10-Q 1 x201433110q.htm 10-Q X 2014.3.31 10Q


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 March 31, 2014
Or
 
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
(Exact name of registrant as specified in its charter)
Delaware
 
1-16811
 
25-1897152
(State or other
jurisdiction of
incorporation)
 
(Commission
File Number)
 
(IRS Employer
Identification No.)
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 P  No    
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ P ] No [    ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  P 
 
Accelerated filer     
 
Non-accelerated filer     
  
Smaller reporting company     
 
 
 
 
(Do not check if a smaller reporting company)
  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes     No P 
Common stock outstanding at April 24, 2014 – 144,701,759 shares




INDEX







UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)

 
 
Three Months Ended 
 March 31,
(Dollars in millions, except per share amounts)
 
2014
 
2013
Net sales:
 
 
 
 
Net sales
 
$
4,169

 
$
4,317

      Net sales to related parties (Note 18)
 
279

 
278

Total
 
4,448

 
4,595

Operating expenses (income):
 
 
 
 
Cost of sales (excludes items shown below)
 
4,038

 
4,242

Selling, general and administrative expenses
 
138

 
145

Depreciation, depletion and amortization
 
166

 
171

Loss (income) from investees
 
4

 
(8
)
      Net (gain) loss on disposal of assets (Note 20)
 
(20
)
 
1

Other expense, net
 

 
6

Total
 
4,326

 
4,557

Income from operations
 
122

 
38

Interest expense
 
61

 
85

Interest income
 
(1
)
 
(1
)
Other financial costs
 
9

 
20

     Net interest and other financial costs (Note 6)
 
69

 
104

Income (loss) before income taxes and noncontrolling interests
 
53

 
(66
)
Income tax provision (Note 8)
 
1

 
7

Net income (loss)
 
52

 
(73
)
Less: Net income attributable to noncontrolling interests
 

 

Net income (loss) attributable to United States Steel Corporation
 
$
52

 
$
(73
)
Earnings per common share (Note 10):
 
 
 
 
Earnings per share attributable to United States Steel Corporation shareholders:
 
 
 
 
-Basic
 
$
0.36

 
$
(0.51
)
-Diluted
 
$
0.34

 
$
(0.51
)








The accompanying notes are an integral part of these consolidated financial statements.

-1-



UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
 
Three Months Ended 
 March 31,
(Dollars in millions)
 
2014
 
2013
Net income (loss)
 
$
52

 
$
(73
)
Other comprehensive income (loss), net of tax:
 
 
 
 
Changes in foreign currency translation adjustments
 
(2
)
 
(37
)
Changes in pension and other employee benefit accounts
 
50

 
69

Total other comprehensive income, net of tax
 
48

 
32

Comprehensive income (loss) including noncontrolling interest
 
100

 
(41
)
Comprehensive income attributable to noncontrolling interest
 

 

Comprehensive income (loss) attributable to United States Steel Corporation
 
$
100

 
$
(41
)




































The accompanying notes are an integral part of these consolidated financial statements.

-2-



UNITED STATES STEEL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
 
(Unaudited) 
 March 31, 
 2014
 
December 31,  
 2013
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
1,099

 
$
604

Receivables, less allowance of $55 and $53
 
2,064

 
1,818

      Receivables from related parties (Note 18)
 
136

 
157

      Inventories (Note 11)
 
2,411

 
2,688

      Income tax receivable (Note 8)
 
184

 
185

      Deferred income tax benefits (Note 8)
 
499

 
576

Other current assets
 
87

 
50

Total current assets
 
6,480

 
6,078

Property, plant and equipment
 
16,722

 
16,799

Less accumulated depreciation and depletion
 
10,931

 
10,877

Total property, plant and equipment, net
 
5,791

 
5,922

Investments and long-term receivables, less allowance of $10 in both periods
 
607

 
621

Intangibles – net (Note 4)
 
266

 
271

Deferred income tax benefits (Note 8)
 
20

 
16

Other noncurrent assets
 
230

 
235

Total assets
 
$
13,394

 
$
13,143

Liabilities
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and other accrued liabilities
 
$
1,890

 
$
1,681

      Accounts payable to related parties (Note 18)
 
110

 
73

Bank checks outstanding
 
26

 

Payroll and benefits payable
 
977

 
974

Accrued taxes
 
135

 
140

Accrued interest
 
78

 
54

      Short-term debt and current maturities of long-term debt (Note 13)
 
323

 
323

Total current liabilities
 
3,539

 
3,245

Long-term debt, less unamortized discount (Note 13)
 
3,615

 
3,616

Employee benefits
 
1,964

 
2,064

Deferred income tax liabilities (Note 8)
 
403

 
445

Deferred credits and other noncurrent liabilities
 
422

 
424

Total liabilities
 
9,943

 
9,794

Contingencies and commitments (Note 20)
 

 

Stockholders’ Equity (Note 16):
 
 
 
 
Common stock (150,925,911 shares issued) (Note 10)
 
151

 
151

Treasury stock, at cost (6,232,397 and 6,245,666 shares)
 
(479
)
 
(480
)
Additional paid-in capital
 
3,675

 
3,667

Retained earnings
 
1,807

 
1,762

Accumulated other comprehensive loss (Note 17)
 
(1,704
)
 
(1,752
)
Total United States Steel Corporation stockholders’ equity
 
3,450

 
3,348

Noncontrolling interests
 
1

 
1

Total liabilities and stockholders’ equity
 
$
13,394

 
$
13,143


The accompanying notes are an integral part of these consolidated financial statements.

-3-



UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

 
 
Three Months Ended 
 March 31,
(Dollars in millions)
 
2014
 
2013
Increase (decrease) in cash and cash equivalents
 
 
 
 
Operating activities:
 
 
 
 
Net income (loss)
 
$
52

 
$
(73
)
Adjustments to reconcile to net cash provided by operating activities:
 
 
 
 
Depreciation, depletion and amortization
 
166

 
171

Provision for doubtful accounts
 
2

 
(1
)
Pensions and other postretirement benefits
 
(16
)
 
(11
)
Deferred income taxes
 
4

 
4

       Net (gain) loss on disposal of assets (Note 20)
 
(20
)
 
1

Currency remeasurement loss
 
7

 
19

Distributions received, net of equity investees loss (income)
 
4

 
(5
)
Changes in:
 
 
 
 
Current receivables
 
(232
)
 
(203
)
Inventories
 
260

 
166

Current accounts payable and accrued expenses
 
335

 
135

Income taxes receivable/payable
 
2

 
(16
)
Bank checks outstanding
 
26

 
33

All other, net
 
(20
)
 
13

Net cash provided by operating activities
 
570

 
233

Investing activities:
 
 
 
 
Capital expenditures
 
(90
)
 
(116
)
Disposal of assets
 
19

 

Change in restricted cash, net
 
6

 
27

Investments, net
 
(1
)
 
(3
)
Net cash used in investing activities
 
(66
)
 
(92
)
Financing activities:
 
 
 
 
Issuance of long-term debt, net of financing costs
 

 
578

Repayment of long-term debt
 

 
(542
)
Dividends paid
 
(7
)
 
(7
)
Net cash (used in) provided by financing activities
 
(7
)
 
29

Effect of exchange rate changes on cash
 
(2
)
 
(7
)
Net increase in cash and cash equivalents
 
495

 
163

Cash and cash equivalents at beginning of year
 
604

 
570

Cash and cash equivalents at end of period
 
$
1,099

 
$
733


The accompanying notes are an integral part of these consolidated financial statements.

-4-



Notes to Consolidated Financial Statements (Unaudited)
1.    Basis of Presentation
United States Steel Corporation (U. S. Steel) produces and sells steel products, including flat-rolled and tubular products, in North America and Central Europe. Operations in North America also include iron ore and coke production facilities, railroad services and real estate operations. Operations in Europe also include coke production facilities.
The year-end consolidated balance sheet data was derived from audited statements but does not include all disclosures required for complete financial statements by accounting principles generally accepted in the United States of America (U.S. GAAP). The other information in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. Additional information is contained in the United States Steel Corporation Annual Report on Form 10-K for the year ended December 31, 2013 which should be read in conjunction with these financial statements.
2.    New Accounting Standards
On February 28, 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for which the Total Amount of the Obligation Is Fixed at the Reporting Date (ASU 2013-04). ASU 2013-04 requires companies to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, as the sum of the amount a company has agreed to pay on the basis of its arrangement among its co-obligors and any additional amount a company expects to pay on behalf of its co-obligors. ASU 2013-04 also requires a company to disclose the nature and amount of the obligation as well as other information about those obligations. ASU 2013-04 was effective for interim and annual periods beginning after December 31, 2013. The adoption did not have a significant impact on U. S. Steel’s consolidated financial statements.
On March 4, 2013, the FASB issued Accounting Standards Update No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries of Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (ASU 2013-05). ASU 2013-05 applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. In addition, the amendments in ASU 2013-05 resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. ASU 2013-05 was effective for interim and annual periods beginning after December 31, 2013. The adoption did not have a significant impact on U. S. Steel’s consolidated financial statements.
On July 18, 2013, the FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). ASU 2013-11 requires the netting of unrecognized tax benefits (UTBs) against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. UTBs are required to be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. ASU 2013-11 was effective for interim and annual periods beginning after December 15, 2013. U. S. Steel early adopted ASU 2013-11 in the second quarter of 2013 on a prospective basis. The adoption did not have a significant impact on U. S. Steel's consolidated financial statements.
3.    Segment Information
U. S. Steel has three reportable segments: Flat-rolled Products (Flat-rolled), U. S. Steel Europe (USSE), and Tubular Products (Tubular). The results of several other operating segments that do not constitute reportable segments, which include railroad services and real estate operations, are combined and disclosed in the Other Businesses category.

-5-



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 (income), income taxes, postretirement benefit expenses (other than service cost and amortization of prior service cost for active employees) and certain other items that management believes are not indicative of future results. 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. The transfer value for steel rounds from Flat-rolled to Tubular is based on cost. All other intersegment sales and transfers are accounted for at market-based prices and are eliminated at the corporate consolidation level. Corporate-level selling, general and administrative expenses and costs related to certain former businesses are allocated to the reportable segments and Other Businesses based on measures of activity that management believes are reasonable.
The results of segment operations for the three months ended March 31, 2014 and 2013 are:
(In millions) First Quarter 2014
 
Customer
Sales
 
Intersegment
Sales
 
Net
Sales
 
Income
(loss)
from
investees
 
Income
(loss)
from
operations
Flat-rolled
 
$
3,027

 
$
303

 
$
3,330

 
$
(6
)
 
$
85

USSE
 
759

 
1

 
760

 

 
32

Tubular
 
643

 
1

 
644

 
2

 
24

Total reportable segments
 
4,429

 
305

 
4,734

 
(4
)
 
141

Other Businesses
 
19

 
34

 
53

 

 
13

Reconciling Items and Eliminations
 

 
(339
)
 
(339
)
 

 
(32
)
Total
 
$
4,448

 
$

 
$
4,448

 
$
(4
)
 
$
122


 
 
 
 
 
 
 
 
 
 
First Quarter 2013
 
 
 
 
 
 
 
 
 
 
Flat-rolled
 
$
3,103

 
$
335

 
$
3,438

 
$
10

 
$
(13
)
USSE
 
783

 
1

 
784

 

 
38

Tubular
 
686

 
1

 
687

 
(1
)
 
64

Total reportable segments
 
4,572

 
337

 
4,909

 
9

 
89

Other Businesses
 
23

 
34

 
57

 
(1
)
 
5

Reconciling Items and Eliminations
 

 
(371
)
 
(371
)
 

 
(56
)
Total
 
$
4,595

 
$

 
$
4,595

 
$
8

 
$
38

The following is a schedule of reconciling items to income (loss) from operations:
 
 
Three Months Ended March 31,
(In millions)
 
2014
 
2013
Items not allocated to segments:
 

 

Postretirement benefit expense (a)
 
$
(32
)
 
$
(56
)
Total reconciling items
 
$
(32
)
 
$
(56
)
(a) Consists of the net periodic benefit cost elements, other than service cost and amortization of prior service cost for active employees, associated with our pension, retiree health care and life insurance benefit plans.
 
4.     Goodwill and Intangible Assets
Goodwill represents the excess of the cost over the fair value of acquired identifiable tangible and intangible assets and liabilities assumed from businesses acquired.

-6-



Goodwill is tested for impairment at the reporting unit level annually in the third quarter and whenever events or circumstances indicate the carrying value may not be recoverable. The evaluation of goodwill impairment involves using either a qualitative or quantitative approach as outlined in Accounting Standards Codification (ASC) Topic 350. U. S. Steel completed its annual goodwill impairment evaluation using the two-step quantitative analysis during the third quarter of 2013. We had two reporting units that included nearly all of our goodwill: our Flat-rolled reporting unit and our Texas Operations reporting unit, which is part of our Tubular operating segment. The results of the second step analysis showed the implied fair value of goodwill was zero for both of our reporting units and therefore, in 2013, U. S. Steel recorded a goodwill impairment charge of $969 million and $837 million for the Flat-rolled reporting unit and the Texas Operations reporting unit.
As a result of this goodwill impairment charge, there is no goodwill remaining within the Flat-rolled and Tubular segments. Goodwill remaining on our consolidated balance sheet at March 31, 2014 is $4 million and is included as a component of other noncurrent assets.
Amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives and are detailed below:
 
 

 
As of March 31, 2014
 
As of December 31, 2013
(In millions)
 
Useful
Lives
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amount
Customer relationships
 
22-23 Years
 
$
212

 
$
64

 
$
148

 
$
215

 
$
63

 
$
152

Other
 
2-20 Years
 
23

 
13

 
10

 
23

 
12

 
11

Total amortizable intangible assets
 

 
$
235

 
$
77

 
$
158

 
$
238

 
$
75

 
$
163

The carrying amount of acquired water rights with indefinite lives as of March 31, 2014 and December 31, 2013 totaled $75 million. The water rights are tested for impairment annually in the third quarter. U. S. Steel performed a qualitative impairment evaluation of its water rights for 2013. The 2013 and prior year tests indicated the water rights were not impaired.
During 2013, U. S. Steel acquired indefinite-lived intangible assets for $12 million and entered into an agreement to make future payments contingent upon certain factors. The aggregate purchase price was $36 million, and U. S. Steel allocated $33 million to indefinite-lived intangible assets, based upon their estimated fair value. The liability for contingent consideration will be reassessed each quarter. The maximum potential liability for contingent consideration is $53 million. As of March 31, 2014, U. S. Steel has recorded a liability of $24 million to reflect the estimated fair value of the contingent consideration. Contingent consideration was valued using a probability weighted discounted cash flow using both Level 2 inputs based on 2013 Standard and Poor’s Bond Guide as well Level 3, significant other unobservable inputs, based on internal forecasts and the weighted average cost of capital derived from market data.
Identifiable intangible assets with finite lives are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. During the third quarter of 2013, U. S. Steel completed a review of its identifiable intangible assets with finite lives and determined that the assets were not impaired.
Amortization expense was $2 million in the three months ended March 31, 2014 and $3 million in the three months ended March 31, 2013. The estimated future amortization expense of identifiable intangible assets during the next five years is $8 million for the remaining portion of 2014, $11 million each year from 2015 to 2017, and $10 million for 2018.

-7-



5.    Pensions and Other Benefits
The following table reflects the components of net periodic benefit cost for the three months ended March 31, 2014 and 2013:
 
 
Pension
Benefits
 
Other
Benefits
(In millions)
 
2014
 
2013
 
2014
 
2013
Service cost
 
$
27

 
$
32

 
$
6

 
$
7

Interest cost
 
109

 
101

 
36

 
35

Expected return on plan assets
 
(153
)
 
(154
)
 
(35
)
 
(33
)
Amortization of prior service cost
 
6

 
6

 
(3
)
 
(3
)
Amortization of actuarial net loss
 
70

 
92

 
(1
)
 
8

Net periodic benefit cost, excluding below
 
59

 
77

 
3

 
14

Multiemployer plans
 
18

 
18

 

 

Settlement, termination and curtailment losses
 
$
7

 
$

 
$

 
$

Net periodic benefit cost
 
$
84

 
$
95

 
$
3

 
$
14

Employer Contributions
During the first three months of 2014, U. S. Steel made $19 million in required cash contributions to the U. S. Steel Canada (USSC) pension plans, cash payments of $17 million to the Steelworkers’ Pension Trust and $19 million of pension payments not funded by trusts.
During the first three months of 2014, cash payments of $47 million were made for other postretirement benefit payments not funded by trusts.
Company contributions to defined contribution plans totaled $12 million and $11 million in the three months ended March 31, 2014 and 2013, respectively.
    
Pension Funding
In November 2013, U. S. Steel's Board of Directors authorized voluntary contributions to U. S. Steel's trusts for pensions and other benefits of up to $300 million through the end of 2015.
6.    Net Interest and Other Financial Costs
Net interest and other financial costs includes interest expense (net of capitalized interest), interest income, financing costs, derivatives gains and losses and foreign currency remeasurement gains and losses. Foreign currency gains and losses are a result of foreign currency denominated assets and liabilities that require remeasurement. During the three months ended March 31, 2014 and 2013, net foreign currency remeasurement losses of $1 million and $9 million, respectively, were recorded in other financial costs. For the three months ended March 31, 2013, net interest and other financial costs also included a charge of $34 million related to repurchases of approximately $542 million aggregate principal amount of our 4.00% Senior Convertible Notes due May 15, 2014.
See Note 12 for additional information on U. S. Steel’s use of derivatives to mitigate its foreign currency exchange rate exposure.

7.    Stock-Based Compensation Plans

U. S. Steel has outstanding stock-based compensation awards that were granted by the Compensation & Organization Committee of the Board of Directors (the Committee) under the 2005 Stock Incentive Plan (the Plan), which is more fully described in Note 12 of the United States Steel Corporation 2013 Annual Report on Form 10-K. An aggregate of 15,450,000 shares of U. S. Steel common stock may be issued under the Plan. As of March 31, 2014, 816,145 shares were available for future grants.


-8-



During the first quarter of 2014, the Committee added return of capital employed (ROCE) as a second performance measure for the 2014 Performance Awards as permitted under the terms of the Plan. Prior to 2014, performance awards were based solely on a total shareholder return (TSR) metric. ROCE awards granted will be measured on a weighted average basis of the Company’s consolidated worldwide income from operations, as adjusted, divided by consolidated worldwide capital employed, as adjusted, over a three year period.

Weighted average ROCE is calculated based on the ROCE achieved in the first, second and third years of the performance period, weighted at 20 percent, 30 percent and 50 percent, respectively. The ROCE awards will payout at approximately 50 percent at the threshold level, 100 percent at the target level and 200 percent at the maximum level. Amounts in between the threshold percentages will be interpolated.

Compensation expense associated with the ROCE awards will be contingent based upon the achievement of the specified ROCE metric as outlined in the Plan and will be adjusted on a quarterly basis to reflect the probability of achieving the ROCE metric.
 
Recent grants of stock-based compensation consist of TSR and ROCE performance awards. The following table is a general summary of the awards made under the Plan during the first quarter of 2014.

2014 Grants
Grant Details
Shares (a) (b)
Fair Value
Performance Awards
 
 
     TSR
279,570

$
21.99

     ROCE
259,280

$
23.71

(a) The share amounts shown in this table do not reflect an adjustment for estimated forfeitures.
(b) The number of performance awards shown represents the target value of the award.
U. S. Steel recognized pre-tax stock-based compensation cost in the amount of $9 million and $10 million in the three months ended March 31, 2014 and 2013, respectively.

As of March 31, 2014, total future compensation cost related to nonvested stock-based compensation arrangements was $38 million, and the weighted average period over which this cost is expected to be recognized is approximately 12 months.

TSR performance awards vest at the end of a three-year performance period as a function of U. S. Steel's total shareholder return compared to the total shareholder return of a group of peer companies over the three-year performance period. Performance awards can vest at between zero and 200 percent of the target award. The fair value of the TSR performance awards is calculated using a Monte-Carlo simulation.

ROCE performance awards vest at the end of a three-year performance period contingent upon meeting the specified ROCE metric. ROCE performance awards can vest at between zero and 200 percent. The fair value of the ROCE performance awards is the average market price of the underlying common stock on the date of grant.
8.    Income Taxes
Tax provision
For the three months ended March 31, 2014 and 2013, we recorded a tax provision of $1 million on our pretax income of $53 million and a tax provision of $7 million on our pretax loss of $66 million, respectively. The tax provision reflects a benefit for percentage depletion in excess of cost depletion for iron ore that we produce and consume or sell. The tax provision does not reflect any tax benefit for pretax losses in Canada, which is a jurisdiction where we have recorded a full valuation allowance on deferred tax assets, and also does not reflect any tax provision or benefit for certain foreign currency remeasurement gains and losses that are not recognized in any tax jurisdiction.
The tax provision for the first three months of 2014 is based on an estimated annual effective rate, which requires management to make its best estimate of annual pretax income or loss. During the year, management regularly updates forecasted annual pretax results for the various countries in which we operate based on changes in factors such as prices, shipments, product mix, plant operating performance and cost estimates. To the extent that actual 2014 pretax results for U.S. and foreign income or loss vary from estimates applied herein, the actual

-9-



tax provision or benefit recognized in 2014 could be materially different from the forecasted amount used to estimate the tax provision for the three months ended March 31, 2014.

Income tax receivable
The income tax receivable of $184 million at March 31, 2014 primarily reflects the federal income tax refund of $176 million that we expect to receive during 2014 as a result of carrying back our 2013 net operating loss to prior years.
Unrecognized tax benefits
Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken, in a tax return and the benefit recognized for accounting purposes pursuant to the guidance in ASC Topic 740 on income taxes. The total amount of gross unrecognized tax benefits was $118 million at March 31, 2014 and $127 million at December 31, 2013. The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $68 million as of March 31, 2014 and $69 million as of December 31, 2013.
U. S. Steel records interest related to uncertain tax positions as a part of net interest and other financial costs in the Consolidated Statement of Operations. Any penalties are recognized as part of selling, general and administrative expenses. As of both March 31, 2014 and December 31, 2013, U. S. Steel had accrued liabilities of $7 million for interest related to uncertain tax positions. U. S. Steel currently does not have a liability for tax penalties.
Deferred taxes
As of March 31, 2014, the net domestic deferred tax asset was $56 million compared to $88 million at December 31, 2013. A substantial amount of U. S. Steel’s domestic deferred tax assets relates to employee benefits that will become deductible for tax purposes over an extended period of time as cash contributions are made to employee benefit plans and retiree benefits are paid in the future. We continue to believe it is more likely than not that the net domestic deferred tax asset will be realized.
As of March 31, 2014, the net foreign deferred tax asset was $60 million, net of established valuation allowances of $1,002 million. At December 31, 2013, the net foreign deferred tax asset was $59 million, net of established valuation allowances of $1,028 million. The net foreign deferred tax asset will fluctuate as the value of the U.S. dollar changes with respect to the euro and the Canadian dollar. At both March 31, 2014 and December 31, 2013, a full valuation allowance was recorded for the net Canadian deferred tax asset primarily due to cumulative losses in Canada.
If evidence changes and it becomes more likely than not that the Company will realize the net Canadian deferred tax asset, the valuation allowance would be partially or fully reversed. Any reversal of this amount would result in a decrease to income tax expense.
9.    Significant Equity Investments
Summarized unaudited income statement information for our significant equity investments for the three months ended March 31, 2014 and 2013 is reported below (amounts represent 100% of investee financial information):
(In millions)
 
2014
 
2013
Net sales
 
$
254

 
$
291

Cost of sales
 
199

 
185

Operating income
 
54

 
104

Net income
 
54

 
104

Net income attributable to significant equity investments
 
54

 
104

U. S. Steel’s portion of the equity in net income of the significant equity investments above was $10 million and $5 million for the three months ended March 31, 2014 and 2013, respectively, which is included in the income from investees line on the Consolidated Statement of Operations.

-10-




10.    Earnings and Dividends Per Common Share
Earnings Per Share Attributable to United States Steel Corporation Shareholders
Basic earnings per common share is based on the weighted average number of common shares outstanding during the period.
Diluted earnings per common share assumes the exercise of stock options, the vesting of restricted stock units and performance awards and the conversion of convertible notes, provided in each case the effect is dilutive. The “if-converted” method is used to calculate the dilutive effect of the Senior Convertible Notes due May 2014 and the “treasury stock” method is used to calculate the dilutive effect of the Senior Convertible Notes due in 2019 (due to our current intent and policy, among other factors, to settle the principal amount of the 2019 Senior Convertible Notes in cash upon conversion).
The computations for basic and diluted earnings per common share from continuing operations are as follows:
 
 
Three Months Ended March 31,
(Dollars in millions, except per share amounts)
 
2014
 
2013
Net income (loss) attributable to United States Steel
 

 

Corporation shareholders
 
$
52

 
$
(73
)
Plus income effect of assumed conversion-interest on convertible notes
 
2

 

Net income (loss) after assumed conversion
 
$
54

 
$
(73
)
Weighted-average shares outstanding (in thousands):
 

 

Basic
 
144,757

 
144,353

Effect of convertible notes
 
10,058

 

Effect of stock options, restricted stock units and performance awards
 
1,299

 

Adjusted weighted-average shares outstanding, diluted
 
156,114

 
144,353

Basic earnings per common share
 
$
0.36

 
$
(0.51
)
Diluted earnings per common share
 
$
0.34

 
$
(0.51
)
The following table summarizes the securities that were antidilutive, and therefore, were not included in the computations of diluted earnings per common share:
 
 
Three Months Ended March 31,
 
(In thousands)
 
2014
 
2013
 
Securities granted under the 2005 Stock Incentive Plan
 
2,336

 
5,537

 
Securities convertible under the Senior Convertible Notes
 

 
26,114

(a) 
Total
 
2,336

 
31,651

 
(a) On March 27, 2013, we repurchased approximately $542 million aggregate principal amount of our 4% Senior Convertible Notes due May 2014. If the repurchases had occurred on January 1, 2013, the antidilutive securities would be 10,058 for the three months ended March 31, 2013.
Dividends Paid Per Share
The dividend for first quarter of 2014 and 2013 was five cents per common share.
11.    Inventories
Inventories are carried at the lower of cost or market. The first-in, first-out method is the predominant method of inventory costing in Europe and Canada. The last-in, first-out (LIFO) method is the predominant method of inventory costing in the United States. At March 31, 2014 and December 31, 2013, the LIFO method accounted for 65 percent and 59 percent of total inventory values, respectively.

-11-



(In millions)
 
March 31, 2014
 
December 31, 2013
Raw materials
 
$
691

 
$
1,011

Semi-finished products
 
1,027

 
1,023

Finished products
 
604

 
558

Supplies and sundry items
 
89

 
96

Total
 
$
2,411

 
$
2,688

Current acquisition costs were estimated to exceed the above inventory values by $1.0 billion at both March 31, 2014 and December 31, 2013. Cost of sales increased and income from operations decreased by $9 million in the first three months of 2014 as a result of the liquidation of LIFO inventories. The effect of liquidations of LIFO inventories was insignificant for the three months ended March 31, 2013.
Inventory includes $80 million and $81 million of property held for residential or commercial development as of March 31, 2014 and December 31, 2013, respectively.
12.    Derivative Instruments
U. S. Steel is exposed to foreign currency exchange rate risks as a result of our European and Canadian operations. USSE’s revenues are primarily in euros and costs are primarily in U.S. dollars and euros. USSC’s revenues and costs are denominated in both Canadian and U.S. dollars. In addition, foreign cash requirements have been, and in the future may be, funded by intercompany loans, creating intercompany monetary assets and liabilities in currencies other than the functional currency of the entities involved, which can affect income when remeasured at the end of each period.
U. S. Steel uses euro forward sales contracts with maturities no longer than 12 months to exchange euros for U.S. dollars to manage our currency requirements and exposure to foreign currency exchange rate fluctuations. Derivative instruments are required to be recognized at fair value in the balance sheet. U. S. Steel has not elected to designate these euro forward sales contracts as hedges. Therefore, changes in their fair value are recognized immediately in the results of operations. The gains and losses recognized on the euro forward sales contracts may also partially offset the accounting remeasurement gains and losses recognized on intercompany loans.
As of March 31, 2014, U. S. Steel held euro forward sales contracts with a total notional value of approximately $321 million. We mitigate the risk of concentration of counterparty credit risk by purchasing our forward sales contracts from several counterparties.
Additionally, U. S. Steel uses fixed-price forward physical purchase contracts to partially manage our exposure to price risk related to the purchases of natural gas and certain nonferrous metals used in the production process. During 2014 and 2013, the forward physical purchase contracts for natural gas and nonferrous metals qualified for the normal purchases and normal sales exemption described in ASC Topic 815 and were not subject to mark-to-market accounting.



-12-



The following summarizes the location and amounts of the fair values and gains or losses related to derivatives included in U. S. Steel’s financial statements as of March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013:
 
 
 
 
Fair Value
 
Fair Value
(In millions)
 
Balance Sheet
Location
 
March 31, 2014
 
December 31, 2013
Foreign exchange forward contracts
 
Accounts payable
 
$
8

 
$
11

 
 
Statement of
Operations
Location
 
Amount of Gain
(Loss)
 
Amount of Gain
(Loss)
(In millions)
 
 
Three Months Ended March 31, 2014
 
Three Months Ended March 31, 2013
Foreign exchange forward contracts
 
Other financial
costs
 
$

 
$
11

In accordance with the guidance found in ASC Topic 820 on fair value measurements and disclosures, the fair value of our euro forward sales contracts was determined using Level 2 inputs, which are defined as “significant other observable” inputs. The inputs used are from market sources that aggregate data based upon market transactions.
13.    Debt
(In millions)
 
Interest
Rates %
 
Maturity
 
March 31, 2014
 
December 31, 2013
2037 Senior Notes
 
6.65
 
2037
 
$
350

 
$
350

2022 Senior Notes
 
7.50
 
2022
 
400

 
400

2021 Senior Notes
 
6.875
 
2021
 
275

 
275

2020 Senior Notes
 
7.375
 
2020
 
600

 
600

2018 Senior Notes
 
7.00
 
2018
 
500

 
500

2017 Senior Notes
 
6.05
 
2017
 
450

 
450

2019 Senior Convertible Notes
 
2.75
 
2019
 
316

 
316

2014 Senior Convertible Notes
 
4.00
 
2014
 
322

 
322

Province Note (C$150 million)
 
1.00
 
2015
 
136

 
141

Environmental Revenue Bonds
 
5.38 - 6.88
 
2015 - 2042
 
549

 
549

Recovery Zone Facility Bonds
 
6.75
 
2040
 
70

 
70

Fairfield Caster Lease
 
 
 
2022
 
35

 
35

Other capital leases and all other obligations
 
 
 
2014
 

 

Amended Credit Agreement
 
Variable
 
2016
 

 

USSK Revolver
 
Variable
 
2016
 

 

USSK credit facility
 
Variable
 
2015
 

 

Total Debt
 
 
 
 
 
4,003

 
4,008

Less Province Note fair value adjustment
 
 
 
 
 
13

 
15

Less unamortized discount
 
 
 
 
 
52

 
54

Less short-term debt and long-term debt due within one year
 
 
 
 
 
323

 
323

Long-term debt
 
 
 
 
 
$
3,615

 
$
3,616

To the extent not otherwise discussed below, information concerning the Senior Notes, the Senior Convertible Notes and other listed obligations can be found in Note 14 of the audited financial statements in the 2013 Annual Report on Form 10-K.

-13-



Amended Credit Agreement
As of March 31, 2014, there were no amounts drawn on the Amended Credit Agreement and inventory values calculated in accordance with the Amended Credit Agreement supported the full $875 million of the facility. Under the Amended Credit Agreement, U. S. Steel must maintain a fixed charge coverage ratio (as further defined in the Amended Credit Agreement) of at least 1.00 to 1.00 for the most recent four consecutive quarters when availability under the Amended Credit Agreement is less than the greater of 10% of the total aggregate commitments and $87.5 million. Since availability was greater than $87.5 million, compliance with the fixed charge coverage ratio covenant was not applicable. Based on the most recent four quarters as of March 31, 2014, we would not have met this covenant. If the value of inventory does not support the full amount of the facility or we are not able to meet this covenant in the future, the full amount of this facility would not be available to the Company.

In addition, beginning on February 13, 2014 and extending until the repayment or conversion of the $322 million of 4.00% Senior Convertible Notes due May 2014, we must maintain minimum liquidity (as further defined in the Amended Credit Agreement) of at least $175 million. The minimum liquidity must include at least $145 million of availability under the Amended Credit Agreement.
Receivables Purchase Agreement
As of March 31, 2014, U. S. Steel has a Receivables Purchase Agreement (RPA) under which trade accounts receivable are sold, on a daily basis without recourse, to U. S. Steel Receivables, LLC (USSR), a wholly owned, bankruptcy-remote, special purpose entity used only for the securitization program. As U. S. Steel accesses this facility, USSR sells senior undivided interests in the receivables to a third-party and a third-party commercial paper conduit, while maintaining a subordinated undivided interest in a portion of the receivables. U. S. Steel has agreed to continue servicing the sold receivables at market rates.
At both March 31, 2014 and December 31, 2013, eligible accounts receivable supported $625 million of availability under the RPA and there were no receivables sold to third-party conduits under this facility. The subordinated retained interest was $625 million at both March 31, 2014 and December 31, 2013. Availability under the RPA was $573 million at March 31, 2014, and $572 million at December 31, 2013, due to letters of credit outstanding of $52 million and $53 million, respectively.
USSR pays the third parties a discount based on the third-parties’ borrowing costs plus incremental fees. We paid approximately $1 million in each of the three month periods ended March 31, 2014 and 2013, relating to fees on the RPA. These costs are included in other financial costs in the Consolidated Statement of Operations.
Generally, the facility provides that as payments are collected from the sold accounts receivables, USSR may elect to have the third-parties reinvest the proceeds in new eligible accounts receivable. As there was no activity under this facility during the three months ended March 31, 2014 and 2013, there were no collections reinvested.
The eligible accounts receivable and receivables sold to third party conduits are summarized below:
(In millions)
 
March 31, 2014
 
December 31, 2013
Balance of accounts receivable-net, eligible for sale to third-parties
 
$
1,161

 
$
988

Accounts receivable sold to third-parties
 

 

Balance included in Receivables on the balance sheet of U. S. Steel
 
$
1,161

 
$
988

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. The retained interest in the receivables is recorded net of the allowance for bad debts, which historically have not been significant.
The facility may be terminated on the occurrence and failure to cure certain events, including, among others, failure of USSR to maintain certain ratios related to the collectability of the receivables and failure to make payment under its material debt obligations, and may also be terminated upon a change of control. The facility expires in July 2016.

-14-



U. S. Steel Košice (USSK) credit facilities
At March 31, 2014, USSK had no borrowings under its €200 million (approximately $276 million) unsecured revolving credit facility (the Credit Agreement). The Credit Agreement contains certain USSK financial covenants (as further defined in the Credit Agreement), including maximum Leverage, maximum Net Debt to Tangible Net Worth, and minimum Interest Cover ratios. The covenants are measured semi-annually for the period covering the last twelve calendar months. USSK may not draw on the Credit Agreement if it does not comply with any of the financial covenants until the next measurement date. The Credit Agreement expires in July 2016.
At March 31, 2014, USSK had no borrowings under its €20 million and €10 million unsecured credit facilities (collectively approximately $41 million) and the availability was approximately $40 million due to approximately $1 million of customs and other guarantees outstanding.
Change in control event
If there is a change in control of U. S. Steel, the following may occur: (a) debt obligations totaling $3,212 million as of March 31, 2014 (including the Senior Notes and Senior Convertible Notes) may be declared immediately due and payable; (b) the Amended Credit Agreement, the RPA and USSK’s €200 million revolving credit agreement may be terminated and any amounts outstanding declared immediately due and payable; and (c) U. S. Steel may be required to either repurchase the leased Fairfield Works slab caster for $39 million or provide a letter of credit to secure the remaining obligation.
14.    Asset Retirement Obligations
U. S. Steel’s asset retirement obligations (AROs) primarily relate to mine and landfill closure and post-closure costs. The following table reflects changes in the carrying values of AROs:
(In millions)
 
March 31, 2014
 
December 31, 2013
Balance at beginning of year
 
$
59

 
$
33

Additional obligations incurred
 

 
28

Obligations settled
 
(2
)
 
(7
)
Accretion expense
 
1

 
5

Balance at end of period
 
$
58

 
$
59

Certain AROs related to disposal costs of the majority of fixed assets at our integrated steel facilities have not been recorded because they have an indeterminate settlement date. These AROs will be initially recognized in the period in which sufficient information exists to estimate their fair value.

-15-




15.    Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, current accounts and notes receivable, accounts payable, bank checks outstanding and accrued interest included in the Consolidated Balance Sheet approximate fair value. See Note 12 for disclosure of U. S. Steel’s derivative instruments, which are accounted for at fair value on a recurring basis.
The following table summarizes U. S. Steel’s financial assets and liabilities that were not carried at fair value at March 31, 2014 and December 31, 2013.
 
 
March 31, 2014
 
December 31, 2013
(In millions)
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
Financial assets:
 

 

 

 

Investments and long-term receivables (a)
 
$
54

 
$
54

 
$
63

 
$
63

Financial liabilities:
 

 

 

 

Debt (b)
 
$
4,218

 
$
3,903

 
$
4,198

 
$
3,904

(a) Excludes equity method investments.
(b) Excludes capital lease obligations.
The following methods and assumptions were used to estimate the fair value of financial instruments included in the table above:
Investments and long-term receivables: Fair value was based on Level 2 inputs which were discounted cash flows. U. S. Steel is subject to market risk and liquidity risk related to its investments.
Long-term debt instruments: Fair value was determined using Level 2 inputs which were derived from quoted market prices and is based on the yield on public debt where available or current borrowing rates available for financings with similar terms and maturities.
Fair value of the financial assets and liabilities disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.
Financial guarantees are U. S. Steel’s only unrecognized financial instrument. For details relating to financial guarantees see Note 20.


-16-



16.    Statement of Changes in Stockholders’ Equity

The following table reflects the first three months of 2014 and 2013 reconciliation of the carrying amount of total equity, equity attributable to U. S. Steel and equity attributable to noncontrolling interests:
Three Months Ended March 31, 2014 (In millions)
 
Total
 
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Common
Stock
 
Treasury
Stock
 
Paid-in
Capital
 
Non-
Controlling
Interest
Balance at beginning of year
 
$
3,349

 

 
$
1,762

 
$
(1,752
)
 
$
151

 
$
(480
)
 
$
3,667

 
$
1

Comprehensive income:
 

 

 

 

 

 

 

 

Net income
 
52

 
52

 
52

 

 

 

 

 

Other comprehensive income (loss), net of tax:
 

 

 

 

 

 

 

 

Pension and other benefit adjustments
 
50

 
50

 

 
50

 

 

 

 

Currency translation adjustment
 
(2
)
 
(2
)
 

 
(2
)
 

 

 

 

Employee stock plans
 
9

 

 

 

 

 
1

 
8

 

Dividends paid on common stock
 
(7
)
 

 
(7
)
 

 

 

 

 

Balance at March 31, 2014
 
$
3,451

 
$
100

 
$
1,807

 
$
(1,704
)
 
$
151

 
$
(479
)
 
$
3,675

 
$
1

Three Months Ended March 31, 2013 (In millions)
 
Total
 
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Common
Stock
 
Treasury
Stock
 
Paid-in
Capital
 
Non-
Controlling
Interest
Balance at beginning of year
 
$
3,478

 

 
$
3,463

 
$
(3,268
)
 
$
151

 
$
(521
)
 
$
3,652

 
$
1

Comprehensive income:
 

 

 

 

 

 

 

 

Net loss
 
(73
)
 
(73
)
 
(73
)
 

 

 

 

 

Other comprehensive income (loss), net of tax:
 

 

 

 

 

 

 

 

Pension and other benefit adjustments
 
69

 
69

 

 
69

 

 

 

 

Currency translation adjustment
 
(37
)
 
(37
)
 

 
(37
)
 

 

 

 

Issuance of conversion option in 2019 Senior Convertible Notes, net of tax
 
32

 
 
 
 
 
 
 
 
 
 
 
32

 
 
Employee stock plans
 
10

 

 

 

 

 
1

 
9

 

Dividends paid on common stock
 
(7
)
 

 
(7
)
 

 

 

 

 

Other
 
(1
)
 


 
(1
)
 


 


 


 


 

Balance at March 31, 2013
 
$
3,471

 
$
(41
)
 
$
3,382

 
$
(3,236
)
 
$
151

 
$
(520
)
 
$
3,693

 
$
1



-17-



17.    Reclassifications from Accumulated Other Comprehensive Income (AOCI)
(In millions) (a)
 
Pension and
Other Benefit
Items
 
Foreign
Currency
Items
 
Total
Balance at December 31, 2013
 
$
(2,127
)
 
$
375

 
$
(1,752
)
Other comprehensive (loss) income before reclassifications
 
(1
)
 
(2
)
 
(3
)
Amounts reclassified from AOCI (b)
 
51

 

 
51

Net current-period other comprehensive income
 
50

 
(2
)
 
48

Balance at March 31, 2014
 
$
(2,077
)
 
$
373

 
$
(1,704
)
(a)All amounts are net of tax. Amounts in parentheses indicate debits.
(b)See table below for further details.
 
 
 
 
Amount reclassified
from AOCI
(In millions) (a)
 
Details about AOCI components
 
Three Months Ended March 31, 2014
 
Three Months Ended March 31, 2013
 
 
 
Amortization of pension and other benefit items
 
 
 
 
 
 
 
Prior service costs
 
$
(10
)
(b) 
$
(3
)
(b) 
 
 
Actuarial gains/(losses)
 
(69
)
(b) 
(100
)
(b) 
 
 
Total before tax
 
(79
)
 
(103
)
 
 
 
Tax benefit
 
28

 
34

 
 
 
Net of tax
 
$
(51
)
 
$
(69
)
 
(a)Amounts in parentheses indicate debits to income/loss.
(b)These AOCI components are included in the computation of net periodic benefit cost (see Note 5 for additional details).
18.    Transactions with Related Parties
Net sales to related parties and receivables from related parties primarily reflect sales of steel products to equity investees. Generally, transactions are conducted under long-term market-based contractual arrangements. Related party sales and service transactions were $279 million and $278 million for the three months ended March 31, 2014 and 2013, respectively.
Purchases from related parties for outside processing services provided by equity investees amounted to $15 million and $19 million for the three months ended March 31, 2014 and 2013, respectively. Purchases of iron ore pellets from related parties amounted to $54 million and $64 million for the three months ended March 31, 2014 and 2013, respectively.
Accounts payable to related parties include balances due to PRO-TEC Coating Company (PRO-TEC) of $99 million and $70 million at March 31, 2014 and December 31, 2013, respectively for invoicing and receivables collection services provided by U. S. Steel. U. S. Steel, as PRO-TEC’s exclusive sales agent, is responsible for credit risk related to those receivables. U. S. Steel also provides PRO-TEC marketing, selling and customer service functions. Payables to other related parties totaled $11 million and $3 million at March 31, 2014 and December 31, 2013, respectively.

-18-




19. Restructuring and Other Charges

During the fourth quarter of 2013, the Company implemented certain headcount reductions and production facility closures related to our iron and steelmaking facilities at Hamilton Works in Canada, barge operations related to Warrior and Gulf Navigation (WGN) in Alabama and administrative headcount reductions at our Hamilton Works and Lake Erie Works also in Canada. We closed our iron and steelmaking facilities at Hamilton Works effective December 31, 2013. Charges for restructuring and ongoing cost reduction initiatives are recorded in the period the Company commits to a restructuring or cost reduction plan, or executes specific actions contemplated by the plan and all criteria for liability recognition have been met. Charges related to the restructuring and cost reductions include severance costs, accelerated depreciation and other closure costs.
The activity in the accrued balances incurred in relation to restructuring and other cost reduction programs during the three months ended March 31, 2014 were as follows:
 
 
Severance
 
Exit
(in millions)
 
Accrual
 
Costs
 
 
 
 
 
Balance at December 31, 2013
 
$
16

 
$
6

 
 
 
 
 
Additional charges (a)
 
2

 

Cash payments/utilization
 
(2
)
 
(2
)
Other adjustments and re-classes (b)
 
(8
)
 

 
 
 
 
 
Balance at March 31, 2014
 
$
8

 
$
4


(a) Additional severance charges incurred during the first quarter related to employees at USSC.
(b) Adjustments primarily related to changes in estimates and early retirements at USSC.

Accrued liabilities for restructuring and other cost reduction programs are included in the following balance sheet lines:
(in millions)
 
March 31, 2014
 
December 31, 2013
Accounts payable
 
$
4

 
$
6

Payroll and benefits payable
 
6

 
8

Employee benefits
 
2

 
8

Total
 
$
12

 
$
22


20.    Contingencies and Commitments
U. S. Steel is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. However, management believes that U. S. Steel will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably.
U. S. Steel accrues for estimated costs related to existing lawsuits, claims and proceedings when it is probable that it will incur these costs in the future.
Asbestos matters As of March 31, 2014, U. S. Steel was a defendant in approximately 700 active cases involving approximately 3,350 plaintiffs. Many of these cases involve multiple defendants (typically from fifty to more than one hundred). About 2,560, or approximately 76 percent, of these plaintiff claims are currently pending in jurisdictions which permit filings with massive numbers of plaintiffs. Based upon U. S. Steel’s experience in such cases, it believes that the actual number of plaintiffs who ultimately assert claims against U. S. Steel will likely be a small fraction of the total number of plaintiffs. During the three months ended March 31,

-19-



2014, U. S. Steel paid approximately $1 million in settlements. These settlements and other dispositions resolved approximately 45 claims. New case filings in the first three months of 2014 added approximately 75 claims. At December 31, 2013, U. S. Steel was a defendant in approximately 720 active cases involving approximately 3,320 plaintiffs. During 2013, U. S. Steel paid approximately $11 million in settlements. These settlements and other dispositions resolved approximately 250 claims. New case filings in the year ended December 31, 2013 added approximately 240 claims. Most claims filed in 2014 and 2013 involved individual or small groups of claimants as many jurisdictions no longer permit the filing of mass complaints.
Historically, these claims against U. S. Steel fall into three major groups: (1) claims made by persons who allegedly were exposed to asbestos at U. S. Steel facilities (referred to as “premises claims”); (2) claims made by industrial workers allegedly exposed to products manufactured by U. S. Steel; and (3) claims made under certain federal and general maritime laws by employees of former operations of U. S. Steel. In general, the only insurance available to U. S. Steel with respect to asbestos claims is excess casualty insurance, which has multi-million dollar retentions. To date, U. S. Steel has received minimal payments under these policies relating to asbestos claims.
These asbestos cases allege a variety of respiratory and other diseases based on alleged exposure to asbestos. U. S. Steel is currently a defendant in cases in which a total of approximately 235 plaintiffs allege that they are suffering from mesothelioma. The potential for damages against defendants may be greater in cases where the plaintiffs can prove mesothelioma.
In many cases in which claims have been asserted against U. S. Steel, the plaintiffs have been unable to establish any causal relationship to U. S. Steel or our products or premises; however, with the decline in mass plaintiff cases, the incidence of claimants actually alleging a claim against U. S. Steel is increasing. In addition, in many asbestos cases, the plaintiffs have been unable to demonstrate that they have suffered any identifiable injury or compensable loss at all; that any injuries that they have incurred did in fact result from alleged exposure to asbestos; or that such alleged exposure was in any way related to U. S. Steel or our products or premises.
The amount U. S. Steel has accrued for pending asbestos claims is not material to U. S. Steel’s financial position. U. S. Steel does not accrue for unasserted asbestos claims because it is not possible to determine whether any loss is probable with respect to such claims or even to estimate the amount or range of any possible losses. The vast majority of pending claims against U. S. Steel allege so-called “premises” liability-based alleged exposure on U. S. Steel’s current or former premises. These claims are made by an indeterminable number of people such as truck drivers, railroad workers, salespersons, contractors and their employees, government inspectors, customers, visitors and even trespassers. In most cases the claimant also was exposed to asbestos in non-U. S. Steel settings; the relative periods of exposure between U. S. Steel and non-U. S. Steel settings vary with each claimant; and the strength or weakness of the causal link between U. S. Steel exposure and any injury vary widely as do the nature and severity of the injury claimed.
We are unable to estimate the ultimate outcome of asbestos-related lawsuits, claims and proceedings due to the unpredictable nature of personal injury litigation. Despite this uncertainty, management believes that the ultimate resolution of these matters will not have a material adverse effect on U. S. Steel’s financial condition, although the resolution of such matters could significantly impact results of operations for a particular quarter. Among the factors considered in reaching this conclusion are: (1) it has been many years since U. S. Steel employed maritime workers or manufactured or sold asbestos containing products; (2) most asbestos containing material was removed or remediated at U. S. Steel facilities many years ago; and (3) U. S. Steel’s history of trial outcomes, settlements and dismissals.

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Environmental matters U. S. Steel is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. Changes in accrued liabilities for remediation activities where U. S. Steel is identified as a named party are summarized in the following table:
(In millions)
Three Months Ended March 31, 2014
Beginning of period
$
233

Accruals for environmental remediation deemed probable and reasonably estimable
1

Payments
(3
)
End of period
$
231

Accrued liabilities for remediation activities are included in the following balance sheet lines:
(In millions)
 
March 31, 2014
 
December 31, 2013
Accounts payable
 
$
17

 
$
17

Deferred credits and other noncurrent liabilities
 
214

 
216

Total
 
$
231

 
$
233

Expenses related to remediation are recorded in cost of sales and totaled $1 million and $4 million for the three months ended March 31, 2014 and 2013, 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. Due to uncertainties inherent in remediation projects and the associated liabilities, it is possible that total remediation costs for active matters may exceed the accrued liabilities by as much as 10 to 25 percent.
Remediation Projects
U. S. Steel is involved in environmental remediation projects at or adjacent to several current and former U. S. Steel facilities and other locations that are in various stages of completion ranging from initial characterization through post-closure monitoring. Based on the anticipated scope and degree of uncertainty of projects, we categorize projects as follows:
(1)
Projects with Ongoing Study and Scope Development are those projects which are still in the study and development phase. For these projects the extent of remediation that may be required is not yet known, the remediation methods and plans are not yet developed, and cost estimates cannot be determined. Therefore, significant costs, in addition to the accrued liabilities for these projects, are reasonably possible.
(2)
Significant Projects with Defined Scope are those projects with significant accrued liabilities, a defined scope and little likelihood of material additional costs.
(3)
Other Projects are those projects with relatively small accrued liabilities for which we believe that, while additional costs are possible, they are not likely to be significant, and those projects for which we do not yet possess sufficient information to estimate potential costs to U. S. Steel.
Projects with Ongoing Study and Scope Development – There are five environmental remediation projects where reasonably possible additional costs for completion are not currently estimable, but could be material. These projects are four Resource Conservation and Recovery Act (RCRA) programs (at Fairfield Works, Lorain Tubular, USS-POSCO Industries (UPI) and the Fairless Plant) and a voluntary remediation program at the former steelmaking plant at Joliet, Illinois. As of March 31, 2014, accrued liabilities for these projects totaled $2 million for the costs of studies, investigations, interim measures, design and/or remediation. It is reasonably possible that additional liabilities associated with future requirements regarding studies, investigations, design and remediation for these projects could be as much as $25 million to $40 million.
Significant Projects with Defined Scope – As of March 31, 2014, there are four significant projects with defined scope greater than or equal to $5 million each, with a total accrued liability of $176 million. These projects are: Gary RCRA currently accrued at $53 million, the former Geneva facility currently accrued at $64 million, the

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former Duluth facility St. Louis River Estuary currently accrued at $52 million, and the Solid Waste Management Unit (SWMU) #4 at UPI currently accrued at $7 million.
Other Projects – There are six other environmental remediation projects which each had an accrued liability of between $1 million and $5 million. The total accrued liability for these projects at March 31, 2014 was $13 million. These projects have progressed through a significant portion of the design phase and material additional costs are not expected.
The remaining environmental remediation projects each had an accrued liability of less than $1 million. The total accrued liability for these projects at March 31, 2014 was $6 million. We do not foresee material additional liabilities for any of these sites.
Post-Closure Costs – Accrued liabilities for post-closure site monitoring and other costs at various closed landfills totaled $28 million at March 31, 2014 and were based on known scopes of work.
Administrative and Legal Costs – As of March 31, 2014, U. S. Steel had an accrued liability of $6 million for administrative and legal costs related to environmental remediation projects. These accrued liabilities were based on projected administrative and legal costs for the next three years and have not changed significantly from year to year.
Capital Expenditures For a number of years, U. S. Steel has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first three months of 2014 and 2013, such capital expenditures totaled $11 million and $10 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.
CO2 Emissions – Current and potential regulation of greenhouse gas (GHG) emissions remains a significant issue for the steel industry, particularly for integrated steel producers such as U. S. Steel. The regulation of carbon dioxide (CO2) emissions has either become law or is being considered by legislative bodies of many nations, including countries where we have operating facilities. The European Union (EU) has established GHG regulations based upon national allocations and a cap and trade system. In Canada, both the federal and Ontario governments have issued proposed requirements for GHG emissions. In the United States, the Environmental Protection Agency (EPA) has published rules for regulating GHG emissions for certain facilities and has implemented various reporting requirements as further described below. In 2010, GHG legislation was passed in the House of Representatives and introduced in the Senate. The federal courts are considering several suits that challenge the EPA’s authority to regulate GHG emissions under the Clean Air Act (CAA). We do not know what action, if any, may be taken by the current or future sessions of Congress.
The European Commission (EC) has created an Emissions Trading System (ETS) and starting in 2013, the ETS began to employ centralized allocation, rather than national allocation plans, that are more stringent than the previous requirements. The ETS also includes a cap designed to achieve an overall reduction of GHGs for the ETS sectors of 21% in 2020 compared to 2005 emissions and auctioning as the basic principle for allocating emissions allowances, with some transitional free allocation provided on the basis of benchmarks for manufacturing industries under risk of transferring their production to other countries with lesser constraints on greenhouse gas emissions or carbon leakage. Manufacturing of sinter, coke oven products, basic iron and steel, ferro-alloys and cast iron tubes have all been recognized as exposing companies to a significant risk of carbon leakage, but the ETS is still expected to lead to additional costs for steel companies in Europe. The EU has imposed limitations under the ETS for the period 2013-2020 (Phase III) that are more stringent than those in NAP II, reducing the number of free allowances granted to companies to cover their CO2 emissions.
In September of 2013, the EC issued EU wide legislation further reducing the expected free allocation for Phase III by an average of approximately 12% for the Phase III period. USSK's final allocation for the Phase III period that was approved by the EC in January is approximately 48 million allowances. Based on 2013 emission intensity levels and projected future production levels and as a result of carryover allowances from the NAP II period, we do not currently expect to need to purchase credits until 2019 and currently estimate a shortfall of 14 million allowances for the Phase III period. However, due to a number of variable factors such as the future market value of allowances, future production levels and future emission intensity levels, we cannot reliably estimate the full cost of complying with the ETS regulations at this time.
U. S. Steel entered into transactions to sell and swap a portion of our emission allowances and recognized gains related to these transactions which are reflected in the net gain on disposal of assets line in the

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Consolidated Statements of Operations. U. S. Steel recognized gains of $17 million during the three months ended March 31, 2014. There were no such similar transactions for the three months ended March 31, 2013.
On May 13, 2010, the EPA published its final Greenhouse Gas Tailoring Rule establishing a mechanism for regulating GHG emissions from facilities through the CAA’s Prevention of Significant Deterioration (PSD) permitting process. U. S. Steel reported its emissions under these rules in accordance with the regulation and its deadlines. Since 2011, new projects that increase GHG emissions by more than 75,000 tons per year have new PSD requirements based on best available control technology (BACT), but only if the project also significantly increases emissions of at least one non-GHG pollutant. Only existing sources with Title V permits or new sources obtaining Title V permits for non-GHG pollutants will also be required to address GHG emissions. As of July 1, 2011, new sources not already subject to Title V requirements that emit over 100,000 tons per year, or modifications to existing permits that increase GHG emissions by more than 75,000 tons per year, are subject to PSD and Title V requirements. On November 17, 2010 the EPA issued its “PSD and Title V Permitting Guidance for Greenhouse Gases” and “Available and Emerging Technologies for Reducing Greenhouse Gas Emissions from the Iron and Steel Industry.” With this guidance, EPA intends to help state and local air permitting authorities identify GHG reductions under the CAA. Additionally, the EPA revised the National Ambient Air Quality Standards (NAAQS) for nitrogen oxide, sulfur dioxide and lead in 2010 and is in the process of revising the NAAQS for 2.5 micron particulate matter, ozone and sulfur dioxides.
It is impossible to estimate the timing or impact of these or other future government action on U. S. Steel, although it could be significant. Such impacts may include substantial capital expenditures, costs for emission allowances, restriction of production, and higher prices for coking coal, natural gas and electricity generated by carbon based systems.
European Union (EU) Environmental Requirements – Slovakia is currently considering a law implementing an EU Waste Framework Directive that would more strictly regulate waste disposal and increase fees for waste disposed of in landfills including privately owned landfills. The intent of the waste directive is to encourage recycling but because Slovakia has not adopted implementing legislation, we cannot estimate the full financial impact of this prospective legislation at this time.
The EU’s Industry Emission Directive will require implementation of EU determined best available techniques (BAT) to reduce environmental impacts as well as compliance with BAT associated emission levels. This directive includes operational requirements for air emissions, wastewater discharges, solid waste disposal and energy conservation, dictates certain operating practices and imposes stricter emission limits. Producers will be required to be in compliance with the iron and steel BAT by March 8, 2016, unless specific extensions are granted by the Slovak environmental authority. We are currently evaluating the costs of complying with BAT, but our most recent broad estimate of likely capital expenditures is $200 million to $250 million over the 2014 to 2016 period. We are currently investigating the possibility of obtaining EU grants to fund a portion of these capital expenditures. We also believe there will be increased operating costs, such as increased energy and maintenance costs, but we are currently unable to reliably estimate them.
Due to other EU legislation, we will be required to make changes to the boilers at our steam and power generation plant in order to comply with stricter air emission limits. In January of 2014, the operation of USSK's boilers was approved by the EC as part of Slovakia's Transitional National Plan (TNP) for bringing all boilers in Slovakia into BAT compliance by no later than 2020. The TNP establishes parameters for determining the date by which specific boilers are required to reach compliance with the new air standards, which has been determined to be October 2017 for our boilers. This gives us the flexibility of delaying the completion of the project to upgrade our boilers to no later than that date, although we may choose to accelerate the implementation of this project in order to qualify for supplementary support payments as part of Slovakia’s renewable energy program. This will result in a reduction in electricity costs once the project is completed. The current projected cost to reconstruct one existing boiler and build one new boiler to achieve compliance is broadly estimated at $150 million.
Environmental and other indemnifications – Throughout its history, U. S. Steel has sold numerous properties and businesses, and many of these sales included indemnifications and cost sharing agreements related to the assets that were sold. These indemnifications and cost sharing agreements have related to the condition of the property, the approved use, certain representations and warranties, matters of title and environmental matters. While most of these provisions have not specifically dealt with environmental issues, there have been transactions in which U. S. Steel indemnified the buyer for non-compliance with past, current and future environmental laws related to existing conditions, and there can be questions as to the applicability of more general indemnification provisions to environmental matters. Most recent indemnifications and cost sharing

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agreements are of a limited nature only applying to non-compliance with past and/or current laws. Some indemnifications and cost sharing agreements only run for a specified period of time after the transactions close and others run indefinitely. In addition, current owners of property formerly owned by U. S. Steel may have common law claims and contribution rights against U. S. Steel for environmental matters. The amount of potential environmental liability associated with these transactions and properties is not estimable due to the nature and extent of the unknown conditions related to the properties sold. Aside from the environmental liabilities already recorded as a result of these transactions due to specific environmental remediation activities and cases (included in the $231 million of accrued liabilities for remediation discussed above), there are no other known environmental liabilities related to these transactions.
Guarantees – The maximum guarantees of the indebtedness of unconsolidated entities of U. S. Steel totaled $29 million at March 31, 2014, which includes a $23 million liability related to a guarantee of debt of an unconsolidated equity investment for which payment by U. S. Steel is probable. The $23 million is the maximum amount U. S. Steel would be obligated to pay as the guarantor and represents the fair value of the obligation at March 31, 2014. If any default related to the guaranteed indebtedness occurs, U. S. Steel has access to its interest in the assets of the investees to reduce its potential losses under the guarantees.
Antitrust Class Actions – In a series of lawsuits filed in federal court in the Northern District of Illinois beginning September 12, 2008, individual direct or indirect buyers of steel products have asserted that eight steel manufacturers, including U. S. Steel, conspired in violation of antitrust laws to restrict the domestic production of raw steel and thereby to fix, raise, maintain or stabilize the price of steel products in the United States. The cases are filed as class actions and claim damages related to steel product purchases during the time period of April 1, 2005 to December 31, 2007. A hearing on class certification was completed in April of 2014 and a determination is pending before the Court.  U. S. Steel is vigorously defending these lawsuits and does not believe that it is probable a liability regarding these matters has been incurred. We are unable to estimate a range of possible loss at this time.
EPA Region V Federal Lawsuit – On August 1, 2012, the U.S. government, joined by the States of Illinois, Indiana and Michigan, filed a complaint (the Complaint) in the Northern District of Indiana alleging various CAA and State air regulatory violations that were to have allegedly occurred at Gary Works, Granite City Works, and Great Lakes Works, our three integrated iron and steel facilities located in EPA Region V. The Complaint alleges that Gary Works failed to obtain the proper pre-construction permit for a routine reline of its Blast Furnace No. 4 in 1990, and that the three facilities failed to meet certain operational, maintenance, opacity, and recordkeeping requirements under the CAA and its implementing regulations. The Complaint requests relief in the form of statutory penalties for each violation and for injunctive relief. U. S. Steel believes that the claims asserted in the Complaint are not justified and are without statutory foundation. On September 21, 2012, U. S. Steel filed a motion to dismiss the U.S. government’s claims for relief regarding the 1990 reline of the Gary Blast Furnace No. 4 and filed an answer to the remaining allegations in the Complaint. On August 21, 2013, the district court issued an Opinion and Order, granting in part, and denying in part, the Motion to Dismiss. The court granted the Motion to Dismiss with respect to penalties such that the government is barred from seeking any civil penalties. However, the court denied our Motion to Dismiss with respect to injunctive relief. On September 6, 2013, U. S. Steel filed a Motion for Reconsideration to the district court with respect to its denial of the Motion to Dismiss regarding injunctive relief. On April, 18, 2014, the district court granted U. S. Steel's Motion for Reconsideration and Motion to Dismiss. The Court determined that the government's claims for civil penalties and injunctive relief regarding the 1990 reline of the Gary Blast Furnace No. 4 allegations are time barred. Fact discovery is being completed in three phases, consisting of one phase for each facility. The first phase of fact discovery, regarding Granite City Works, was completed on December 20, 2013. The second phase for discovery regarding Great Lakes Works is ongoing. U. S. Steel will continue to vigorously defend against these claims. At this time, the potential outcome is not reasonably estimable.
Randle Reef – The Canadian and Ontario governments have identified for remediation a sediment deposit, commonly referred to as Randle Reef, in Hamilton Harbor near USSC’s Hamilton Works, for which the regulatory agencies estimate expenditures with a net present value of approximately C$140 million (approximately $127 million). The national and provincial governments have each allocated approximately C$46 million (approximately $42 million) for this project. Local sources, including industry, have also agreed to provide funding of approximately C$46 million (approximately $42 million) for this project. USSC has committed to contribute approximately 11,000 tons of hot rolled steel and to fund C$2 million (approximately $2 million). The C$2 million (approximately $2 million) was contributed in 2013 and the steel contribution is expected to be made in 2014. As of March 31, 2014, the remaining contribution commitment is reflected on USSC's balance sheet as a current liability of approximately C$8 million (approximately $7 million).

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Other contingencies Under certain operating lease agreements covering various equipment, U. S. Steel has the option to renew the lease or to purchase the equipment at the end of the lease term. If U. S. Steel does not exercise the purchase option by the end of the lease term, U. S. Steel guarantees a residual value of the equipment as determined at the lease inception date (totaling approximately $15 million at March 31, 2014). No liability has been recorded for these guarantees as the potential loss is not probable.
Insurance U. S. Steel maintains insurance for certain property damage, equipment, business interruption and general liability exposures; however, insurance is applicable only after certain deductibles and retainages. U. S. Steel is self-insured for certain other exposures including workers’ compensation (where permitted by law) and auto liability. Liabilities are recorded for workers’ compensation and personal injury obligations. Other costs resulting from losses under deductible or retainage amounts or not otherwise covered by insurance are charged against income upon occurrence.
U. S. Steel uses surety bonds, trusts and letters of credit to provide whole or partial financial assurance for certain obligations such as workers’ compensation. The total amount of active surety bonds, trusts and letters of credit being used for financial assurance purposes was approximately $162 million as of March 31, 2014, which reflects U. S. Steel’s maximum exposure under these financial guarantees, but not its total exposure for the underlying obligations. A significant portion of our trust arrangements and letters of credit are collateralized by our RPA. The remaining trust arrangements and letters of credit are collateralized by restricted cash. Restricted cash, which is recorded in other current and noncurrent assets, totaled $75 million at March 31, 2014, of which less than $1 million was classified as current, and $81 million at December 31, 2013, of which less than $1 million was classified as current. Restricted cash at March 31, 2014 also includes $37 million to fund certain capital projects at Gary Works, our Clairton Plant and Granite City Works. The proceeds become unrestricted as capital expenditures for these projects are made.
Capital Commitments At March 31, 2014, U. S. Steel’s contractual commitments to acquire property, plant and equipment totaled $176 million.
Contractual Purchase Commitments – U. S. Steel is obligated to make payments under contractual purchase commitments, including unconditional purchase obligations. Payments for contracts with remaining terms in excess of one year are summarized below (in millions):
Remainder of 2014
 
2015
 
2016
 
2017
 
2018
 
Later
Years
 
Total
$666
 
$654
 
$426
 
$342
 
$309
 
$1,448
 
$3,845
The majority of U. S. Steel’s unconditional purchase obligations relates to the supply of industrial gases, energy and utility services with terms ranging from two to 14 years. Unconditional purchase obligations also include coke and steam purchase commitments related to a coke supply agreement with Gateway Energy & Coke Company LLC (Gateway) under which Gateway is obligated to supply 90 percent to 105 percent of the expected annual capacity of the heat recovery coke plant at our Granite City Works, and U. S. Steel is obligated to purchase the coke from Gateway at the contract price. As of March 31, 2014, a maximum default payment of approximately $245 million would apply if U. S. Steel terminates the agreement.
Total payments relating to unconditional purchase obligations were approximately $134 million and $183 million for the three months ended March 31, 2014 and 2013, respectively.

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Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain sections of Management’s Discussion and Analysis include forward-looking statements concerning trends or events potentially affecting the businesses of United States Steel Corporation (U. S. Steel). These statements typically contain words such as “anticipates,” “believes,” “estimates,” “expects,” “intends” or similar words indicating that future outcomes are not known with certainty and are subject to risk factors that could cause these outcomes to differ significantly from those projected. In accordance with “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors that could cause future outcomes to differ materially from those set forth in forward-looking statements. For discussion of risk factors affecting the businesses of U. S. Steel, see Item 1A. Risk Factors and “Supplementary Data – Disclosures About Forward-Looking Statements” in U. S. Steel’s Annual Report on Form 10-K for the year ended December 31, 2013. References in this Quarterly Report on Form 10-Q to “U. S. Steel,” “the Company,” “we,” “us” and “our” refer to U. S. Steel and its consolidated subsidiaries unless otherwise indicated by the context.
RESULTS OF OPERATIONS
Net sales by segment for the first quarter of 2014 and 2013 are set forth in the following table:
 
 
Quarter Ended
March 31,
 
 
(Dollars in millions, excluding intersegment sales)
 
2014
 
2013
 
%
Change
Flat-rolled Products (Flat-rolled)
 
$
3,027

 
$
3,103

 
(2
)%
U. S. Steel Europe (USSE)
 
759

 
783

 
(3
)%
Tubular Products (Tubular)
 
643

 
686

 
(6
)%
     Total sales from reportable segments
 
4,429

 
4,572

 
(3
)%
Other Businesses
 
19

 
23

 
(17
)%
Net sales
 
$
4,448

 
$
4,595

 
(3
)%
Management’s analysis of the percentage change in net sales for U. S. Steel’s reportable business segments for the quarter ended March 31, 2014 versus the quarter ended March 31, 2013 is set forth in the following table:
Quarter Ended March 31, 2014 versus Quarter Ended March 31, 2013
 
 
Steel Products (a)
 
 
 
 
 
 
Volume
 
Price
 
Mix
 
FX (b)
 
Coke &
Other
 
Net
Change
Flat-rolled
 
(6
)%
 
4
 %
 
 %
 
(1
)%
 
1
%
 
(2
)%
USSE
 
(2
)%
 
(4
)%
 
 %
 
3
 %
 
%
 
(3
)%
Tubular
 
(4
)%
 
(1
)%
 
(2
)%
 
 %
 
1
%
 
(6
)%
(a) Excludes intersegment sales
(b) Foreign currency translation effects
Net sales were $4,448 million in the first quarter of 2014, compared with $4,595 million in the same quarter last year. The decrease in sales for the Flat-rolled segment primarily reflected lower shipments as a result of weather-related issues (decrease of 344 thousand net tons) partially offset by an increase in average realized prices (increase of $42 per net ton). The decrease in sales for the European segment was primarily due to lower average realized euro-based prices (decrease of €26 per net ton) and lower shipments (decrease of 17 thousand net tons) partially offset by the weakening of the U.S. dollar versus the euro. The decrease in sales for the Tubular segment primarily reflected lower average realized prices (decrease of $77 per net ton) and lower shipments (decrease of 9 thousand net tons) primarily as a result of continued high import levels and weather-related issues.

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Pension and other benefits costs
Pension and other benefit costs are reflected in our cost of sales and selling, general and administrative expense line items in the Consolidated Statements of Operations.
Defined benefit and multiemployer pension plan costs totaled $84 million in the first quarter of 2014, compared to $95 million in the first quarter of 2013. The $11 million decrease is primarily due to a higher discount rate.
Costs related to defined contribution plans totaled $12 million in the first quarter of 2014 compared to $11 million in the first quarter of 2013.
Other benefit costs totaled $3 million in the first quarter of 2014, compared to $14 million in the first quarter of 2013. The $11 million decrease is primarily due to a higher discount rate and favorable claims cost experience.
Net periodic pension cost, including multiemployer plans, is expected to total approximately $330 million in 2014. Total other benefits costs in 2014 are expected to total approximately $15 million.
A sensitivity analysis of the projected incremental effect of a hypothetical one percentage point change in the significant inputs used in the calculation of pension and other benefits net periodic benefit costs is provided in the following table:
 
 
Hypothetical Rate
Increase (Decrease)
(Dollars in millions)
 
1%
 
(1)%
Expected return on plan assets
 
 
 
 
Incremental (decrease) increase in:
 
 
 
 
Net periodic pension cost
 
$
(100
)
 
$
100

Discount rate
 
 
 
 
Incremental (decrease) increase in:
 
 
 
 
Net periodic pension & other benefits costs
 
$
(39
)
 
$
55

Health care cost escalation trend rates
 
 
 
 
Incremental increase (decrease) in:
 
 
 
 
Service and interest cost components for 2014
 
$
10

 
$
(8
)
Selling, general and administrative expenses
Selling, general and administrative expenses were $138 million in the first quarter of 2014 compared to $145 million in the first quarter of 2013. The decrease is primarily related to lower pension and other benefits costs as discussed above.

Restructuring and Other Charges

During the fourth quarter of 2013, the Company implemented certain headcount reductions and production facility closures related to our iron and steelmaking facilities at Hamilton Works in Canada, barge operations related to Warrior and Gulf Navigation (WGN) in Alabama and administrative headcount reductions at our Hamilton Works and Lake Erie Works also in Canada. We closed our iron and steelmaking facilities at Hamilton Works effective December 31, 2013. Charges for restructuring and ongoing cost reduction initiatives are recorded in the period the Company commits to a restructuring or cost reduction plan, or executes specific actions contemplated by the plan and all criteria for liability recognition have been met.
Management believes its actions with regard to the Company’s Canadian operations will have a positive impact on the Company’s annual cash flows of approximately $40 million over the course of subsequent periods as a result of decreased payroll and benefits costs and other idle facility costs. Additionally, management does not believe there will be any significant impacts related to the Company’s revenues as a result of this restructuring.

During the first quarter of 2014, the Company recorded severance related charges of approximately $2 million, which were reported in cost of sales in the Consolidated Statement of Operations, for additional employee reductions at our Canadian operations, made cash payments related to restructuring of approximately $4 million for severance and

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closure costs related to our Canadian and WGN operations and made changes in estimates of approximately $8 million. There were no such items for the first quarter of 2013.
Income (loss) from operations by segment for the first quarter of 2014 and 2013 is set forth in the following table:

 
Quarter Ended
March 31,
 
%
Change
 
(Dollars in millions)
 
2014
 
2013
 
 
Flat-rolled
 
$
85

 
$
(13
)
 
NM

 
USSE
 
32

 
38

 
(16
)%
 
Tubular
 
24

 
64

 
(63
)%
 
Total income from reportable segments
 
141

 
89

 
58
 %
 
Other Businesses
 
13

 
5

 
160
 %
 
Segment income from operations
 
154

 
94

 
64
 %
 
Postretirement benefit expense
 
(32
)
 
(56
)
 
(43
)%
 
Total income from operations
 
$
122

 
$
38

 
221
 %
 
Segment results for Flat-rolled
 
 
Quarter Ended
March 31,
 
%
Change
 
 
2014
 
2013
 
Income (loss) from operations ($ millions)
 
$
85

 
$
(13
)
 
NM

Gross margin
 
9
%
 
5
%
 
4
 %
Raw steel production (mnt)
 
4,491

 
4,920

 
(9
)%
Capability utilization(a)
 
83
%
 
82
%
 
1
 %
Steel shipments (mnt)
 
3,674

 
4,018

 
(9
)%
Average realized steel price per ton
 
$
761

 
$
719

 
6
 %
(a) Prior to the permanent shut down of the iron and steelmaking facilities at Hamilton Works on December 31, 2013, annual raw steel production capability for Flat-rolled was 24.3 million net tons.
The increase in Flat-rolled results in the first quarter of 2014 compared to the same period in 2013 resulted from increased prices (approximately $180 million), higher repairs and maintenance and other operating costs (approximately $25 million), higher raw material costs (approximately $15 million), higher income from our joint ventures (approximately $10 million) and higher steel substrate sales to our Tubular segment (approximately $5 million). These changes were partially offset by increased energy costs, primarily due to higher natural gas costs (approximately $85 million), decreased shipment volumes due to weather-related issues (approximately $35 million) and higher costs for profit based payments (approximately $15 million).
 

-28-



Segment results for USSE
 
 
Quarter Ended
March 31,
 
%
Change
 
 
2014
 
2013
 
Income from operations ($ millions)
 
$
32

 
$
38

 
(16
)%
Gross margin
 
8
%
 
11
%
 
(3
)%
Raw steel production (mnt)
 
1,141

 
1,203

 
(5
)%
Capability utilization
 
93
%
 
98
%
 
(5
)%
Steel shipments (mnt)
 
1,031

 
1,048

 
(2
)%
Average realized steel price per ton
 
$
710

 
$
718

 
(1
)%
The decrease in USSE results in the first quarter of 2014 compared to the same period in 2013 was primarily due to lower average realized prices (approximately $35 million) and a decrease in shipping volumes (approximately $5 million). These changes were partially offset by favorable effects of transactions to sell and swap a portion of our emissions allowances (approximately $15 million), the weakening of the U.S. dollar versus the euro in the first quarter of 2014 as compared to the same period in 2013 (approximately $10 million), lower raw material costs (approximately $5 million) and decreased repairs and maintenance and other operating costs (approximately $5 million).
Segment results for Tubular
 
 
Quarter Ended
March 31,
 
%
Change
 
 
2014
 
2013
 
Income from operations ($ millions)
 
$
24

 
$
64

 
(63