UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the Quarterly Period Ended March 31, 2020
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the transition period from to .
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||
(Address of principal executive offices) | (Zip Code) | ||||
(412 ) 433-1121
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically 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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
x | Accelerated filer | o | Non-accelerated filer | o | Smaller reporting company | Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | o | ||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x
Common stock outstanding at April 27, 2020 – 170,375,833 shares
INDEX
Page | |||
PART I – FINANCIAL INFORMATION | |||
Item 1. | Financial Statements: | ||
Item 2. | |||
Item 3. | |||
Item 4. | |||
PART II – OTHER INFORMATION | |||
Item 1. | |||
Item 1A. | |||
Item 4. | |||
Item 5. | |||
Item 6. | |||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains information that may constitute ”forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in those sections. Generally, we have identified such forward-looking statements by using the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “target,” “forecast,” “aim,” "should," “will,” "may" 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 changes, share of sales and earnings per share changes, anticipated cost savings, potential capital and operational cash improvements, U. S. Steel's future ability or plans to take ownership of the Big River Steel joint venture as a wholly owned subsidiary, 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 risks related to the satisfaction of the conditions of creating the joint venture with Stelco in the anticipated time frame or at all and the possibility that the option will not be exercised by Stelco, possible production or operations interruptions related to the novel coronavirus (COVID-19) pandemic that could disrupt supply or delivery of, or demand for, the Company's products, as well as the risks and uncertainties described in this report and in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, 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
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended March 31, | ||||||||
(Dollars in millions, except per share amounts) | 2020 | 2019 | ||||||
Net sales: | ||||||||
Net sales | $ | $ | ||||||
Net sales to related parties (Note 20) | ||||||||
Total (Note 6) | ||||||||
Operating expenses (income): | ||||||||
Cost of sales (excludes items shown below) | ||||||||
Selling, general and administrative expenses | ||||||||
Depreciation, depletion and amortization | ||||||||
Loss (earnings) from investees | ( | ) | ||||||
Tubular asset impairment charges (Notes 1 and 10) | ||||||||
Gain on equity investee transactions | ( | ) | ||||||
Restructuring and other charges (Note 21) | ||||||||
Net loss on sale of assets | ||||||||
Other losses, net | ||||||||
Total | ||||||||
(Loss) earnings before interest and income taxes | ( | ) | ||||||
Interest expense | ||||||||
Interest income | ( | ) | ( | ) | ||||
Other financial benefits | ( | ) | ( | ) | ||||
Net periodic benefit (income) cost (other than service cost) | ( | ) | ||||||
Net interest and other financial costs | ||||||||
(Loss) earnings before income taxes | ( | ) | ||||||
Income tax (benefit) provision (Note 13) | ( | ) | ||||||
Net (loss) earnings | ( | ) | ||||||
Less: Net earnings attributable to noncontrolling interests | ||||||||
Net (loss) earnings attributable to United States Steel Corporation | $ | ( | ) | $ | ||||
(Loss) earnings per common share (Note 14): | ||||||||
(Loss) earnings per share attributable to United States Steel Corporation stockholders: | ||||||||
-Basic | $ | ( | ) | $ | ||||
-Diluted | $ | ( | ) | $ | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
-1-
UNITED STATES STEEL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended March 31, | ||||||||
(Dollars in millions) | 2020 | 2019 | ||||||
Net (loss) earnings | $ | ( | ) | $ | ||||
Other comprehensive income (loss), net of tax: | ||||||||
Changes in foreign currency translation adjustments | ( | ) | ( | ) | ||||
Changes in pension and other employee benefit accounts | ||||||||
Changes in derivative financial instruments | ( | ) | ||||||
Total other comprehensive income, net of tax | ||||||||
Comprehensive (loss) income including noncontrolling interest | ( | ) | ||||||
Comprehensive income attributable to noncontrolling interest | ||||||||
Comprehensive (loss) income attributable to United States Steel Corporation | $ | ( | ) | $ | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
-2-
UNITED STATES STEEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions) | March 31, 2020 | December 31, 2019 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents (Note 7) | $ | $ | ||||||
Receivables, less allowance of $33 and $28 | ||||||||
Receivables from related parties (Note 20) | ||||||||
Inventories (Note 8) | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Long-term restricted cash (Note 7) | ||||||||
Operating lease assets (Note 9) | ||||||||
Property, plant and equipment | ||||||||
Less accumulated depreciation and depletion | ||||||||
Total property, plant and equipment, net | ||||||||
Investments and long-term receivables, less allowance of $8 and $5 | ||||||||
Intangibles – net (Note 10) | ||||||||
Deferred income tax benefits (Note 13) | ||||||||
Other noncurrent assets | ||||||||
Total assets | $ | $ | ||||||
Liabilities | ||||||||
Current liabilities: | ||||||||
Accounts payable and other accrued liabilities | $ | $ | ||||||
Accounts payable to related parties (Note 20) | ||||||||
Payroll and benefits payable | ||||||||
Accrued taxes | ||||||||
Accrued interest | ||||||||
Current operating lease liabilities (Note 9) | ||||||||
Current portion of long-term debt (Note 16) | ||||||||
Total current liabilities | ||||||||
Noncurrent operating lease liabilities (Note 9) | ||||||||
Long-term debt, less unamortized discount and debt issuance costs (Note 16) | ||||||||
Employee benefits | ||||||||
Deferred income tax liabilities (Note 13) | ||||||||
Deferred credits and other noncurrent liabilities | ||||||||
Total liabilities | ||||||||
Contingencies and commitments (Note 22) | ||||||||
Stockholders’ Equity (Note 18): | ||||||||
Common stock (179,027,981 and 178,555,206 shares issued) (Note 14) | ||||||||
Treasury stock, at cost (8,653,246 and 8,509,337 shares) | ( | ) | ( | ) | ||||
Additional paid-in capital | ||||||||
Retained earnings | ||||||||
Accumulated other comprehensive loss (Note 19) | ( | ) | ( | ) | ||||
Total United States Steel Corporation stockholders’ equity | ||||||||
Noncontrolling interests | ||||||||
Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
-3-
UNITED STATES STEEL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, | ||||||||
(Dollars in millions) | 2020 | 2019 | ||||||
Increase (decrease) in cash, cash equivalents and restricted cash | ||||||||
Operating activities: | ||||||||
Net (loss) earnings | $ | ( | ) | $ | ||||
Adjustments to reconcile to net cash provided by operating activities: | ||||||||
Depreciation, depletion and amortization | ||||||||
Tubular asset impairment charges (Notes 1 and 10) | ||||||||
Gain on equity investee transactions | ( | ) | ||||||
Restructuring and other charges (Note 21) | ||||||||
Pensions and other postretirement benefits | ( | ) | ||||||
Deferred income taxes (Note 13) | ||||||||
Net loss on sale of assets | ||||||||
Equity investee earnings, net of distributions received | ( | ) | ||||||
Changes in: | ||||||||
Current receivables | ( | ) | ( | ) | ||||
Inventories | ( | ) | ( | ) | ||||
Current accounts payable and accrued expenses | ( | ) | ||||||
Income taxes receivable/payable | ||||||||
All other, net | ( | ) | ||||||
Net cash (used in) provided by operating activities | ( | ) | ||||||
Investing activities: | ||||||||
Capital expenditures | ( | ) | ( | ) | ||||
Proceeds from sale of assets | ||||||||
Proceeds from sale of ownership interests in equity investees | ||||||||
Investments, net | ( | ) | ||||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Financing activities: | ||||||||
Revolving credit facilities - borrowings, net of financing costs (Note 16) | ||||||||
Revolving credit facilities - repayments (Note 16) | ( | ) | ||||||
Issuance of long-term debt, net of financing costs (Note 16) | ||||||||
Repayment of long-term debt (Note 16) | ( | ) | ||||||
Common stock repurchased (Note 24) | ( | ) | ||||||
Dividends paid | ( | ) | ( | ) | ||||
Taxes paid for equity compensation plans (Note 12) | ( | ) | ( | ) | ||||
Net cash provided by (used in) financing activities | ( | ) | ||||||
Effect of exchange rate changes on cash | ( | ) | ( | ) | ||||
Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ) | ||||||
Cash, cash equivalents and restricted cash at beginning of year (Note 7) | ||||||||
Cash, cash equivalents and restricted cash at end of period (Note 7) | $ | $ | ||||||
Supplemental Cash Flow Information: | ||||||||
Non-cash investing and financing activities: | ||||||||
Change in accrued capital expenditures | $ | ( | ) | $ | ( | ) | ||
U. S. Steel common stock issued for employee/non-employee director stock plans | ||||||||
Capital expenditures funded by finance lease borrowings | ||||||||
Export Credit Agreement (ECA) financing | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
-4-
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation and Significant Accounting Policies
United States Steel Corporation (U. S. Steel, or the Company) produces and sells steel products, including flat-rolled and tubular products, in North America and Europe. Operations in North America also include iron ore and coke production facilities, railroad services and real estate operations. Operations in Europe also include coke production facilities.
The year-end Condensed 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 condensed 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 condensed 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, 2019, which should be read in conjunction with these condensed financial statements.
Property, plant and equipment
U. S. Steel evaluates impairment of its property, plant and equipment whenever circumstances indicate that the carrying value may not be recoverable. We evaluate impairment of long-lived assets at the asset group level. Our asset groups are Flat-Rolled, welded tubular, seamless tubular and U. S. Steel Europe (USSE). Asset impairments are recognized when the carrying value of an asset group exceeds its recoverable amount as determined by the asset group's aggregate projected discounted cash flows.
During 2019, the challenging steel market environment in the U.S. and Europe and recent losses in the welded tubular asset group were considered triggering events for the Flat-Rolled, USSE and welded tubular asset groups. U. S. Steel completed a quantitative analysis of its long-lived assets for these asset groups and determined that the assets were not impaired. There were no triggering events for seamless tubular in 2019.
2. New Accounting Standards
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, (ASU 2020-04). ASU 2020-04 provides optional exceptions for applying generally accepted accounting principles to modifications of contracts, hedging relationships, and other transactions that reference LIBOR or another rate that will be discontinued by reference rate reform if certain criteria are met. U. S. Steel is currently assessing the impact of the ASU but does not believe it will have a material impact on its Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes (ASU 2019-12). ASU 2019-12 simplifies accounting for income taxes by removing certain exceptions from the general principles in Topic 740 including elimination of the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items such as other comprehensive income. ASU 2019-12 also clarifies and amends certain guidance in Topic 740. ASU 2019-12 is effective for public companies for fiscal years beginning after December 15, 2020, including interim periods, with early adoption of all amendments in the same period permitted. U. S. Steel is currently assessing the impact of the ASU, but does not believe it will have a significant impact on its Consolidated Financial Statements.
3. Recently Adopted Accounting Standard
-5-
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which adds an impairment model that is based on expected losses rather than incurred losses. Under ASU 2016-13, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 was effective for public companies for fiscal years beginning after December 15, 2019 including interim reporting periods. U. S. Steel adopted this standard effective January 1, 2020. The impact of adoption was not material to the Condensed Consolidated Financial Statements.
U. S. Steel's significant financial instruments which are valued at cost are trade receivables (receivables). U. S. Steel's receivables carry standard industry terms and are categorized in two receivable pools, U.S. and U. S. Steel Europe (USSE). Both pools use customer specific risk ratings based on customer financial metrics, past payment experience and other factors and qualitatively consider economic conditions to assess the level of allowance for doubtful accounts. USSE mitigates credit risk for over 70 percent of its receivables balance using credit insurance, letters of credit, bank guarantees, prepayments or other collateral. Below is a summary of the allowance for doubtful accounts for the segments. Additional reserve recorded in the period ended March 31, 2020 primarily reflects uncertainty over near-term anticipated market conditions.
(in millions) | U.S. | USSE | Total Allowance | |||||||||
Balance at December 31, 2019 | $ | $ | $ | |||||||||
Additional reserve | ||||||||||||
Balance at March 31, 2020 | $ | $ | $ | |||||||||
4. Segment Information
U. S. Steel has three reportable segments: North American Flat-Rolled (Flat-Rolled), U. S. Steel Europe (USSE); and Tubular Products (Tubular). U. S. Steel's investment in Big River Steel and the results of our railroad and real estate businesses that do not constitute reportable segments are combined and disclosed in the Other Businesses category.
The chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being earnings (loss) before interest and income taxes. Earnings (loss) before interest and income taxes for reportable segments and Other Businesses does not include net interest and other financial costs (income), income taxes, and certain other items that management believes are not indicative of future results.
The accounting principles applied at the operating segment level in determining earnings (loss) before interest and income taxes are generally the same as those applied at the consolidated financial statement level. Intersegment sales and transfers are accounted for at market-based prices and are eliminated at the corporate consolidation level. Corporate-level selling, general and administrative expenses and costs related to certain former businesses are allocated to the reportable segments and Other Businesses based on measures of activity that management believes are reasonable.
-6-
The results of segment operations for the three months ended March 31, 2020 and 2019 are:
(In millions) Three Months Ended March 31, 2020 | Customer Sales | Intersegment Sales | Net Sales | Earnings (loss) from investees | Earnings (loss) before interest and income taxes | |||||||||||||||
Flat-Rolled | $ | $ | $ | $ | $ | ( | ) | |||||||||||||
USSE | ( | ) | ||||||||||||||||||
Tubular | ( | ) | ||||||||||||||||||
Total reportable segments | ( | ) | ||||||||||||||||||
Other Businesses | ( | ) | ||||||||||||||||||
Reconciling Items and Eliminations | ( | ) | ( | ) | ( | ) | ||||||||||||||
Total | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||
Three Months Ended March 31, 2019 | ||||||||||||||||||||
Flat-Rolled | $ | $ | $ | $ | $ | |||||||||||||||
USSE | ||||||||||||||||||||
Tubular | ||||||||||||||||||||
Total reportable segments | ||||||||||||||||||||
Other Businesses | ||||||||||||||||||||
Reconciling Items and Eliminations | ( | ) | ( | ) | ( | ) | ||||||||||||||
Total | $ | $ | $ | $ | $ | |||||||||||||||
Three Months Ended March 31, | ||||||||
(In millions) | 2020 | 2019 | ||||||
Items not allocated to segments: | ||||||||
Tubular asset impairment charges (Notes 1 and 10) | $ | ( | ) | $ | ||||
Restructuring and other charges (Note 21) | ( | ) | $ | |||||
Gain on previously held investment in UPI | ||||||||
December 24, 2018 Clairton coke making facility fire | ( | ) | ||||||
Total reconciling items | $ | ( | ) | $ | ( | ) | ||
5. Acquisition
On February 29, 2020, U. S. Steel purchased the remaining 50 % ownership interest in USS-POSCO Industries (UPI) for $3 million, net of cash received of $2 million. There was an assumption of accounts payable owed to U. S. Steel for prior sales of steel substrate of $135 million associated with the purchase that is reflected as a reduction in receivables from related parties on the Company's Condensed Consolidated Balance Sheet. UPI is located in Pittsburg, California and markets sheet and tin mill products, principally in the western United States. UPI produces hot rolled pickled and oiled, cold-rolled sheets, galvanized sheets and tin mill products made from hot bands principally provided by U. S. Steel. UPI’s annual production capability is approximately 1.5 million tons. The remaining interest in UPI was purchased by the Company to obtain more control over the future of this investment. The Company had a liability that resulted from historical losses recorded due to our continuing involvement in the previously held equity investment in UPI. Using step acquisition accounting we increased the value of our previously held equity investment to its fair value of $5 million which resulted in a gain of approximately $25 million. The gain was recorded in gain on equity investee transactions in the Condensed Consolidated Statement of Operations.
-7-
There was a step-up to fair value for property, plant and equipment of $47 million and an intangible asset of $54 million that was recorded. The intangible asset arises from a land lease contract, under which a certain portion of payment owed to UPI is realized in the form of deductions from electricity costs. The intangible asset will be amortized over a ten year period. Transaction costs associated with the acquisition and the amount of revenue recognized in the Condensed Consolidated Statement of Operations as a result of the acquisition were not significant.
The following table presents the allocation of the aggregate purchase price based on estimated fair values.
(in millions) | |||
Assets Acquired: | |||
Receivables | $ | ||
Inventories | |||
Other current assets | |||
Property, plant and equipment | |||
Intangibles | |||
Other noncurrent assets | |||
Total Assets Acquired | $ | ||
Liabilities Assumed: | |||
UPI accounts payable for substrate purchased from U. S. Steel (a) | $ | ||
Accounts payable and accrued liabilities | |||
Payroll and benefits payable | |||
Current portion of long-term debt | |||
Employee benefits | |||
Total Liabilities Assumed | $ | ||
Fair value of previously held investment in UPI | $ | ||
Purchase price - net of cash acquired | |||
Difference in assets acquired and liabilities assumed | $ | ||
(a) The transaction to purchase UPI included the assumption of $135 million of accounts payable owed to U. S. Steel for prior sales of steel substrate to UPI. This amount is reflected as a reduction in receivables from related parties in the Company's Condensed Consolidated Balance Sheet as both the corresponding receivable and payable amounts between U. S. Steel and UPI are eliminated in consolidation upon acquisition.
-8-
6. Revenue
Revenue is generated primarily from contracts to produce, ship and deliver steel products, and to a lesser extent, raw materials sales such as iron ore pellets and coke by-products and railroad services and real estate sales. Generally, U. S. Steel’s performance obligations are satisfied and revenue is recognized at a point in time, when title transfers to our customer for product shipped or services are provided. Revenues are recorded net of any sales incentives. Shipping and other transportation costs charged to customers are treated as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. Costs related to obtaining sales contracts are incidental and are expensed when incurred. Because customers are invoiced at the time title transfers and U. S. Steel’s right to consideration is unconditional at that time, U. S. Steel does not maintain contract asset balances. Additionally, U. S. Steel does not maintain contract liability balances, as performance obligations are satisfied prior to customer payment for product. U. S. Steel offers industry standard payment terms.
U. S. Steel has three reportable segments: Flat-Rolled, USSE and Tubular. Flat-Rolled primarily generates revenue from sheet and coated product sales to North American customers. Flat-Rolled also sells slabs, iron ore pellets and coke making by-products. USSE sells slabs, sheet, strip mill plate, coated products and spiral welded pipe to customers primarily in the Eastern European market. Tubular sells seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as oil country tubular goods or OCTG), standard and line pipe and mechanical tubing and primarily serves customers in the oil, gas and petrochemical markets. Revenue from our railroad and real estate businesses is reported in the Other Businesses category in our segment reporting structure. The following tables disaggregate our revenue by product for each of our reportable business segments for the three months ended March 31, 2020 and 2019, respectively:
Net Sales by Product (In millions):
Three Months Ended March 31, 2020 | Flat-Rolled | USSE | Tubular | Other Businesses | Total | |||||||||||
Semi-finished | $ | $ | $ | $ | $ | |||||||||||
Hot-rolled sheets | ||||||||||||||||
Cold-rolled sheets | ||||||||||||||||
Coated sheets | ||||||||||||||||
Tubular products | ||||||||||||||||
All Other (a) | ||||||||||||||||
Total | $ | $ | $ | $ | $ | |||||||||||
(a) Consists primarily of sales of raw materials and coke making by-products.
Three Months Ended March 31, 2019 | Flat-Rolled | USSE | Tubular | Other Businesses | Total | |||||||||||
Semi-finished | $ | $ | $ | $ | $ | |||||||||||
Hot-rolled sheets | ||||||||||||||||
Cold-rolled sheets | ||||||||||||||||
Coated sheets | ||||||||||||||||
Tubular products | ||||||||||||||||
All Other (a) | ||||||||||||||||
Total | $ | $ | $ | $ | $ | |||||||||||
(a) Consists primarily of sales of raw materials and coke making by-products.
7. Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within U. S. Steel's Condensed Consolidated Balance Sheets that sum to the total of the same amounts shown in the Condensed Consolidated Statement of Cash Flows:
-9-
(In millions) | March 31, 2020 | March 31, 2019 | ||||||
Cash and cash equivalents | $ | $ | ||||||
Restricted cash in other current assets | ||||||||
Long-term restricted cash | ||||||||
Total cash, cash equivalents and restricted cash | $ | $ | ||||||
In order to preserve cash and enhance our liquidity during the COVID-19 outbreak and disruptions in the oil and gas industry, we borrowed an additional $800 million under the Fifth Amended and Restated Credit Agreement which was held as cash on our Condensed Consolidated Balance Sheet at March 31, 2020.
Amounts included in restricted cash represent cash balances which are legally or contractually restricted, primarily for electric arc furnace construction, environmental capital expenditure projects and insurance purposes.
8. Inventories
Inventories are carried at the lower of cost or market for last-in, first-out (LIFO) inventories and lower of cost and net realizable value for first-in, first-out (FIFO) method inventories. The LIFO method is the predominant method of inventory costing in the United States. The FIFO method is the predominant inventory costing method in Europe. At March 31, 2020 and December 31, 2019, the LIFO method accounted for 65 percent and 75 percent of total inventory values, respectively.
(In millions) | March 31, 2020 | December 31, 2019 | ||||||
Raw materials | $ | $ | ||||||
Semi-finished products | ||||||||
Finished products | ||||||||
Supplies and sundry items | ||||||||
Total | $ | $ | ||||||
Current acquisition costs were estimated to exceed the above inventory values by $762 million and $735 million at March 31, 2020 and December 31, 2019, respectively. As a result of the liquidation of LIFO inventories, cost of sales increased and earnings before interest and income taxes decreased by $5 million and $1 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
Inventory includes $40 million of land held for residential/commercial development as of both March 31, 2020 and December 31, 2019.
9. Leases
Effective January 1, 2019, U. S. Steel adopted ASU 2016-02 using the modified retrospective transition method outlined in ASU 2018-11 which permitted application of ASU 2016-02 on January 1, 2019 using a cumulative effect adjustment to the opening balance of retained earnings.
Operating lease assets consist primarily of office space, aircraft, heavy mobile equipment used in our mining operations and facilities and equipment under operating service agreements for electricity generation and scrap processing. Significant finance leases include the Fairfield slab caster lease and heavy mobile equipment used in our mining operations (see Note 16 for further details). Variable lease payments are primarily related to operating service agreements where payment is solely dependent on consumption of certain services, such as raw material and by-product processing. Generally, we are not reasonably certain that renewal options or purchase options will be exercised. There is no impact to our leased assets for residual value guarantees as the potential loss is not probable (see “Other Contingencies” in Note 22 for further details). We do not have material restrictive covenants associated with our leases or material amounts of sublease income. From time to time, U. S. Steel may enter into arrangements for the construction or purchase of an asset and then enter into a financing arrangement to lease the asset. U. S. Steel recognizes leased assets and liabilities under these arrangements when it obtains control of the asset.
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The following table summarizes the lease amounts included in our Condensed Consolidated Balance Sheet as of March 31, 2020 and December 31, 2019.
(In millions) | Balance Sheet Location | March 31, 2020 | December 31, 2019 | |||||
Assets | ||||||||
Operating | Operating lease assets (a) | $ | $ | |||||
Finance | Property, plant and equipment (b) | |||||||
Total Lease Assets | $ | $ | ||||||
Liabilities | ||||||||
Current | ||||||||
Operating | Current operating lease liabilities | $ | $ | |||||
Finance | Current portion of long-term debt | |||||||
Non-Current | ||||||||
Operating | Noncurrent operating lease liabilities | |||||||
Finance | Long-term debt less unamortized discount and issue costs | |||||||
Total Lease Liabilities | $ | $ | ||||||
(a) Operating lease assets are recorded net of accumulated amortization of $57 million and $50 million as of March 31, 2020 and December 31, 2019, respectively.
(b) Finance lease assets are recorded net of accumulated depreciation of $29 million and $27 million as of March 31, 2020 and December 31, 2019, respectively.
The following table summarizes lease costs included in our Condensed Consolidated Statement of Operations for the three month periods ended March 31, 2020 and March 31, 2019.
(In millions) | Classification | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |||||
Operating Lease Cost (a) | Cost of sales | $ | $ | |||||
Operating Lease Cost | Selling, general and administrative expenses | |||||||
Finance Lease Cost | ||||||||
Amortization | Depreciation, depletion and amortization | |||||||
Interest | Interest expense | |||||||
Total Lease Cost | $ | $ | ||||||
(a) Operating lease cost recorded in cost of sales includes $3 million and $5 million of variable lease cost for the three months ended March 31, 2020 and March 31, 2019, respectively. An immaterial amount of variable lease cost is included in selling, general and administrative expenses and immaterial amounts of short-term lease cost are included in cost of sales and selling, general and administrative expenses.
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Lease liability maturities as of March 31, 2020 are shown below.
(In millions) | Operating | Finance | Total | ||||||||
2020 | $ | $ | $ | ||||||||
2021 | |||||||||||
2022 | |||||||||||
2023 | |||||||||||
2024 | |||||||||||
After 2024 | |||||||||||
Total Lease Payments | $ | $ | $ | ||||||||
Less: Interest | |||||||||||
Present value of lease liabilities | $ | $ | $ | ||||||||
Lease terms and discount rates are shown below.
As of March 31, 2020 | ||
Weighted average lease term | ||
Finance | ||
Operating | ||
Weighted average discount rate | ||
Finance | % | |
Operating | % | |
Supplemental cash flow information related to leases follows.
(In millions) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||
Operating cash flows from operating leases | $ | $ | |||||
Operating cash flows from finance leases | |||||||
Financing cash flows from finance leases | |||||||
Right-of-use assets exchanged for lease liabilities: | |||||||
Operating leases | |||||||
Finance leases | |||||||
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10. Intangible Assets
Intangible assets that are being amortized on a straight-line basis over their estimated useful lives are detailed below:
As of March 31, 2020 | As of December 31, 2019 | |||||||||||||||||||||||||||||
(In millions) | Useful Lives | Gross Carrying Amount | Accumulated Impairment | Accumulated Amortization | Net Amount | Gross Carrying Amount | Accumulated Amortization | Net Amount | ||||||||||||||||||||||
Customer relationships | 22 Years | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Patents | 10-15 Years | |||||||||||||||||||||||||||||
Energy Contract | 10 Years | |||||||||||||||||||||||||||||
Other Intangibles | 4-20 Years | |||||||||||||||||||||||||||||
Total amortizable intangible assets | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Identifiable intangible assets with finite lives are reviewed for impairment whenever events or circumstances indicate that the carrying values may not be recoverable. For the period ended March 31, 2020, the steep decline in oil prices that resulted from market oversupply and declining demand was considered a triggering event for the welded tubular asset group. A quantitative analysis was completed and resulted in a $67 million impairment of the welded tubular asset group's intangible assets. See Note 1 for further details.
Amortization expense was $3 million and $2 million for the three months ended March 31, 2020 and March 31, 2019, respectively. The estimated amortization expense for the remainder of 2020 is $5 million. We expect approximately $6 million in annual amortization expense through 2024.
As part of the purchase of UPI, we acquired an intangible asset with a fair value of approximately $54 million that will be amortized over ten years . This asset arises from a land lease contract, under which a certain portion of payment owed to UPI is realized in the form of deductions from electricity costs. See Note 5 to the Condensed Consolidated Financial Statements for further details.
The carrying amount of acquired water rights with indefinite lives as of March 31, 2020 and December 31, 2019 totaled $75 million. The acquired water rights are tested for impairment annually in the third quarter, or whenever events or circumstances indicate the carrying value may not be recoverable. U. S. Steel performed a quantitative impairment evaluation of its acquired water rights during the third quarter of 2019. Based on the results of the evaluation, the water rights were not impaired.
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11. Pensions and Other Benefits
The following table reflects the components of net periodic benefit cost for the three months ended March 31, 2020 and 2019:
Pension Benefits | Other Benefits | |||||||||||||||
(In millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Service cost | $ | $ | $ | $ | ||||||||||||
Interest cost | ||||||||||||||||