X 2015.3.31 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2015
Or
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| [ ] | 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)
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Delaware | | 1-16811 | | 25-1897152 |
(State or other jurisdiction of incorporation) | | (Commission File Number) | | (IRS Employer Identification No.) |
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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):
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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 23, 2015 – 145,679,235 shares
INDEX
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PART I – FINANCIAL INFORMATION | |
| Item 1. | Financial Statements: | |
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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| Item 1. | | |
| Item 4. | | |
| Item 6. | | |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains information that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Generally, we have identified such forward-looking statements by using the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “target”, “forecast”, “aim,” “will” and similar expressions or by using future dates in connection with any discussion of, among other things, operating performance, trends, events or developments that we expect or anticipate will occur in the future, statements relating to volume growth, share of sales and earnings per share growth, and statements expressing general views about future operating results. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. Forward-looking statements are not historical facts, but instead represent only the Company’s beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of the Company’s control. It is possible that the Company’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Management believes that these forward-looking statements are reasonable as of the time made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. Our Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to the risks and uncertainties described in this report and in “Item 1A. Risk Factors” and “Supplementary Data - Disclosures About Forward-Looking Statements” in our Annual Report on Form 10-K for the year ended December 31, 2014, and those described from time to time in our future reports filed with the Securities and Exchange Commission.
References in this Quarterly Report on Form 10-Q to "U. S. Steel", "the Company", "we", "us", and "our" refer to United States Steel Corporation and its consolidated subsidiaries unless otherwise indicated by the context.
UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
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| | | | | | | | |
| | Three Months Ended March 31, |
(Dollars in millions, except per share amounts) | | 2015 | | 2014 |
Net sales: | | | | |
Net sales | | $ | 2,946 |
| | $ | 4,169 |
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Net sales to related parties (Note 17) | | 326 |
| | 279 |
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Total | | 3,272 |
| | 4,448 |
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Operating expenses (income): | | | | |
Cost of sales (excludes items shown below) | | 3,066 |
| | 4,038 |
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Selling, general and administrative expenses | | 102 |
| | 138 |
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Depreciation, depletion and amortization | | 144 |
| | 166 |
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(Earnings) loss from investees | | (6 | ) | | 4 |
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Restructuring and other charges (Note 18) | | 153 |
| | — |
|
Net gain on disposal of assets (Note 19) | | — |
| | (20 | ) |
Total | | 3,459 |
| | 4,326 |
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(Loss) earnings before interest and income taxes (EBIT) | | (187 | ) | | 122 |
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Interest expense | | 51 |
| | 61 |
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Interest income | | — |
| | (1 | ) |
Other financial costs | | 11 |
| | 9 |
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Net interest and other financial costs (Note 6) | | 62 |
| | 69 |
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(Loss) earnings before income taxes | | (249 | ) | | 53 |
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Income tax (benefit) provision (Note 8) | | (174 | ) | | 1 |
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Net (loss) earnings | | (75 | ) | | 52 |
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Less: Net earnings attributable to noncontrolling interests | | — |
| | — |
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Net (loss) earnings attributable to United States Steel Corporation | | $ | (75 | ) | | $ | 52 |
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Earnings (loss) per common share (Note 9): | | | | |
Earnings (loss) per share attributable to United States Steel Corporation stockholders: | | | | |
-Basic | | $ | (0.52 | ) | | $ | 0.36 |
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-Diluted | | $ | (0.52 | ) | | $ | 0.34 |
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The accompanying notes are an integral part of these consolidated financial statements.
UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
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| | | | | | | | |
| | Three Months Ended March 31, |
(Dollars in millions) | | 2015 | | 2014 |
Net (loss) earnings | | $ | (75 | ) | | $ | 52 |
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Other comprehensive (loss) income, net of tax: | | | | |
Changes in foreign currency translation adjustments | | (103 | ) | | (2 | ) |
Changes in pension and other employee benefit accounts | | 43 |
| | 50 |
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Total other comprehensive (loss) income, net of tax | | (60 | ) | | 48 |
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Comprehensive (loss) income including noncontrolling interest | | (135 | ) | | 100 |
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Comprehensive income attributable to noncontrolling interest | | — |
| | — |
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Comprehensive (loss) income attributable to United States Steel Corporation | | $ | (135 | ) | | $ | 100 |
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The accompanying notes are an integral part of these consolidated financial statements.
UNITED STATES STEEL CORPORATION
CONSOLIDATED BALANCE SHEET
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| | | | | | | | |
(Dollars in millions) | | (Unaudited) March 31, 2015 | | December 31, 2014 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 1,266 |
| | $ | 1,354 |
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Receivables, less allowance of $37 and $45 | | 1,423 |
| | 1,632 |
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Receivables from related parties, less allowance of $209 and $218 (Note 17) | | 225 |
| | 310 |
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Inventories (Note 10) | | 2,418 |
| | 2,496 |
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Deferred income tax benefits (Note 8) | | 362 |
| | 602 |
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Other current assets | | 48 |
| | 37 |
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Total current assets | | 5,742 |
| | 6,431 |
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Property, plant and equipment | | 14,545 |
| | 15,139 |
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Less accumulated depreciation and depletion | | 10,191 |
| | 10,565 |
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Total property, plant and equipment, net | | 4,354 |
| | 4,574 |
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Investments and long-term receivables, less allowance of $8 in both periods | | 578 |
| | 577 |
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Long-term receivables from related parties, less allowance of $1,130 and $1,188 | | 336 |
| | 362 |
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Intangibles – net (Note 4) | | 202 |
| | 204 |
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Deferred income tax benefits (Note 8) | | 216 |
| | 46 |
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Other noncurrent assets | | 116 |
| | 120 |
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Total assets | | $ | 11,544 |
| | $ | 12,314 |
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Liabilities | | | | |
Current liabilities: | | | | |
Accounts payable and other accrued liabilities | | $ | 1,702 |
| | $ | 1,870 |
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Accounts payable to related parties (Note 17) | | 135 |
| | 131 |
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Bank checks outstanding | | 32 |
| | 1 |
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Payroll and benefits payable | | 856 |
| | 1,003 |
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Accrued taxes | | 133 |
| | 134 |
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Accrued interest | | 73 |
| | 52 |
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Short-term debt and current maturities of long-term debt (Note 12) | | 378 |
| | 378 |
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Total current liabilities | | 3,309 |
| | 3,569 |
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Long-term debt, less unamortized discount (Note 12) | | 3,124 |
| | 3,120 |
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Employee benefits | | 1,033 |
| | 1,117 |
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Deferred income tax liabilities (Note 8) | | 7 |
| | 301 |
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Deferred credits and other noncurrent liabilities | | 403 |
| | 407 |
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Total liabilities | | 7,876 |
| | 8,514 |
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Contingencies and commitments (Note 19) | |
| |
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Stockholders’ Equity (Note 15): | | | | |
Common stock (150,925,911 shares issued) (Note 9) | | 151 |
| | 151 |
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Treasury stock, at cost (5,255,341 and 5,270,872 shares) | | (395 | ) | | (396 | ) |
Additional paid-in capital | | 3,633 |
| | 3,623 |
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Retained earnings | | 1,779 |
| | 1,862 |
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Accumulated other comprehensive loss (Note 16) | | (1,501 | ) | | (1,441 | ) |
Total United States Steel Corporation stockholders’ equity | | 3,667 |
| | 3,799 |
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Noncontrolling interests | | 1 |
| | 1 |
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Total liabilities and stockholders’ equity | | $ | 11,544 |
| | $ | 12,314 |
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The accompanying notes are an integral part of these consolidated financial statements.
UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
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| | | | | | | | |
| | Three Months Ended March 31, |
(Dollars in millions) | | 2015 | | 2014 |
Increase (decrease) in cash and cash equivalents | | | | |
Operating activities: | | | | |
Net (loss) earnings | | $ | (75 | ) | | $ | 52 |
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Adjustments to reconcile to net cash provided by operating activities: | | | | |
Depreciation, depletion and amortization | | 144 |
| | 166 |
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Restructuring and other charges (Note 18) | | 153 |
| | — |
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Provision for doubtful accounts | | (6 | ) | | 2 |
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Pensions and other postretirement benefits | | (17 | ) | | (16 | ) |
Deferred income taxes | | (166 | ) | | 4 |
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Net gain on disposal of assets (Note 19) | | — |
| | (20 | ) |
Distributions received, net of equity investees earnings | | (4 | ) | | 4 |
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Changes in: | | | | |
Current receivables | | 237 |
| | (232 | ) |
Inventories | | 33 |
| | 260 |
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Current accounts payable and accrued expenses | | (192 | ) | | 335 |
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Income taxes receivable/payable | | 16 |
| | 2 |
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Bank checks outstanding | | 31 |
| | 26 |
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All other, net | | (18 | ) | | (13 | ) |
Net cash provided by operating activities | | 136 |
| | 570 |
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Investing activities: | | | | |
Capital expenditures | | (172 | ) | | (90 | ) |
Disposal of assets | | — |
| | 19 |
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Change in restricted cash, net | | 2 |
| | 6 |
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Investments, net | | (1 | ) | | (1 | ) |
Net cash used in investing activities | | (171 | ) | | (66 | ) |
Financing activities: | | | | |
Dividends paid | | (7 | ) | | (7 | ) |
Net cash used in financing activities | | (7 | ) | | (7 | ) |
Effect of exchange rate changes on cash | | (46 | ) | | (2 | ) |
Net increase in cash and cash equivalents | | (88 | ) | | 495 |
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Cash and cash equivalents at beginning of year | | 1,354 |
| | 604 |
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Cash and cash equivalents at end of period | | $ | 1,266 |
| | $ | 1,099 |
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The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation and Significant Accounting Policies
United States Steel Corporation (U. S. Steel or the Company) produces and sells steel products, including flat-rolled and tubular products, in North America and 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 consolidated results for the three months ended March 31, 2015 do not reflect the results of U. S. Steel Canada Inc. (USSC) due to USSC’s filing for creditor protection pursuant to Canada’s Companies’ Creditors Arrangement Act (CCAA) on September 16, 2014. The consolidated statement of operations, consolidated statement of comprehensive income (loss) and consolidated statement of cash flows for the three months ended March 31, 2014 include the results for USSC.
The year-end consolidated balance sheet data was derived from audited statements but does not include all disclosures required for complete financial statements by accounting principles generally accepted in the United States of America (U.S. GAAP). The other information in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair statement of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. Additional information is contained in the United States Steel Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which should be read in conjunction with these financial statements.
2. New Accounting Standards
On April 7, 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU 2015-03 changes the presentation of debt issuance costs in financial statements and requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. ASU 2015-03 is effective for public entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years; early application is permitted. An entity is required to apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. U. S. Steel is evaluating the financial statement implications of adopting ASU 2015-03.
On August 27, 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 explicitly requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. Currently, there is no guidance in U.S. GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern or to provide related footnote disclosures. ASU 2014-15 is effective for all entities for interim and annual periods beginning after December 15, 2016; early application is permitted. U. S. Steel does not expect any financial statement impact relating to the adoption of this ASU.
On May 28, 2014, the FASB and the International Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016; early application is not permitted. On April 1, 2015, the FASB voted to propose a one year deferral of the effective date of ASU 2014-09, but to permit entities to adopt the standard on the original effective date if they choose. U. S. Steel is evaluating the financial statement implications of adopting ASU 2014-09.
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 our railroad and real estate businesses that do not constitute reportable segments are combined and disclosed in the Other Businesses category.
The Flat-Rolled segment information subsequent to September 16, 2014 does not include USSC. Transactions between U. S. Steel and USSC subsequent to USSC applying for relief from its creditors pursuant to CCAA (CCAA filing) are considered related party transactions.
Effective January 1, 2015, the Flat-Rolled segment has been realigned to better serve customer needs through the creation of commercial entities to specifically address customers in the automotive, consumer, industrial, service center and mining market sectors. This realignment did not affect the Company's reportable segments.
The chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being earnings (loss) before interest and income taxes (EBIT). EBIT 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 EBIT 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, 2015 and 2014 are: |
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(In millions) First Quarter 2015 | | Customer Sales | | Intersegment Sales | | Net Sales | | Earnings (loss) from investees | | EBIT |
Flat-Rolled | | $ | 2,194 |
| | $ | 103 |
| | $ | 2,297 |
| | $ | 5 |
| | $ | (67 | ) |
USSE | | 691 |
| | 1 |
| | 692 |
| | — |
| | 37 |
|
Tubular | | 371 |
| | — |
| | 371 |
| | 3 |
| | 1 |
|
Total reportable segments | | 3,256 |
| | 104 |
| | 3,360 |
| | 8 |
| | (29 | ) |
Other Businesses | | 16 |
| | 28 |
| | 44 |
| | (2 | ) | | 8 |
|
Reconciling Items and Eliminations | | — |
| | (132 | ) | | (132 | ) | | — |
| | (166 | ) |
Total | | $ | 3,272 |
| | $ | — |
| | $ | 3,272 |
| | $ | 6 |
| | $ | (187 | ) |
| | | | | | | | | | |
First Quarter 2014 | | | | | | | | | | |
Flat-Rolled | | $ | 3,027 |
| | $ | 303 |
| | $ | 3,330 |
| | $ | (6 | ) | | $ | 85 |
|
USSE | | 759 |
| | 1 |
| | 760 |
| | — |
| | 32 |
|
Tubular | | 643 |
| | 1 |
| | 644 |
| | 2 |
| | 24 |
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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 |
|
The following is a schedule of reconciling items to EBIT: |
| | | | | | | | |
| | Three Months Ended March 31, |
(In millions) | | 2015 | | 2014 |
Items not allocated to segments: | |
| |
|
Postretirement benefit expense (a) | | $ | (13 | ) | | $ | (32 | ) |
Other items not allocated to segments: | |
| |
|
Loss on shutdown of coke production facilities (b) | | (153 | ) | | — |
|
Total other items not allocated to segments | | (153 | ) | | — |
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Total reconciling items | | $ | (166 | ) | | $ | (32 | ) |
(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 defined pension, retiree health care and life insurance benefit plans.
(b) Included in Restructuring and Other Charges on the Consolidated Statements of Operations. See Note 18 to the Consolidated Financial Statements.
4. Intangible Assets
Intangible assets are being amortized on a straight-line basis over their estimated useful lives and are detailed below:
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| |
| | As of March 31, 2015 | | As of December 31, 2014 |
(In millions) | | Useful Lives | | Gross Carrying Amount | | Accumulated Amortization | | Net Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Amount |
Customer relationships | | 22-23 Years | | $ | 132 |
| | $ | 48 |
| | $ | 84 |
| | $ | 132 |
| | $ | 46 |
| | $ | 86 |
|
Other | | 2-20 Years | | 23 |
| | 13 |
| | 10 |
| | 23 |
| | 13 |
| | 10 |
|
Total amortizable intangible assets | |
| | $ | 155 |
| | $ | 61 |
| | $ | 94 |
| | $ | 155 |
| | $ | 59 |
| | $ | 96 |
|
The carrying amount of acquired water rights with indefinite lives as of March 31, 2015 and December 31, 2014 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 2014. The 2014 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 is reassessed each quarter. The maximum potential liability for contingent consideration is $53 million. As of March 31, 2015, 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 as 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 values may not be recoverable.
Amortization expense was $2 million in both the three months ended March 31, 2015 and March 31, 2014. The estimated future amortization expense of identifiable intangible assets during the next five years is $5 million for the remaining portion of 2015 and $7 million each year from 2016 to 2019.
5. Pensions and Other Benefits
The following table reflects the components of net periodic benefit cost for the three months ended March 31, 2015 and 2014:
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| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(In millions) | | 2015 | | 2014 | | 2015 | | 2014 |
Service cost | | $ | 26 |
| | $ | 27 |
| | $ | 5 |
| | $ | 6 |
|
Interest cost | | 66 |
| | 109 |
| | 24 |
| | 36 |
|
Expected return on plan assets | | (110 | ) | | (153 | ) | | (38 | ) | | (35 | ) |
Amortization of prior service cost | | 4 |
| | 6 |
| | (2 | ) | | (3 | ) |
Amortization of actuarial net loss | | 64 |
| | 70 |
| | 2 |
| | (1 | ) |
Net periodic benefit cost, excluding below | | 50 |
| | 59 |
| | (9 | ) | | 3 |
|
Multiemployer plans | | 18 |
| | 18 |
| | — |
| | — |
|
Settlement, termination and curtailment losses | | 3 |
| | 7 |
| | — |
| | — |
|
Net periodic benefit cost | | $ | 71 |
| | $ | 84 |
| | $ | (9 | ) | | $ | 3 |
|
Employer Contributions
During the first three months of 2015, U. S. Steel made cash payments of $21 million to the Steelworkers’ Pension Trust and $8 million of pension payments not funded by trusts.
During the first three months of 2015, cash payments of $43 million were made for other postretirement benefit payments not funded by trusts. In addition, U. S. Steel made a required contribution of $10 million in the first three months of 2015 to our trust for represented retiree health care and life insurance benefits.
Company contributions to defined contribution plans totaled $10 million and $12 million for the three months ended March 31, 2015 and 2014, respectively.
Non-retirement postemployment benefits
U. S. Steel incurred costs of approximately $14 million for the three months ended March 31, 2015 related to the accrual of employee costs for supplemental unemployment benefits and the continuation of health care benefits and life insurance coverage for employees associated with the temporary idling of certain facilities and reduced production at others. Payments during the three months ended March 31, 2015 were insignificant. There were no significant similar costs incurred during the three months ended March 31, 2014.
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. In August 2014, U. S. Steel made a voluntary contribution of $140 million to our main U.S. defined benefit plan.
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 primarily a result of foreign currency denominated assets and liabilities that require remeasurement and the impacts of euro-U.S. dollar derivatives activity. During the three months ended March 31, 2015 and 2014, there was an insignificant amount of net foreign currency effects recorded in other financial costs.
See Note 11 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 13 of the United States Steel Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2014. An aggregate of 21,250,000 shares of U. S. Steel common stock may be issued under the Plan. As of March 31, 2015, 1,262,031 shares were available for future grants.
During the first quarter of 2014, the Committee added return on capital employed (ROCE) as a second performance measure for the Performance Awards as permitted under the terms of the Plan. Prior to the addition of the ROCE awards, performance awards were based solely on a total shareholder return (TSR) metric. ROCE awards granted are measured on a weighted average basis of the Company’s consolidated worldwide EBIT, 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 are 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 stock options, restricted stock units, and TSR and ROCE performance awards. Stock options are generally issued at the market price of the underlying stock on the date of the grant. Upon exercise of stock options, shares of U. S. Steel common stock are issued from treasury stock. The following table is a general summary of the awards made under the Plan. There were no issuances of stock options or restricted stock units during the first quarter of 2014.
|
| | | | | | | | | | | |
| 2015 | | 2014 |
Grant Details | Shares(a) | Fair Value(b) | | Shares(a) | Fair Value(b) |
Stock Options | 1,067,190 |
| $ | 10.04 |
| | — |
| $ | — |
|
Restricted Stock Units | 765,750 |
| $ | 24.75 |
| | — |
| $ | — |
|
Performance Awards:(c) | | | | | |
TSR | 273,560 |
| $ | 24.95 |
| | 279,570 |
| $ | 21.99 |
|
ROCE (d) | — |
| $ | — |
| | 259,280 |
| $ | 23.71 |
|
(a) The share amounts shown in this table do not reflect an adjustment for estimated forfeitures.
(b) Represents the per share weighted-average for all grants during the quarter.
(c) The number of performance awards shown represents the target value of the award.
(d) In lieu of ROCE equity awards being granted in 2015, the Company granted cash settled ROCE incentives to certain members of executive management.
U. S. Steel recognized pretax stock-based compensation expense in the amount of $11 million and $9 million in the three month periods ended March 31, 2015 and 2014, respectively.
As of March 31, 2015, total future compensation expense related to nonvested stock-based compensation arrangements was $62 million, and the weighted average period over which this expense is expected to be recognized is approximately 1.2 years.
Compensation expense for stock options is recorded over the vesting period based on the fair value on the date of grant, as calculated by U. S. Steel using the Black-Scholes model and the assumptions listed below. The stock options vest ratably over a three-year service period and have a term of ten years.
|
| | | | |
Black-Scholes Assumptions | | 2015 Grants |
Grant date price per share of option award | | $ | 24.78 |
|
Exercise price per share of option award | | $ | 24.78 |
|
Expected annual dividends per share, at grant date | | $ | 0.20 |
|
Expected life in years | | 5.0 |
|
Expected volatility | | 47 | % |
Risk-free interest rate | | 1.6 | % |
Grant date fair value per share of unvested option awards as calculated from above | | $ | 10.04 |
|
The expected annual dividends per share are based on the latest annualized dividend rate at the date of grant; the expected life in years is determined primarily from historical stock option exercise data; the expected volatility is based on the historical volatility of U. S. Steel stock; and the risk-free interest rate is based on the U.S. Treasury strip rate for the expected life of the option.
Restricted stock units generally vest ratably over three years. The fair value of the restricted stock units is the average market price of the underlying common stock on the date of the grant.
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. TSR 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 of the target award. The fair value of the ROCE performance awards is the average market price of the underlying common stock on the date of grant.
8. Income Taxes
Tax provision
For the three months ended March 31, 2015 and 2014, we recorded a tax benefit of $174 million on our pretax loss of $249 million and a tax provision of $1 million on our pretax income of $53 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. Included in the tax provision is a net benefit of $31 million relating to the adjustment of certain tax reserves in the first three months of 2015. The tax provision does not reflect any tax benefit for pretax losses in Canada, prior to the deconsolidation on September 16, 2014, which is a jurisdiction where we had recorded a full valuation allowance on deferred tax assets.
The tax benefit for the first three months of 2015 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 2015 pretax results for U.S. and foreign income or loss vary from estimates applied herein, the actual tax provision or benefit recognized in 2015 could be materially different from the forecasted amount used to estimate the tax provision for the three months ended March 31, 2015.
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 Accounting Standards Codification (ASC) Topic 740 on income taxes. The total amount of gross unrecognized tax benefits was $83 million at March 31, 2015 and $112 million at December 31, 2014. The change in unrecognized tax benefits reflects a net decrease primarily due to the conclusion of certain tax examinations. The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $24 million as of March 31, 2015 and $59 million as of December 31, 2014.
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 March 31, 2015 and December 31, 2014, U. S. Steel had accrued liabilities of $2 million and $7 million, respectively, 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, 2015, the net domestic deferred tax asset was $557 million compared to $318 million at December 31, 2014. 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, 2015, the net foreign deferred tax asset was $14 million, net of an established valuation allowance of $5 million. At December 31, 2014, the net foreign deferred tax asset was $29 million, net of an established valuation allowance of $5 million. The net foreign deferred tax asset will fluctuate as the value of the U.S. dollar changes with respect to the euro.
9. Earnings and Dividends Per Common Share
Earnings Per Share Attributable to United States Steel Corporation Stockholders
Basic earnings per common share is based on the weighted average number of common shares outstanding during the period.
Diluted earnings per common share assumes the exercise of stock options, the vesting of restricted stock units and performance awards and the conversion of convertible notes, provided in each case the effect is dilutive. The “treasury stock” method is used to calculate the dilutive effect of the Senior Convertible Notes due in 2019 (2019 Senior Convertible Notes) 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 "if-converted" method was used to calculate the dilutive effect of the 2014 Senior Convertible Notes due May 2014 (2014 Senior Convertible Notes).
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) | | 2015 | | 2014 |
Net (loss) earnings attributable to United States Steel Corporation stockholders | | $ | (75 | ) | | $ | 52 |
|
Plus earnings effect of assumed conversion-interest on convertible notes | | — |
| | 2 |
|
Net (loss) earnings after assumed conversion | | $ | (75 | ) | | $ | 54 |
|
Weighted-average shares outstanding (in thousands): | |
| |
|
Basic | | 145,733 |
| | 144,757 |
|
Effect of convertible notes | | — |
| | 10,058 |
|
Effect of stock options, restricted stock units and performance awards | | — |
| | 1,299 |
|
Adjusted weighted-average shares outstanding, diluted | | 145,733 |
| | 156,114 |
|
Basic earnings per common share | | $ | (0.52 | ) | | $ | 0.36 |
|
Diluted earnings per common share | | $ | (0.52 | ) | | $ | 0.34 |
|
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) | | 2015 | | 2014 |
Securities granted under the 2005 Stock Incentive Plan | | 10,056 |
| | 2,336 |
Dividends Paid Per Share
The dividend for the first quarter of 2015 and 2014 was five cents per common share.
10. 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. The last-in, first-out (LIFO) method is the predominant method of inventory costing in the United States. At March 31, 2015 and December 31, 2014, the LIFO method accounted for 81 percent and 78 percent of total inventory values, respectively.
|
| | | | | | | | |
(In millions) | | March 31, 2015 | | December 31, 2014 |
Raw materials | | $ | 864 |
| | $ | 801 |
|
Semi-finished products | | 982 |
| | 1,053 |
|
Finished products | | 502 |
| | 563 |
|
Supplies and sundry items | | 70 |
| | 79 |
|
Total | | $ | 2,418 |
| | $ | 2,496 |
|
Current acquisition costs were estimated to exceed the above inventory values by $875 million and $1.0 billion at March 31, 2015 and December 31, 2014, respectively. As a result of the liquidation of LIFO inventories, cost of sales increased and EBIT decreased by $4 million and $9 million in the three months ended March 31, 2015 and March 31, 2014, respectively.
Inventory includes $66 million and $69 million of property held for residential or commercial development as of March 31, 2015 and December 31, 2014, respectively.
11. Derivative Instruments
U. S. Steel is exposed to foreign currency exchange rate risks as a result of our European operations. USSE’s revenues are primarily in euros and costs are primarily in U.S. dollars and euros. 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 consolidated 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 consolidated 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, 2015, U. S. Steel held euro forward sales contracts with a total notional value of approximately $316 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 2015 and 2014, 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.
The following summarizes the location and amounts of the fair values and gains or losses related to derivatives included in U. S. Steel's consolidated financial statements as of March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014:
|
| | | | | | | | | | |
| | | | Fair Value | | Fair Value |
(In millions) | | Balance Sheet Location | | March 31, 2015 | | December 31, 2014 |
Foreign exchange forward contracts | | Accounts receivable | | $ | 49 |
| | $ | 31 |
|
Foreign exchange forward contracts | | Accounts payable | | $ | 1 |
| | $ | — |
|
|
| | | | | | | | | | |
(In millions) | | Statement of Operations Location | | Amount of Gain | | Amount of Gain |
| | Three Months Ended March 31, 2015 | | Three Months Ended March 31, 2014 |
Foreign exchange forward contracts | | Other financial costs | | $ | 43 |
| | $ | — |
|
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.
12. Debt
|
| | | | | | | | | | | | |
(In millions) | | Interest Rates % | | Maturity | | March 31, 2015 | | December 31, 2014 |
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(a) | | 2.75 | | 2019 | | 316 |
| | 316 |
|
Environmental Revenue Bonds | | 5.38 - 6.88 | | 2015 - 2042 | | 549 |
| | 549 |
|
Recovery Zone Facility Bonds | | 6.75 | | 2040 | | 70 |
| | 70 |
|
Fairfield Caster Lease | | | | 2022 | | 33 |
| | 33 |
|
Other capital leases and all other obligations | | | | 2019 | | 1 |
| | — |
|
Amended Credit Agreement | | Variable | | 2016 | | — |
| | — |
|
USSK Revolver | | Variable | | 2016 | | — |
| | — |
|
USSK credit facilities | | Variable | | 2015 - 2016 | | — |
| | — |
|
Total Debt | | | | | | 3,544 |
| | 3,543 |
|
Less unamortized discount | | | | | | 42 |
| | 45 |
|
Less short-term debt and long-term debt due within one year(a) | | | | | | 378 |
| | 378 |
|
Long-term debt | | | | | | $ | 3,124 |
| | $ | 3,120 |
|
(a) The 2019 Senior Convertible Notes were reclassified to current as a result of USSC's CCAA filing.
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 15 of the audited financial statements in the United States Steel Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
Amended Credit Agreement
As of March 31, 2015, there were no amounts drawn on the $875 million credit facility agreement (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 percent 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.
Receivables Purchase Agreement
As of March 31, 2015, 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. As U. S. Steel accesses this facility, USSR sells senior undivided interests in the receivables to third parties, 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 March 31, 2015 and December 31, 2014, eligible accounts receivable supported $502 million and $625 million of availability, respectively, under the RPA and there were no receivables sold to third-parties under this facility. The subordinated retained interest was $502 million and $625 million at March 31, 2015 and December 31, 2014, respectively. Availability under the RPA was $452 million at March 31, 2015 and $576 million at December 31, 2014, due to letters of credit outstanding of $50 million and $49 million, respectively.
USSR pays the third-parties a discount based on the third-parties’ borrowing costs plus incremental fees. We paid approximately $1 million for each of the three months ended March 31, 2015 and 2014, 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, 2015 and 2014, there were no collections reinvested.
The eligible accounts receivable and receivables sold to third party conduits are summarized below:
|
| | | | | | | | |
(In millions) | | March 31, 2015 | | December 31, 2014 |
Balance of accounts receivable-net, eligible for sale to third-parties | | $ | 782 |
| | $ | 1,013 |
|
Accounts receivable sold to third-parties | | — |
| | — |
|
Balance included in Receivables on the balance sheet of U. S. Steel | | $ | 782 |
| | $ | 1,013 |
|
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.
U. S. Steel Košice (USSK) credit facilities
At March 31, 2015, USSK had no borrowings under its €200 million (approximately $215 million) unsecured revolving credit facility (the USSK Credit Agreement). The USSK Credit Agreement contains certain USSK financial covenants (as further defined in the USSK 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 USSK Credit Agreement if it does not comply with any of the financial covenants until the next measurement date. At March 31, 2015, USSK had full availability under the USSK Credit Agreement. The USSK Credit Agreement expires in July 2016.
At March 31, 2015, USSK had no borrowings under its €20 million and €10 million unsecured credit facilities (collectively approximately $31 million) and the availability was approximately $30 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 $2,891 million as of March 31, 2015 (including the Senior Notes and Senior Convertible Notes) may be declared immediately due and payable; (b) the Amended Credit Agreement, the RPA and the USSK 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 $36 million or provide a letter of credit to secure the remaining obligation.
13. 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, 2015 | | December 31, 2014 | |
Balance at beginning of year | | $ | 48 |
| | $ | 59 |
| |
Additional obligations incurred | | 44 |
| (a) | 6 |
| |
Obligations settled | | — |
| | (19 | ) | (b) |
Foreign currency translation effects | | (1 | ) | | (2 | ) | |
Accretion expense | | 1 |
| | 4 |
| |
Balance at end of period | | $ | 92 |
| | $ | 48 |
| |
(a) Additional AROs relate to the permanent closure of the coke production facilities at Gary Works and Granite City Works.
(b) Includes $16 million as a result of the deconsolidation of USSC as of the end of the day on September 15, 2014.
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.
14. Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, current accounts and notes receivable, investments and long-term receivables, accounts payable, bank checks outstanding, and accrued interest included in the consolidated balance sheet approximate fair value. See Note 11 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, 2015 and December 31, 2014.
|
| | | | | | | | | | | | | | | | |
| | March 31, 2015 | | December 31, 2014 |
(In millions) | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount |
Financial liabilities: | |
| |
| |
| |
|
Long-term debt (a) | | $ | 3,648 |
| | $ | 3,469 |
| | $ | 3,740 |
| | $ | 3,466 |
|
(a) Excludes capital lease obligations.
The following methods and assumptions were used to estimate the fair value of financial instruments included in the table above:
Long-term debt: Fair value was determined using Level 2 inputs which were derived from quoted market prices and is based on the yield on public debt where available or current borrowing rates available for financings with similar terms and maturities.
Fair value of the financial 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 19.
15. Statement of Changes in Stockholders’ Equity
The following table reflects the first three months of 2015 and 2014 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, 2015 (In millions) | | Total | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Common Stock | | Treasury Stock | | Paid-in Capital | | Non- Controlling Interest |
Balance at beginning of year | | $ | 3,800 |
| | $ | 1,862 |
| | $ | (1,441 | ) | | $ | 151 |
| | $ | (396 | ) | | $ | 3,623 |
| | $ | 1 |
|
Comprehensive income (loss): | |
| |
| |
| |
| |
| |
| |
|
Net loss | | (75 | ) | | (75 | ) | |
| |
| |
| |
| |
|
Other comprehensive income (loss), net of tax: | |
| |
| |
| |
| |
| |
| |
|
Pension and other benefit adjustments | | 43 |
| |
| | 43 |
| |
| |
| |
| |
|
Currency translation adjustment | | (103 | ) | |
| | (103 | ) | |
| |
| |
| |
|
Employee stock plans | | 11 |
| |
| |
| |
| | 1 |
| | 10 |
| |
|
Dividends paid on common stock | | (7 | ) | | (7 | ) | |
| |
| |
| |
| |
|
Other | | (1 | ) | | (1 | ) | |
|
| | | |
|
| | | | |
Balance at March 31, 2015 | | $ | 3,668 |
| | $ | 1,779 |
| | $ | (1,501 | ) | | $ | 151 |
| | $ | (395 | ) | | $ | 3,633 |
| | $ | 1 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2014 (In millions) | | Total | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Common Stock | | Treasury Stock | | Paid-in Capital | | Non- Controlling Interest |
Balance at beginning of year | | $ | 3,376 |
| | $ | 1,789 |
| | $ | (1,752 | ) | | $ | 151 |
| | $ | (480 | ) | | $ | 3,667 |
| | $ | 1 |
|
Comprehensive income (loss): | |
| |
| |
| |
| |
| |
| |
|
Net earnings | | 52 |
| | 52 |
| |
| |
| |
| |
| |
|
Other comprehensive income (loss), net of tax: | |
| |
| |
| |
| |
| |
| |
|
Pension and other benefit adjustments | | 50 |
| |
| | 50 |
| |
| |
| |
| |
|
Currency translation adjustment | | (2 | ) | |
| | (2 | ) | |
| |
| |
| |
|
Employee stock plans | | 9 |
| |
| |
| |
| | 1 |
| | 8 |
| |
|
Dividends paid on common stock | | (7 | ) | | (7 | ) | |
| |
| |
| |
| |
|
Balance at March 31, 2014 | | $ | 3,478 |
| | $ | 1,834 |
| | $ | (1,704 | ) | | $ | 151 |
| | $ | (479 | ) | | $ | 3,675 |
| | $ | 1 |
|
16. Reclassifications from Accumulated Other Comprehensive Income (AOCI)
|
| | | | | | | | | | | | | | | | |
(In millions) (a) | | Pension and Other Benefit Items | | Foreign Currency Items | | Other | | Total |
Balance at December 31, 2014 | | $ | (1,852 | ) | | $ | 416 |
| | $ | (5 | ) | | $ | (1,441 | ) |
Other comprehensive (loss) income before reclassifications | | (1 | ) | | (103 | ) | | (5 | ) | | (109 | ) |
Amounts reclassified from AOCI | | 44 |
| (b) | — |
| | 5 |
| | 49 |
|
Net current-period other comprehensive income | | 43 |
| | (103 | ) | | — |
| | (60 | ) |
Balance at March 31, 2015 | | $ | (1,809 | ) | | $ | 313 |
| | $ | (5 | ) | | $ | (1,501 | ) |
(a)All amounts are net of tax. Amounts in parentheses indicate decreases in AOCI.
(b)See table below for further details.
|
| | | | | | | | | |
| | | Amount reclassified from AOCI |
| | | Three Months Ended March 31, |
(In millions) (a) | Details about AOCI components | | 2015 | | 2014 |
| Amortization of pension and other benefit items | | | | |
| Prior service costs (b) | | $ | (2 | ) | | $ | (10 | ) |
| Actuarial losses (b) | | (66 | ) | | (69 | ) |
| Settlement, termination and curtailment gains (b) | | (3 | ) | | — |
|
| Total before tax | | (71 | ) | | (79 | ) |
| Tax benefit | | 27 |
| | 28 |
|
| Net of tax | | $ | (44 | ) | | $ | (51 | ) |
(a)Amounts in parentheses indicate decreases in AOCI.
(b)These AOCI components are included in the computation of net periodic benefit cost (see Note 5 for additional details).
17. Transactions with Related Parties
Net sales to related parties and receivables from related parties primarily reflect sales of steel products to equity investees and USSC after the CCAA filing on September 16, 2014. Generally, transactions are conducted under long-term market-based contractual arrangements. Related party sales and service transactions were $326 million and $279 million for the three months ended March 31, 2015 and 2014, respectively.
Purchases from related parties for outside processing services provided by equity investees and steel products from USSC after the CCAA filing on September 16, 2014 amounted to $101 million and $15 million for the three months ended March 31, 2015 and 2014, respectively. Purchases of iron ore pellets from related parties amounted to $30 million and $54 million for the three months ended March 31, 2015 and 2014, respectively.
Accounts payable to related parties include balances due to PRO-TEC Coating Company (PRO-TEC) of $86 million and $78 million at March 31, 2015 and December 31, 2014, 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, including USSC after the CCAA filing on September 16, 2014, totaled $49 million and $53 million at March 31, 2015 and December 31, 2014, respectively.
18. Restructuring and Other Charges
During the three months ended March 31, 2015, the Company recorded a charge of $153 million, which is reported in restructuring and other charges in the consolidated statement of operations, related to the permanent shutdown of the cokemaking operations at Gary Works and Granite City Works, within our Flat-Rolled segment. In addition to the write-down of assets, the charge also includes employee related costs, including costs for severance, supplemental unemployment benefits and continuation of health care benefits of $18 million and other shutdown costs, primarily environmental.
During the three months ended March 31, 2014, the Company recorded severance related charges of $2 million for headcount reductions within our Flat-Rolled segment related to our Canadian operations prior to the deconsolidation of USSC. Cash payments were made related to severance and exit costs of $4 million. Favorable adjustments for changes in estimates on restructuring reserves were made for $8 million.
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, asset impairments 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, 2015 were as follows:
|
| | | | | | | | | | | | | | | | |
| | Employee Related | | Exit | | Asset | | |
(in millions) | | Costs | | Costs | | Impairments | | Total |
Balance at December 31, 2014 | | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 5 |
|
| | | | | | | | |
Additional charges | | 18 |
| | 45 |
| (a) | 90 |
| | 153 |
|
Cash payments/utilization | | — |
| | — |
| | (90 | ) | | (90 | ) |
Other adjustments and reclassifications | | — |
|
| — |
| | — |
| | — |
|
| | | | | | | | |
Balance at March 31, 2015 | | $ | 23 |
| | $ | 45 |
| | $ | — |
| | $ | 68 |
|
(a) Primarily environmental costs.
Accrued liabilities for restructuring and other cost reduction programs are included in the following balance sheet lines:
|
| | | | | | | | |
(in millions) | | March 31, 2015 | | December 31, 2014 |
Accounts payable | | $ | 28 |
| | $ | — |
|
Payroll and benefits payable | | 23 |
| | 5 |
|
Deferred credits and other noncurrent liabilities | | 17 |
| | — |
|
Total | | $ | 68 |
| | $ | 5 |
|
19. 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, 2015, U. S. Steel was a defendant in approximately 900 active cases involving approximately 3,420 plaintiffs. The vast majority of these cases involve multiple defendants. At December 31, 2014, U. S. Steel was a defendant in approximately 880 active cases involving approximately 3,455 plaintiffs. About 2,540, or approximately 74 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, 2015, settlements and other dispositions resolved approximately 110 claims, and new case filings added approximately
75 claims. During 2014, settlements and other dispositions resolved approximately 190 cases, and new case filings added approximately 325 cases.
The following table shows the activity with respect to asbestos litigation:
|
| | | | | | | | |
Period ended | | Opening Number of Claims | | Claims Dismissed, Settled and Resolved | | New Claims | | Closing Number of Claims |
December 31, 2012 | | 3,235 | | 190 | | 285 | | 3,330 |
December 31, 2013 | | 3,330 | | 250 | | 240 | | 3,320 |
December 31, 2014 | | 3,320 | | 190 | | 325 | | 3,455 |
March 31, 2015 | | 3,455 | | 110 | | 75 | | 3,420 |
Historically, asbestos-related claims against U. S. Steel fall into three major groups: (1) claims made by persons who allegedly were exposed to asbestos on the premises of U. S. Steel facilities; (2) claims made by persons allegedly exposed to products manufactured by U. S. Steel; and (3) claims made under certain federal and maritime laws by employees of former operations of U. S. Steel.
The amount U. S. Steel accrues for pending asbestos claims is not material to U. S. Steel’s financial condition. However, U. S. Steel is unable to estimate the ultimate outcome of asbestos-related claims due to a number of uncertainties, including (1) the rates at which new claims are filed, (2) the number of and effect of bankruptcies of other companies traditionally defending asbestos claims, (3) uncertainties associated with the variations in the litigation process from jurisdiction to jurisdiction, (4) uncertainties regarding the facts, circumstances and disease process with each claim, and (5) any new legislation enacted to address asbestos-related claims. Despite these uncertainties, management believes that the ultimate resolution of these matters will not have a material adverse effect on U. S. Steel’s financial condition, although the resolution of such matters could significantly impact results of operations for a particular quarter.
Environmental matters – U. S. Steel is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. Changes in accrued liabilities for remediation activities where U. S. Steel is identified as a named party are summarized in the following table:
|
| | | |
(In millions) | Three Months Ended March 31, 2015 |
Beginning of period | $ | 212 |
|
Accruals for environmental remediation deemed probable and reasonably estimable | — |
|
Obligations settled | (2 | ) |
End of period | $ | 210 |
|
Accrued liabilities for remediation activities are included in the following consolidated balance sheet lines:
|
| | | | | | | | |
(In millions) | | March 31, 2015 | | December 31, 2014 |
Accounts payable | | $ | 19 |
| | $ | 19 |
|
Deferred credits and other noncurrent liabilities | | 191 |
| | 193 |
|
Total | | $ | 210 |
| | $ | 212 |
|
Expenses related to remediation are recorded in cost of sales and were insignificant for both three month periods ended March 31, 2015 and March 31, 2014. 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 reasonably 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 significant 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, 2015, 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, 2015, there are four significant projects with defined scope greater than or equal to $5 million each, with a total accrued liability of $159 million. These projects are Gary RCRA (accrued liability of $38 million), the former Geneva facility (accrued liability of $64 million), the former Duluth facility St. Louis River Estuary (accrued liability of $50 million), and the Solid Waste Management Unit (SWMU) #4 at UPI (accrued liability of $7 million).
Other Projects – There are four 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, 2015 was $8 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 had an accrued liability of less than $1 million. The total accrued liability for these projects at March 31, 2015 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, 2015 and were based on known scopes of work.
Administrative and Legal Costs – As of March 31, 2015, U. S. Steel had an accrued liability of $7 million for administrative and legal costs related to environmental remediation projects. These accrued liabilities were based on projected administrative and legal costs for the next three years and do not change significantly from year to year.
See Part II, "Item 1 – Legal Proceedings – Environmental Proceedings" for further details regarding U. S. Steel's environmental remediation at its various production facilities.
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 2015 and 2014, such capital expenditures totaled $23 million and $11 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 the United States, the Environmental Protection Agency (EPA) has published rules for regulating GHG emissions for certain facilities (both new and existing). The U.S. Supreme Court has upheld the EPA's authority under the Clean Air Act (CAA) to regulate GHG emissions from new or modified stationary sources that are required to obtain pre-construction and operating permits for non-GHG regulated air pollutants, and federal courts are considering several suits that challenge the EPA's authority to regulate GHG emissions from other types of sources (including existing sources). Congress could take additional action to increase the regulation of GHG emissions.
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 GHG emissions, commonly referred to as 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 the 2008-2012 period (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 percent. USSK's final allocation for the Phase III period that was approved by the EC in January 2014 is approximately 48 million allowances. Based on 2014 emission intensity levels and projected future production levels, and as a result of carryover allowances from the NAP II period, we do not currently anticipate the need to purchase credits until 2018, and we currently estimate a shortfall of 16 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 a gain of $17 million during the three months ended March 31, 2014, reflected as a net gain on disposal of assets. There were no such similar transactions for the three months ended March 31, 2015.
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 program. Under the Greenhouse Gas Tailoring Rule, as modified by the recent U.S. Supreme Court decision upholding the rule, new projects that increase GHG emissions by a significant amount (generally more than 75,000 tons of CO2 per year) are subject to the PSD requirements, including the installation of best available control technology (BACT), if the project also significantly increases emissions of at least one non-GHG pollutant. On January 8, 2014, the EPA published proposed New Source Performance Standards (NSPS) for GHG emissions from new electric generating units (EGUs). As a result of that rule, on June 18, 2014, the EPA also published proposed guidance under CAA Section 111(d) to regulate CO2 emissions from EGUs. Additionally, the EPA recently revised the National Ambient Air Quality Standards (NAAQS) for nitrogen oxide, sulfur dioxide, particulate matter, and lead, and in December 2014, proposed to lower the ozone NAAQS to a level within the range of 65 to 70 parts per billion (ppb).
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.
EU Environmental Requirements – Slovakia adopted a new waste code in March 2015 that will become effective January 1, 2016. This legislation implements the EU Waste Framework Directive that strictly regulates waste disposal and encourages recycling, among other provisions, by increasing fees for waste disposed of in landfills, including privately owned industrial landfills. We are currently analyzing the legislation in order to estimate the potential financial impact on USSK's operations.
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 exceptions or 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 €80 million to €155 million (approximately $86 million to $167 million) over the 2015 to 2020 period. There are ongoing efforts to seek EU grants to fund a portion of these capital expenditures. The EU has various programs under which funds are allocated to member states to implement broad public policies, which are then awarded by the member states to public and private entities on a competitive basis. The total capital expenditures required for BAT compliance will depend upon, among other factors, the extent to which EU incentive grants are awarded for these projects. 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 for large combustion plants. In January 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 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. The boiler projects have been approved by our Board of Directors and we are now in the execution phase. These projects will result in a reduction in electricity, operating, maintenance and waste disposal costs once completed. The current projected cost to reconstruct one existing boiler and build one new boiler to achieve compliance is approximately $170 million. Broad legislative changes were enacted by the Slovak Republic to extend the scope of support for renewable sources of energy, that are intended to allow USSK to participate in Slovakia's renewable energy incentive program once both boiler projects are completed.
Guarantees – The maximum guarantees of the indebtedness of unconsolidated entities of U. S. Steel totaled $4 million at March 31, 2015.
EPA Region V Federal Lawsuit – On August 1, 2012, the EPA, joined by the States of Illinois, Indiana and Michigan, initiated an action in the Northern District of Indiana alleging various air regulatory violations at Gary Works, Granite City Works, and Great Lakes Works. The action contends that Gary Works failed to obtain the proper CAA 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. Civil penalties and injunctive relief is requested. U. S. Steel believes that the claims asserted in the action are not justified and are without legal foundation. The Court has dismissed all claims related to the Blast Furnace No. 4 reline. Fact discovery on the remaining claims is being conducted in three phases with discovery regarding Granite City Works and Great Lakes Works now complete. U. S. Steel will continue to vigorously defend against these claims. At this time, the potential outcome on the asserted claims is not reasonably estimable.
CCAA - On September 16, 2014 USSC commenced court-supervised restructuring proceedings under CCAA before the Ontario Superior Court of Justice. As part of the CCAA proceedings, U. S. Steel has submitted both secured and unsecured claims that have been verified by the court-appointed Monitor. As of March 31, 2015, the court-appointed Monitor has verified U. S. Steel's claims in the CCAA proceedings are approximately $1.8 billion. U. S. Steel's claims have been challenged by a number of interested parties which, if successful, could result in the reclassification of those claims and/or modifications to the values of those claims. U. S. Steel is contesting those challenges within the CCAA proceedings, the outcome of which can not be reasonably estimated at this time.
Other contingencies – Under certain operating lease agreements covering various equipment, U. S. Steel has the option to renew the lease or to purchase the equipment at the end of the lease term. If U. S. Steel does not exercise the purchase option by the end of the lease term, U. S. Steel guarantees a residual value of the equipment as determined at the lease inception date (totaling approximately $12 million at March 31, 2015). 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 $165 million as of March 31, 2015, 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 $48 million at March 31, 2015, of which approximately $1 million was classified as current, and $51 million at December 31, 2014, of which $1 million was classified as current. Restricted cash at March 31, 2015 also includes $4 million to fund certain capital projects at Granite City Works. The proceeds become unrestricted as capital expenditures for these projects are made.
Capital Commitments – At March 31, 2015, U. S. Steel’s contractual commitments to acquire property, plant and equipment totaled $352 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 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Later Years | | Total |
$588 | | $704 | | $558 | | $539 | | $286 | | $923 | | $3,598 |
The majority of U. S. Steel’s unconditional purchase obligations relates to the supply of industrial gases, and certain energy and utility services with terms ranging from two to 13 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, and U. S. Steel is obligated to purchase the coke from Gateway at the contract price. As of March 31, 2015, a maximum default payment of approximately $232 million would apply if U. S. Steel terminates the agreement.
Total payments relating to unconditional purchase obligations were $111 million and $134 million for the three months ended March 31, 2015 and 2014, respectively.
|
| |
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
RESULTS OF OPERATIONS
During the first quarter of 2015, the Company adjusted its operating footprint by temporarily reducing its production levels within its Flat-Rolled and Tubular segments as well as permanently shutting down certain of its coke production facilities. Management may continue to further adjust the Company's operations in 2015. Customer order rates for our products, market demand, economic conditions as well as import levels will determine the size and duration of these adjustments.
The consolidated results for the three months ended March 31, 2015 do not reflect the results of U. S. Steel Canada (USSC) due to USSC’s filing for creditor protection pursuant to Canada’s Companies’ Creditors Arrangement Act (CCAA) on September 16, 2014. The consolidated statement of operations, consolidated statement of comprehensive income (loss) and consolidated statement of cash flows for the three months ended March 31, 2014 include the results for USSC.
Net sales by segment for the three months ended March 31, 2015 and 2014 are set forth in the following table:
|
| | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(Dollars in millions, excluding intersegment sales) | | 2015 | | 2014 | | % Change |
Flat-Rolled Products (Flat-Rolled) | | $ | 2,194 |
| | $ | 3,027 |
| | (28 | )% |
U. S. Steel Europe (USSE) | | 691 |
| | 759 |
| | (9 | )% |
Tubular Products (Tubular) | | 371 |
| | 643 |
| | (42 | )% |
Total sales from reportable segments | | 3,256 |
| | 4,429 |
| | (26 | )% |
Other Businesses | | 16 |
| | 19 |
| | (16 | )% |
Net sales | | $ | 3,272 |
| | $ | 4,448 |
| | (26 | )% |
Management’s analysis of the percentage change in net sales for U. S. Steel’s reportable business segments for the three months ended March 31, 2015 versus the three months ended March 31, 2014 is set forth in the following table:
Three Months Ended March 31, 2015 versus Three Months Ended March 31, 2014 |
| | | | | | | | | | | | | | | | | | |
| | Steel Products (a) | | | | |
| | Volume | | Price | | Mix | | FX (b) | | Coke & Other | | Net Change |
Flat-Rolled | | (24 | )% | | — | % | | — | % | | — | % | | (4 | )% | | (28 | )% |
USSE | | 22 | % | | (10 | )% | | (1 | )% | | (20 | )% | | — | % | | (9 | )% |
Tubular | | (46 | )% | | 4 | % | | 2 | % | | — | % | | (2 | )% | | (42 | )% |
(a) Excludes intersegment sales
(b) Foreign currency translation effects
Net sales were $3,272 million in the three months ended March 31, 2015, compared with $4,448 million in the same period last year. The decrease in sales for the Flat-Rolled segment primarily reflected a decrease in shipments (decrease of 1,057 thousand net tons) as a result of market conditions and the deconsolidation of USSC (represents 559 thousand net tons of the total decrease). The decrease in sales for the USSE segment was primarily due to the strengthening of the U.S. dollar versus the euro in the three months ended March 31, 2015 as compared to the same period in 2014 (decrease in average exchange rate of 0.24) and lower average realized euro-based prices (decrease of €47 per net ton) partially offset by higher shipments (increase of 233 thousand net tons). The decrease in sales for the Tubular segment primarily reflected lower shipments (decrease of 199 thousand net tons) as a result of reduced drilling activity caused by low crude oil prices and continued high import levels partially offset by higher average realized prices (increase of $158 per net ton).
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 $71 million in the three months ended March 31, 2015, compared to $84 million in the three months ended March 31, 2014. The $13 million decrease is primarily due to the natural maturation of our pension plans, partially offset by a lower discount rate and expected return on assets assumptions.
Costs related to defined contribution plans totaled $11 million in the three months ended March 31, 2015, compared to $12 million in the three months ended March 31, 2014.
Other benefit costs totaled $(9) million in the three months ended March 31, 2015, compared to $3 million in the three months ended March 31, 2014. The $12 million decrease is primarily due to the deconsolidation of USSC.
Net periodic pension cost, including multiemployer plans, is expected to total approximately $275 million in 2015. Total other benefits costs in 2015 are expected to be a benefit of approximately $(35) million. The pension cost projection includes approximately $75 million of contributions to the Steelworkers Pension Trust.
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 | | $ | (77 | ) | | $ | 77 |
|
Discount rate | | | | |
Incremental (decrease) increase in: | | | | |
Net periodic pension & other benefits costs | | $ | (35 | ) | | $ | 56 |
|
Health care cost escalation trend rates | | | | |
Incremental increase (decrease) in: | | | | |
Service and interest cost components for 2015 | | $ | 5 |
| | $ | (4 | ) |
Non-retirement postemployment benefits
U. S. Steel incurred costs of approximately $14 million for the three months ended March 31, 2015 related to employee costs for supplemental unemployment benefits and the continuation of health care benefits and life insurance coverage for employees associated with the temporary idling of certain facilities and reduced production at others. Payments for these benefits during the three months ended March 31, 2015 were insignificant. There were no significant costs incurred during the three months ended March 31, 2014.
Selling, general and administrative expenses
Selling, general and administrative expenses were $102 million in the three months ended March 31, 2015, compared to $138 million in the three months ended March 31, 2014. The decrease is primarily related to lower pension and other benefits costs as discussed above.
Restructuring and Other Charges
During the three months ended March 31, 2015, the Company recorded a charge of $153 million, which is reported in restructuring and other charges in the consolidated statement of operations, related to the permanent shutdown of the cokemaking operations at Gary Works and Granite City Works, within our Flat-Rolled segment. In addition to the write-down of assets, the charge also includes employee related costs, including costs for severance, supplemental unemployment benefits (SUB) and continuation of health care benefits of $18 million and other shutdown costs, primarily environmental.
During the three months ended March 31, 2014, the Company recorded severance related charges of $2 million for headcount reductions within our Flat-Rolled segment related to our Canadian operations prior to the deconsolidation of USSC. Cash payments were made related to severance and exit costs of $4 million. Favorable adjustments for changes in estimates on restructuring reserves were made for $8 million.
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, asset impairments and other closure costs.
Management believes its actions with regard to the Company’s operations will have a positive impact on the Company’s annual cash flows of approximately $125 million to $150 million over the course of subsequent annual periods as a result of decreased payroll and benefits costs, capital savings and other idle facility costs. Also, the actions will result in other non-cash savings of approximately $90 million, primarily related to reduced depreciation expense in future periods. Additionally, management does not believe there will be any significant impacts related to the Company’s revenues as a result of these actions.
Earnings before interest and income taxes (EBIT) by segment for the three months ended March 31, 2015 and 2014 is set forth in the following table:
|
| | | | | | | | | | | |
| | Three Months Ended March 31, | | % Change |
(Dollars in millions) | | 2015 | | 2014 | |
Flat-Rolled | | $ | (67 | ) | | $ | 85 |
| | NM |
|
USSE | | 37 |
| | 32 |
| | 16 | % |
Tubular | | 1 |
| | 24 |
| | (96 | )% |
Total earnings from reportable segments | | (29 | ) | | 141 |
| | NM |
|
Other Businesses | | 8 |
| | 13 |
| | (38 | )% |
Segment EBIT | | (21 | ) | | 154 |
| | NM |
|
Items not allocated to segments: | | | | | | |
Postretirement benefit expense | | (13 | ) | | (32 | ) | | (59 | )% |
Other items not allocated to segments: | |
| |
| |
|
Loss on shutdown of coke production facilities | | (153 | ) | | — |
| | 100 | % |
Total EBIT | | $ | (187 | ) | | $ | 122 |
| | (100 | )% |
Segment results for Flat-Rolled
|
| | | | | | | | | | | |
| | Three Months Ended March 31, | | % Change |
| | 2015 | | 2014 | |
Earnings before interest and taxes ($ millions) | | $ | (67 | ) | | $ | 85 |
| | NM |
|
Gross margin | | 4 | % | | 9 | % | | (5 | )% |
Raw steel production (mnt) | | 2,868 |
| | 4,491 |
| | (36 | )% |
Capability utilization | | 60 | % | | 83 | % | | (23 | )% |
Steel shipments (mnt) | | 2,617 |
| | 3,674 |
| | (29 | )% |
Average realized steel price per ton | | $ | 768 |
| | $ | 761 |
| (a) | 1 | % |
(a) Average realized steel price per ton excluding USSC was $774 for the three months ended March 31, 2014.
The decrease in Flat-Rolled results for the three months ended March 31, 2015 compared to the same period in 2014 resulted from higher repairs and maintenance and other operating costs (approximately $115 million), lower shipment volumes (approximately $75 million), lower average realized prices excluding USSC, see footnote (a) to the table above,(approximately $60 million), and lower steel substrate sales to our Tubular segment (approximately $40 million). These changes were partially offset by lower raw materials costs (approximately $70 million), lower energy costs (approximately $55 million), and lower costs for profit-based payments (approximately $20 million).
Segment results for USSE
|
| | | | | | | | | | | |
| | Three Months Ended March 31, | | % Change |
| | 2015 | | 2014 | |
Earnings before interest and taxes ($ millions) | | $ | 37 |
| | $ | 32 |
| | 16 | % |
Gross margin | | 11 | % | | 8 | % | | 3 | % |
Raw steel production (mnt) | | 1,283 |
| | 1,141 |
| | 12 | % |
Capability utilization | | 104 | % | | 93 | % | | 11 | % |
Steel shipments (mnt) | | 1,264 |
| | 1,031 |
| | 23 | % |
Average realized steel price per ton | | $ | 530 |
| | $ | 710 |
| | (25 | )% |
The increase in USSE results for the three months ended March 31, 2015 compared to the same period in 2014 was primarily due to lower raw materials costs (approximately $100 million) and higher shipment volumes (approximately $20 million). These changes were partially offset by lower average realized euro-based prices (approximately $65 million) and the strengthening of the U.S. dollar versus the euro in the three months ended March 31, 2015 as compared to the same period in 2014 (approximately $45 million).
Segment results for Tubular
|
| | | | | | | | | | | |
| | Three Months Ended March 31, | | % Change |
| | 2015 | | 2014 | |
Earnings before interest and taxes ($ millions) | | $ | 1 |
| | |