reexamined every five years to determine if there are any changes in the
characteristics or delineation of the waste products and if there then
exist feasible remedial alternatives. A public highway is being
constructed across the other former facility and U. S. Steel has
conducted required remediation preparatory to the highway construction.
In the second quarter of 2002, the MADEP demanded that U. S. Steel
remove the residual asphaltic material on the bank of the adjacent
Blackstone River. This additional work is estimated to cost $1.1
million.
38
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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.
Outlook
-------
Shipments for Flat-rolled products are expected to increase
slightly in the third quarter. Further improvement in average realized
prices is also anticipated. For full-year 2002, Flat-rolled shipments
are expected to approximate 10.1 million net tons.
For Tubular, some improvement is expected in the second half with
shipments and averaged realized prices up from the depressed levels in
the first half of 2002. Shipments for full-year 2002 are expected to be
approximately 900,000 net tons.
USSK's average realized prices in third quarter 2002 are expected
to increase, with shipments in line with the second quarter. Shipments
in 2002 are projected to be approximately 4.0 million net tons.
Management remains optimistic that U. S. Steel will be profitable
for 2002.
On March 8, 2002, USSK announced that it had entered into a
Cooperation and Toll Conversion Agreement (tolling agreement) and a
Facility Management Agreement with Sartid, a.d. (Sartid), an integrated
steel company with facilities located in Smederevo and Sabac in the
Republic of Serbia. The tolling agreement provides for the conversion
of slabs into hot-rolled bands and cold-rolled full hard into tin-coated
products. USSK retains ownership of these materials and markets the hot-
rolled bands and finished tin products in its own distribution system.
The Facility Management Agreement permits USSK, or an affiliated
company, to have management oversight of Sartid's tin processing
facilities at Sabac. On June 28, 2002, USSK entered into a Supplemental
Cooperation and Toll Conversion Agreement (supplemental agreement) with
Sartid under which Sartid agrees to toll convert additional raw
materials provided by USSK into products specified by USSK. Under the
supplemental agreement, USSK retains ownership of the raw materials and
products. On July 30, 2002, bankruptcy proceedings were initiated
involving Sartid. On August 5, 2002, the Bankruptcy Administrator
contacted USSK requesting USSK to renew the agreements between Sartid
and USSK. USSK anticipates that such renewals will be entered into in
the near future.
In addition, USSK continues to explore possibilities for
involvement in the restructuring of Sartid, as announced by USSK, the
Government of the Republic of Serbia and Sartid when they entered into a
letter of intent concerning these matters on March 8, 2002.
On April 10, 2002, U. S. Steel announced that it had signed a
letter of intent to sell all of the coal and related assets associated
with U. S. Steel Mining Company's West Virginia and Alabama mines. A
definitive agreement on the sale is expected before the end of the year.
39
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
On August 1, 2002, U. S. Steel announced that it had terminated its
agreement with Lone Star Steel Company to purchase, market and sell
electric resistance welded (ERW) tubular products manufactured by
U. S. Steel, and will resume exclusive marketing and sales of the ERW
product line.
Because of a higher than expected number of normal salaried
retirements, together with last year's Voluntary Early Retirement
Program that was completed in June, an unfavorable pension settlement
effect is expected to be recognized later this year for the qualified
plan for non-union employees. The amount of this recognition of
deferred actuarial losses will depend on pension fund investment
performance and liability changes up to the measurement date, but is
broadly estimated to be approximately $100 million (pretax).
Due to the sharp decline in the value of the equity holdings of the
company's major pension trusts, we expect that the December 31, 2002
market value of the assets in the U. S. Steel pension plan for union
employees will be lower than previously anticipated and may be lower
than the accumulated benefit obligation (ABO). When the ABO of a plan
exceeds the market value of plan assets, SFAS No. 87, "Employer's
Accounting for Pensions" requires companies to record an additional
minimum liability equal to this excess amount plus any pension asset
recorded. This liability would be offset by an intangible asset
equivalent to any unrecognized prior service cost and a charge to
equity, net of tax effects. This potential effect will be calculated
and recorded, if necessary, at the next measurement date of the plan,
which is expected to be December 31, 2002. Based on current asset
values, we broadly estimate a required additional minimum liability of
$1.5 billion (reflecting an assumed unfunded ABO of $400 million and a
recorded pension asset of $1.1 billion) and an intangible asset of $400
million for this plan, resulting in the establishment of a $400 million
deferred tax asset and a charge to equity of $700 million. The actual
return on plan assets and changes in the calculated actuarial liability
during the second half of 2002 could materially affect these estimated
amounts.
Discussions are ongoing between the Slovak Republic and the
European Commission concerning admission of Slovakia into the European
Union (EU). USSK understands that these accession negotiations include
discussions regarding the applicability of the EU's state aid
limitations to the income tax credit currently available to USSK as well
as other issues. Based upon currently available information, management
does not anticipate that those negotiations and any agreement resulting
therefrom, will result in a material adverse impact upon U. S. Steel.
U. S. Steel continues to be interested in participating in
consolidation of the domestic steel industry if it would be beneficial
to our customers, shareholders, creditors and employees. U. S. Steel
has had and continues to have discussions with several parties regarding
consolidation opportunities. Among the factors that would impact
U. S. Steel's participation in consolidation are the nature and extent
of relief from the burden of retiree obligations related to
existing retirees from other domestic steel companies, which may come
through the bankruptcy process or otherwise, the terms of a new labor
agreement and progress in President Bush's program to address worldwide
overcapacity. Also, U. S. Steel may make additional investments in
Central Europe to expand our business and to better serve our customers
who are seeking worldwide supply arrangements.
40
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 shipments and prices, the potential coal mining asset sale,
pension matters, tax issues and industry consolidation. Some factors,
among others, that could affect full-year 2002 market conditions,
shipments and prices include import levels, future product demand,
prices and mix, global and company steel production, plant operating
performance, domestic natural gas prices and usage, the resumption of
operation of steel facilities sold under the bankruptcy laws, and U.S.
and European economic performance and political developments. Steel
shipments and prices can be affected by imports and actions of the U.S.
Government and its agencies. Factors that may affect USSK results are
similar to domestic factors, including excess world supply, plus foreign
currency fluctuations, matters peculiar to international marketing such
as tariffs, and completion of facility projects at USSK. Factors that
may impact the occurrence and timing of the coal mining asset sale
include the availability of financing to the buyer and completion of
definitive documentation. Factors that may affect the amount of the
expected unfavorable pension settlement for the qualified plan for non-
union employees later this year include, among others, pension fund
investment performance, liability changes and interest rates. Factors
that may affect the amount of any additional minimum liability for the
U. S. Steel pension plan for union employees later this year include,
among others, pension fund investment performance, liability changes and
interest rates. The negotiation and possible consummation of any merger
or acquisition agreement and the potential completion of any industry
consolidation or acquisitions, whether domestic or international, are
all subject to numerous conditions, many of which are among the factors
generally impacting the steel business. Many of these conditions depend
upon actions of other parties, such as the federal government, the USWA,
creditors, bankruptcy courts and foreign governments. There is no
assurance that any merger agreement will be negotiated and/or
consummated, or that any industry domestic or international
consolidation in general will occur, nor any specificity concerning the
terms upon which any of these might occur. 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, 2001, and in subsequent filings for U. S. Steel.
Steel imports to the United States accounted for an estimated 24%
of the domestic steel market in the first five months of 2002 and for
the year 2001, and 27% for the year 2000.
On July 11, 2002, the U.S. Department of Commerce announced final
determinations in the anti-dumping cases concerning cold-rolled carbon
steel flat products from five of the 20 countries involved in these
proceedings. The U.S. Department of Commerce will continue its
investigation in all of the remaining cases. The U.S. International
Trade Commission held the final injury hearing on July 18, 2002 and will
render a decision at a later date.
The relief in the Section 201 action that was announced by
President Bush on March 5, 2002 became effective for imports entering
the U.S. on and after March 20, 2002. The U.S. Trade Representative
will continue to process requests for exemption from the remedy through
August 31, 2002.
41
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Accounting Standards
--------------------
On January 1, 2002, U. S. Steel adopted Statements of Financial
Accounting Standards (SFAS) No. 141 "Business Combinations," No. 142
"Goodwill and Other Intangible Assets" and No. 144 "Accounting for
Impairment or Disposal of Long-Lived Assets." There was no financial
statement implication related to the initial adoption of these
Statements. For more information see Note 1 of the Selected Notes to
Financial Statements.
On April 30, 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections."
Generally, SFAS No. 145 is effective for transactions occurring after
May 15, 2002. There was no financial statement implication related to
the adoption of this Statement. For more information see Note 1 of the
Selected Notes to Financial Statements.
The adoption of these Statements has not affected U. S. Steel's
critical accounting policies and estimates. For a discussion of
critical accounting policies and estimates, please refer to the Annual
Report on Form 10-K for the year ended December 31, 2001.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes 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 should 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 will adopt the
Statement effective January 1, 2003. The transition adjustment
resulting from the adoption of SFAS No. 143 will be reported as a
cumulative effect of a change in accounting principle. At this time,
U. S. Steel has not completed its assessment of the effect of the
adoption of this Statement on either its financial position or results
of operations.
SFAS No. 146, "Accounting for Exit or Disposal Activities" was
issued in July of 2002. SFAS No. 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring
activities. The scope of SFAS No. 146 includes (1) costs to terminate
contracts that are not capital leases; (2) costs to consolidate
facilities or relocate employees; and (3) termination benefits provided
to employees who are involuntarily terminated under the terms of a one-
time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract. The provisions of this
Statement will be effective for exit or disposal activities initiated
after December 31, 2002, with early application encouraged.
42
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, 2002, 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 3.3 8.3
Tin 0.1 0.3
(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, 2002. 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, 2002, may cause future pretax
income effects to differ from those presented in the table.
43
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, 2002, interest rates on the fair value of the
U. S. Steel's non-derivative financial instruments is provided in the
following table:
(Dollars in millions)
------------------------------------------------------------------------
As of June 30, 2002
Incremental
Increase in
Non-Derivative Fair Fair
Financial Instruments(a) Value Value(b)
------------------------------------------------------------------------
Financial assets:
Investments and
long-term receivables $45 $-
------------------------------------------------------------------------
Financial liabilities:
Long-term debt (c)(d) $1,212 $71
------------------------------------------------------------------------
(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, 2002, 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, 2002.
(c) Includes amounts due within one year.
(d) Fair value was based on market prices where available, or
current borrowing rates for financings with similar terms and
maturities.
At June 30, 2002, 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 $71 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.
44
UNITED STATES STEEL CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
------------------------------------
Foreign Currency Exchange Rate Risk
-----------------------------------
U. S. Steel is subject to the risk of price fluctuations related to
anticipated 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, 2002, U. S. Steel had open Euro forward sale
contracts for both U.S. dollars (total notional value of approximately
$15.4 million) and Slovak koruna (total notional value of approximately
$19.3 million). A 10% increase in the June 30, 2002 Euro forward rates
would result in an additional $3.5 million charge to income.
Equity Price Risk
-----------------
As of June 30, 2002, U. S. Steel was subject to equity price risk
and market liquidity risk related to its investment in VSZ a.s., the
former parent of U. S. Steel Kosice, s.r.o. These risks are not readily
quantifiable for several reasons including the absence of a readily
determinable fair value as determined under U. S. generally accepted
accounting principles.
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.
45
UNITED STATES STEEL CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
----------------------------------------
Second Quarter Six Months
Ended June 30 Ended June 30
(Dollars in millions) 2002 2001 2002 2001
------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
Flat-rolled Products $(26) $(143) $(100) $(285)
Tubular Products 6 35 9 61
U. S. Steel Kosice 26 41 25 82
Other Businesses:
Coal, Coke and Iron Ore 11 14 (3) (18)
Straightline (10) - (17) -
All other 25 34 37 44
----- ----- ----- -----
Income (Loss) from Operations before 32 (19) (49) (116)
special items
Special Items:
Federal excise tax refund 33 - 33 -
Insurance recoveries related to USS- 6 2 18 2
POSCO fire
Asset impairments - receivables (14) - (14) (74)
Pension settlement loss (10) - (10) -
Costs related to Fairless shutdown - - (1) -
Reversal of litigation accrual - - 9 -
Costs related to Separation - (8) - (8)
Gain (adj. to gain) on Transtar - (2) - 68
reorganization
----- ----- ----- -----
Total Income (Loss) from Operations $47 $(27) $(14) $(128)
CAPITAL EXPENDITURES
Flat-rolled Products $6 $83 $17 $99
Tubular Products 10 - 15 -
U. S. Steel Kosice 17 9 34 14
Other Businesses 15 12 38 28
----- ----- ----- -----
Total $48 $104 $104 $141
OPERATING STATISTICS
Average realized price: ($/net ton)(a)
Flat-rolled Products $402 $395 $390 $399
Tubular Products 636 677 638 689
U. S. Steel Kosice 257 249 252 267
Steel Shipments:(a)(b)
Flat-rolled Products 2,571 2,296 4,902 4,433
Tubular Products 217 315 405 610
U. S. Steel Kosice 1,105 1,071 1,861 1,824
Raw Steel-Production:(b)
Domestic Facilities 2,998 2,621 5,904 5,244
U. S. Steel Kosice 1,191 1,131 2,108 2,083
Raw Steel-Capability Utilization:(c)
Domestic Facilities 93.9% 82.1% 93.0% 82.6%
U. S. Steel Kosice 95.5% 90.7% 85.0% 84.0%
Domestic iron ore shipments(b)(d) 5,059 5,189 7,348 7,100
Domestic coke shipments(b)(d) 1,356 1,293 2,520 2,501
-------------
(a) Excludes intersegment transfers.
(b) Thousands of net tons.
(c) Based on annual raw steel production capability of 12.8
million net tons for domestic facilities and 5.0 million net tons
for U. S. Steel Kosice.
(d) Includes intersegment transfers.
46
Part II - Other Information:
----------------------------
Item 1. LEGAL PROCEEDINGS
Environmental Proceedings
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 section
of the Grand Calumet River that runs through 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 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 June 30, 2002, project costs have amounted to $10.2 million with
another $28.2 million presently projected to complete the project, over
the next two years. Construction began in January 2002 on a Corrective
Action Management Unit (CAMU) to contain the dredged material on company
property north of the river between Bridge Street and the former
American Juice factory. Removal of PCB-contaminated sediment is
expected to start in October 2002 at the river's headwaters. Closure
costs for the CAMU are estimated to be an additional $4.9 million.
In October 1996, U. S. Steel was notified by the Indiana Department
of Environmental Management (IDEM) acting as lead trustee, that IDEM and
the U.S. Department of the Interior had concluded a preliminary
investigation of potential injuries to natural resources related to
releases of hazardous substances from various municipal and industrial
sources along the east branch of the Grand Calumet River and Indiana
Harbor Canal. The public trustees completed a preassessment screen
pursuant to federal regulations and have determined to perform a Natural
Resources Damages Assessment. U. S. Steel was identified as a PRP along
with 15 other companies owning property along the river and harbor
canal. U. S. Steel and eight other PRPs have formed a joint defense
group. In 2000, the trustees concluded their assessment of sediment
injuries, which includes a technical review of environmental conditions.
The PRP joint defense group has proposed terms for the settlement of
this claim which have been endorsed by representatives of the trustees
and the EPA to be included in a consent decree that U. S. Steel expects
to resolve this claim. No formal legal proceedings have been filed in
this matter.
On October 21, 1994, and again on December 30, 1994, IDEM issued
notices of violation (NOVs) relating to Gary Works alleging various
violations of air pollution requirements. In early 1996, U. S. Steel
paid a $6 million penalty and agreed to install additional pollution
control equipment and to implement environmental protection programs
over a period of several years. A substantial portion of these programs
has been implemented, with expenditures through June 30, 2002 of
approximately $103 million. The cost to complete these programs is
presently
47
Part II - Other Information (Continued):
----------------------------------------
indeterminable. On March 8, 1999, U. S. Steel entered into an agreed
order with IDEM to resolve outstanding air issues. U. S. Steel paid a
penalty of $207,400 and installed equipment at the No. 8 Blast Furnace
and the No. 1 BOP to reduce air emissions.
On November 30, 1999, IDEM issued an NOV alleging various air
violations at Gary Works, including opacity violations at the No. 1 BOP
and pushing violations at the four Coke Batteries. An agreed order is
being negotiated. Because IDEM has not yet determined the merits of the
defenses raised by U. S. Steel, the cost of a settlement of this matter
is presently indeterminable. The opacity problem has been corrected.
U. S. Steel and IDEM met on January 13, 2000, to discuss the NOV.
U. S. Steel supplied additional documentation to IDEM concerning alleged
violations and is waiting for IDEM's response.
On February 12, 1987, U. S. Steel and the Pennsylvania Department
of Environmental Resources (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 $10.2 million with another $0.9 million presently estimated
to complete the project.
In December 1995, U. S. Steel reached an agreement in principle
with the EPA and the Department of Justice (DOJ) with respect to alleged
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 million, implement two SEPs
costing a total of $1.75 million and implement a RCRA corrective action
at the facility. One SEP was completed during 1998 at a cost of
$250,000. The second SEP is under way. 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 RFI work plan for the site was submitted for agency approval in
the first quarter of 2001. (Phase 1 sampling under the first RFI work
plan is expected to be completed in two and a half (2-1/2) years. At
that time the results would be analyzed to determine what, if any, phase
2 sampling may be required to begin the corrective measures study
segment of the process.)
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 EPA to undertake emergency removal work at the Municipal &
Industrial Disposal Co. site in Elizabeth Township, 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 PADER
placed the site on the Pennsylvania State Superfund list and began a
Remedial Investigation (RI), which was issued in 1997. After a
feasibility study by
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Pennsylvania Department of Environmental Protection (PADEP) and
U. S. Steel's submission of a conceptual remediation plan in 2001,
U. S. Steel submitted a revised conceptual remediation plan on May 31,
2002, and continued to negotiate with the PADEP toward a final
resolution of U. S. Steel's liability at this site. Those negotiations
resulted in tentative agreement between U. S. Steel and the PADEP on the
terms of a Consent Order and Agreement under which U. S. Steel will be
solely responsible for the remediation of the site. U. S. Steel
estimates its future liability at the site to be $7.1 million.
Asbestos Litigation
U. S. Steel is a defendant in a large number of cases in which
approximately 18,000 claimants allege injury resulting from exposure to
asbestos. Nearly all of these cases involve 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; and (3) claims
made by industrial workers allegedly exposed to an electrical cable
product formerly manufactured by U. S. Steel. To date, all actions
resolved have been either dismissed or resolved for immaterial amounts.
In 2001, U. S. Steel disposed of claims from approximately 11,300
claimants with aggregate total payments of less than $200,000 and
approximately 10,000 new claims were filed. The factual issues with
respect to each claimant vary considerably due to the nature and
duration of the alleged exposure of each individual claimant to
U. S. Steel products or premises, the exposure of each individual
claimant to products or premises of other defendants, the nature and
seriousness of the alleged injuries asserted by each claimant and the
other possible causes of any such injuries (such as the use of tobacco
products or exposure to other substances). In addition, because most
claimants assert their claims against multiple defendants, fail to
allege specific damage amounts in their complaints, fail to allocate the
alleged liability among the various defendants, and frequently amend
their complaints including any allegations of amounts sought, it is not
possible to reasonably estimate the amount claimed by any given claimant
or the claimants as a whole in pending cases. In the cases where the
claimants have asserted specific dollar damages against U. S. Steel, the
amounts claimed are not material either individually or in the
aggregate. It is also not possible to predict the outcome of these
matters; however, based upon present knowledge, management believes that
it is unlikely that the resolution of the pending actions in the
aggregate will have a material adverse effect on our financial
condition. Among the factors that management considered in reaching
this conclusion are: (1) that U. S. Steel has been subject to a total of
approximately 32,000 asbestos claims over the last twelve years that
have been administratively dismissed 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 has remained
steady, (3) that it has 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. 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.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on April 30, 2002.
Approximately 96.2 percent of the votes cast by U. S. Steel
shareholders approved the election of Dr. Shirley Ann Jackson, Dan D.
Sandman, John W. Snow, Thomas J. Usher and Douglas C. Yearley to serve
three-year terms as Class I directors. Continuing as Class II directors
for a term expiring in 2003 are J. Gary Cooper, Paul E. Lego, Seth E.
Schofield, and John P. Surma. Continuing as Class III directors for a
term expiring in 2004 are Robert J. Darnell, Roy G. Dorrance, Charles R.
Lee, and John F. McGillicuddy.
Shareholders also elected PricewaterhouseCoopers LLP as independent
accountant with a favorable vote of approximately 95.5 percent of all
votes cast.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
99.2 Certification 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 10, 2002, reporting under Item 9.
Regulation FD Disclosure, that U. S. Steel is furnishing
information for the April 10, 2002 press release titled
"U. S. Steel to Sell Assets of Mining Company."
* Form 8-K dated April 26, 2002, reporting under Item 9.
Regulation FD Disclosure, that U. S. Steel is furnishing
information for the April 26, 2002 U. S. Steel Corporation
Earnings Release.
Form 8-K dated May 14, 2002, reporting under Item 5. Other
Events, the filing of the underwriting agreement that
U. S. Steel executed and delivered on May 14, 2002 with Credit
Suisse First Boston Corporation and J. P. Morgan Securities
Inc., as the joint bookrunning managers.
Form 8-K dated May 17, 2002, reporting under Item 5. Other
Events, that U. S. Steel is filing the May 17, 2002 press
release titled "Underwriters Exercise Over-allotment Option on
U. S. Steel Common Stock Offering."
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Form 8-K dated June 4, 2002, reporting under Item 5. Other
Events, that U. S. Steel is filing audited Financial Statements
and Notes to conform Footnote 8 "Segment Information" to the new
reportable segment information for the years ended December 31,
2001, 2000, and 1999, and supplemental schedules containing
selected quarterly segment and other statistical information for
the quarter ended March 31, 2002, selected quarterly and full
year segment and other statistical information for 2001, and
selected full year segment and other statistical information for
the years 2000 and 1999 presented in accordance with the new
reportable segment composition.
Form 8-K dated June 28, 2002, reporting under Item 5. Other
Events, that U. S. Steel is filing this report to update the
litigation disclosure in its Annual Report on Form 10-K for the
year ended December 31, 2001 and its Quarterly Report on Form
10-Q for the quarter ended March 31, 2002.
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* Reports submitted to the Securities and Exchange Commission
under Item 9, Regulation FD Disclosure. Pursuant to General
Instruction B of Form 8-K, the reports submitted under Item 9
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.
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
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Larry G. Schultz
Vice President and Controller
August 12, 2002