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1
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------
UNITED STATES STEEL CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its
charter)
Delaware 1-16811 25-1897152
-------------- ----------- ---------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
600 Grant Street, Pittsburgh, PA 15219-2800
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 433-1121
----------------------------
(Registrant's telephone
number,
including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes..X..No.....
Common stock outstanding at October 31, 2002 - 102,292,619 shares
2
UNITED STATES STEEL CORPORATION
SEC FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2002
--------------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Statement of Operations 3
Balance Sheet 4
Statement of Cash Flows 5
Selected Notes to Financial Statements 6
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends and Ratio of
Earnings to Fixed Charges 22
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 23
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 48
Item 4. Controls and Procedures 51
Supplemental Statistics 52
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 53
Item 6. Exhibits and Reports on Form 8-K 56
SIGNATURE 57
CERTIFICATIONS 57
NON-AUDIT SERVICES 59
WEBSITE POSTING 59
3
Part I - Financial Information:
UNITED STATES STEEL CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share 2002 2001 2002 2001
amounts)
- ----------------------------------------------------------------------------
REVENUES AND OTHER INCOME:
Revenues $1,659 $1,379 $4,409 $4,274
Revenues from related parties 246 266 688 614
Income from investees 2 11 11 51
Net gains on disposal of assets 2 4 7 20
Other income 5 - 40 2
------ ------ ------ ------
Total revenues and other income 1,914 1,660 5,155 4,961
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of revenues 1,611 1,540 4,518 4,714
Selling, general and administrative 74 51 245 154
expenses
Depreciation, depletion and amortization 89 94 266 246
------ ------ ------ ------
Total costs and expenses 1,774 1,685 5,029 5,114
------ ------ ------ ------
INCOME (LOSS) FROM OPERATIONS 140 (25) 126 (153)
Net interest and other financial costs 32 38 85 74
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES 108 (63) 41 (227)
Income tax provision (benefit) 2 (40) (9) (183)
------ ------ ------ ------
NET INCOME (LOSS) $ 106 $ (23) $ 50 $ (44)
====== ====== ====== ======
COMMON STOCK DATA:
Net income (loss), per share
- Basic and diluted $ 1.04 $ (.26) $ .52 $ (.50)
Weighted average shares, in thousands
- Basic 101,926 89,223 95,767 89,223
- Diluted 101,926 89,223 95,769 89,223
Dividends paid per share:
United States Steel Corporation Common $ .05 - $ .15 -
Stock
USX - U. S. Steel Group Common Stock - $ .10 - $ .45
Selected notes to financial statements appear on pages 6-21.
4
UNITED STATES STEEL CORPORATION
BALANCE SHEET (Unaudited)
-------------------------------
September December 31
30
(Dollars in millions) 2002 2001
- -------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 105 $ 147
Receivables, less allowance of $56 and $58 936 671
Receivables from related parties, less
allowance of $116 and $107 122 159
Inventories 967 870
Deferred income tax benefits 226 216
Other current assets 25 10
------ ------
Total current assets 2,381 2,073
Investments and long-term receivables,
less allowance of $38 and $39 329 340
Long-term receivables from related parties,
less allowance of $42 and $36 6 14
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$7,076 and $6,866 2,989 3,084
Pension asset 2,841 2,745
Other noncurrent assets 133 81
------ ------
Total assets $ 8,679 $ 8,337
====== ======
LIABILITIES
Current liabilities:
Accounts payable $ 695 $ 559
Accounts payable to related parties 101 135
Payroll and benefits payable 233 239
Accrued taxes 281 248
Accrued interest 32 45
Long-term debt due within one year 7 32
------ ------
Total current liabilities 1,349 1,258
Long-term debt, less unamortized discount 1,428 1,434
Deferred income taxes 736 732
Employee benefits 2,046 2,008
Long-term payable to related parties - 33
Deferred credits and other liabilities 344 366
------ ------
Total liabilities 5,903 5,831
------ ------
Contingencies and commitments (See Note 16) - -
STOCKHOLDERS' EQUITY
Common stock issued - 102,149,928 shares and
89,197,740 shares 102 89
Additional paid-in capital 2,683 2,475
Retained earnings 36 -
Accumulated other comprehensive loss (41) (49)
Deferred compensation (4) (9)
------ ------
Total stockholders' equity 2,776 2,506
------ ------
Total liabilities and stockholders' equity $ 8,679 $ 8,337
====== ======
Selected notes to financial statements appear on pages 6-21.
5
UNITED STATES STEEL CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
Nine Months
Ended
September 30
(Dollars in millions) 2002 2001
- --------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss) $ 50 $ (44)
Adjustments to reconcile to net cash provided
from operating activities:
Depreciation, depletion and amortization 266 246
Pensions and other postretirement benefits (35) (59)
Deferred income taxes (12) 84
Net gains on disposal of assets (7) (20)
Income from equity investees (11) (51)
Changes in:
Current receivables
- sold 320 -
- repurchased (320) -
- operating turnover (235) (56)
- income taxes - (18)
- provision for doubtful accounts 7 74
Inventories (97) 23
Current accounts payable and accrued expenses 193 55
All other - net (43) (41)
------ ------
Net cash provided from operating activities 76 193
------ ------
INVESTING ACTIVITIES:
Capital expenditures (150) (197)
Acquisition of U. S. Steel Kosice (38) (14)
Disposal of assets 12 17
Restricted cash - withdrawals 3 5
- deposits (60) (2)
Investees - investments (15) (3)
- loans and advances (3) -
- repayments of loans and advances 7 -
All other - net - 10
------ ------
Net cash used in investing activities (244) (184)
------ ------
FINANCING ACTIVITIES:
Net change in attributed portion of Marathon
consolidated debt and other financial obligations - 300
Repayment of long-term debt (31) (6)
Settlement with Marathon (54) -
Common stock issued 223 -
Dividends paid (14) (46)
------ ------
Net cash provided from financing activities 124 248
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 2 (1)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH (42) 256
EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 147 219
------ ------
CASH AND EQUIVALENTS AT END OF PERIOD $ 105 $ 475
====== ======
Cash provided from (used in) operating activities
included:
Interest and other financial costs paid (net of
amount capitalized) $ (105) $ (155)
Income taxes refunded from (paid to) tax (4) 8
authorities
Income tax settlements received from Marathon - 379
Selected notes to financial statements appear on pages 6-21.
6
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is
unaudited but, in the opinion of management, reflects all adjustments
necessary for a fair presentation of the results for the periods
covered. All such adjustments are of a normal recurring nature
unless disclosed otherwise. These financial statements, including
selected notes, have been prepared in accordance with the applicable
rules of the Securities and Exchange Commission and do not include
all of the information and disclosures required by accounting
principles generally accepted in the United States of America for
complete financial statements. Certain reclassifications of prior
year data have been made to conform to 2002 classifications.
Additional information is contained in the United States Steel
Corporation Annual Report on Form 10-K for the year ended December
31, 2001.
On January 1, 2002, United States Steel Corporation (U. S. Steel)
adopted Statement of Financial Accounting Standards (SFAS) No. 141
"Business Combinations." SFAS No. 141 requires that all business
combinations be accounted for under the purchase method of accounting
and established specific criteria for the recognition of intangible
assets separately from goodwill. This Statement also requires that
if any excess of fair value of acquired assets over cost in a
business combination remains after reducing to zero amounts that
would have otherwise been assigned to the acquired assets, that
remaining excess shall be recognized immediately as an extraordinary
gain, rather than being deferred and amortized. There was no
financial statement impact related to the initial adoption of SFAS
No. 141 and the guidance will be applied on a prospective basis.
On January 1, 2002, U. S. Steel adopted SFAS No. 142 "Goodwill
and Other Intangible Assets" which addresses the accounting for
goodwill and other intangible assets after an acquisition. The most
significant changes made by SFAS No. 142 are that 1) goodwill and
intangible assets with indefinite lives will no longer be amortized,
but must be tested for impairment at least annually; and 2) the
amortization period for intangible assets with finite lives will no
longer be limited to forty years. SFAS No. 142 requires transitional
disclosure of what reported net income and the associated per share
amount would have been in all periods presented had SFAS No. 142 been
in effect. There was no impact to net income or the related per
share amount for any period presented in the financial statements.
Also adopted on January 1, 2002, was SFAS No. 144 "Accounting
for Impairment or Disposal of Long-Lived Assets." This Statement
establishes a single accounting model for long-lived assets to be
disposed of by sale and provides additional guidance on assets to be
held and used and assets to be disposed of other than by sale. There
was no financial statement impact related to the initial adoption of
this Statement.
7
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
1. (Continued)
On April 30, 2002, the Financial Accounting Standards Board
(FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from the Extinguishment of Debt," and the criteria in
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" will now be used to classify gains and
losses on the extinguishment of debt. SFAS No. 64, "Extinguishments
of Debt Made to Satisfy Sinking Fund Requirements" amended SFAS No. 4
and is no longer necessary because SFAS No. 4 has been rescinded.
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers" did
not apply to U. S. Steel. SFAS No. 13, "Accounting for Leases" is
amended to require certain lease modifications that have economic
effects similar to sale-leaseback transactions to be accounted for in
the same manner as sale-leaseback transactions. SFAS No. 145 also
makes technical corrections to existing pronouncements. While these
corrections are not substantive in nature, in some instances, they
may change accounting practice. Generally, SFAS No. 145 is effective
for fiscal years beginning after May 15, 2002, except for certain
provisions related to SFAS No. 13 that are effective for transactions
occurring after May 15, 2002.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes a new accounting
model for the recognition and measurement of retirement obligations
associated with tangible long-lived assets. SFAS No. 143 requires
that an asset retirement obligation be capitalized as part of the
cost of the related long-lived asset and subsequently allocated to
expense using a systematic and rational method. U. S. Steel will
adopt this Statement effective January 1, 2003. The transition
adjustment resulting from the adoption of SFAS No. 143 will be
reported as a cumulative effect of a change in accounting principle
and is currently estimated to be a pretax charge of less than
$25 million.
SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued in July of 2002. SFAS No. 146
addresses significant issues regarding the recognition, measurement
and reporting of costs that are associated with exit and disposal
activities, including restructuring activities. The scope of SFAS
No. 146 includes (1) costs to terminate contracts that are not
capital leases; (2) costs to consolidate facilities or relocate
employees; and (3) termination benefits provided to employees who are
involuntarily terminated under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an
individual deferred-compensation contract. The provisions of this
Statement will be effective for exit or disposal activities initiated
after December 31, 2002.
8
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. U. S. Steel is engaged domestically in the production, sale and
transportation of steel mill products, coal, coke and taconite
pellets (iron ore); the management of mineral resources; the
management and development of real estate; and engineering and
consulting services and, through U. S. Steel Kosice in the Slovak
Republic, in the production and sale of steel mill products and coke
primarily for the Central European market. Prior to December 31,
2001, the businesses of U. S. Steel comprised an operating unit of
USX Corporation, now named Marathon Oil Corporation (Marathon).
Marathon had two outstanding classes of common stock: USX-Marathon
Group common stock, which was intended to reflect the performance of
Marathon's energy business, and USX-U. S. Steel Group common stock
(Steel Stock), which was intended to reflect the performance of
Marathon's steel business. On December 31, 2001, U. S. Steel was
capitalized through the issuance of 89.2 million shares of common
stock to the holders of Steel Stock in exchange for all outstanding
shares of Steel Stock on a one-for-one basis (the Separation).
The accompanying consolidated balance sheets as of September 30,
2002, and December 31, 2001, the statements of operations for the
quarter and nine months ended September 30, 2002, and the statement
of cash flows for the nine months ended September 30, 2002, represent
U. S. Steel's financial results on a stand-alone basis, while the
statements of operations for the quarter and nine months ended
September 30, 2001, and the statement of cash flows for the nine
months ended September 30, 2001, represent a carve-out presentation
of the businesses comprising U. S. Steel and are not intended to be a
complete presentation of the financial results or cash flows of U. S.
Steel on a stand-alone basis.
The statement of operations for the periods of 2001 contains
certain transactions related to interest and other financial costs
that were attributed to U. S. Steel by Marathon based on U. S.
Steel's cash flows and its capital structure. Corporate general and
administrative costs were allocated to U. S. Steel during the periods
of 2001 based upon utilization or other methods that management
believed to be reasonable and which considered certain measures of
business activities, such as employment, investments and revenues.
Income taxes were allocated to U. S. Steel during the periods of 2001
in accordance with Marathon's tax allocation policy. In general,
such policy provided that the consolidated provision and related tax
payments or refunds be allocated based principally upon the financial
income, taxable income, credits, preferences and other amounts
directly related to U. S. Steel.
Effective January 1, 2002, net pension and other postretirement
costs associated with active employees at our operating locations are
reflected in cost of revenues. Net costs and credits associated with
corporate headquarters personnel and all retirees are reflected in
selling, general and administrative expenses. Prior year data has
been reclassified to conform to the current year presentation, which
resulted in a decrease in cost of revenues and an increase in
selling, general and administrative expenses of $41 million and
$121 million for the third quarter and nine months of 2001,
respectively.
9
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. Selling, general and administrative expenses for the nine months
of 2002 included a pretax settlement charge of $10 million related to
retirements of personnel covered under the non tax-qualified pension
plan and the executive management supplemental pension program. Also
included in this same period of 2002 is the $14 million pretax charge
related to reserving Republic Technologies International Holdings,
LLC (Republic) receivables, as discussed in Note 8.
Selling, general and administrative expenses for the nine months of
2001 included $9 million of costs, primarily for professional fees
related to the Separation.
4. On March 1, 2001, U. S. Steel completed the purchase of the tin
mill products business of LTV Corporation (LTV), which is now
operated as East Chicago Tin. In this noncash transaction, U. S.
Steel assumed approximately $66 million of certain employee-related
obligations from LTV. The acquisition was accounted for using the
purchase method of accounting. Results of operations for 2001
included the operations of East Chicago Tin from the date of
acquisition.
On March 23, 2001, Transtar, Inc. (Transtar) completed a
reorganization with its two voting shareholders, U. S. Steel and
Transtar Holdings, L.P. (Holdings), an affiliate of Blackstone
Capital Partners L.P. As a result of this transaction, U. S. Steel
became sole owner of Transtar and certain of its subsidiaries.
Holdings became owner of the other subsidiaries of Transtar. Because
the reorganization involved the sale of certain subsidiaries to
Holdings, a noncontrolling shareholder, Transtar recorded a gain by
comparing the carrying value of the businesses sold to their fair
value. U. S. Steel recorded $68 million in income from investees to
reflect its share of the gain recognized by Transtar as a result of
the reorganization. Concurrently, U. S. Steel accounted for the
change in ownership of Transtar using the step-acquisition purchase
method of accounting. Also, in the first quarter of 2001, in
connection with this transaction, U. S. Steel recognized a favorable
deferred tax adjustment of $33 million related to its investment in
the stock of Transtar that was no longer required when U. S. Steel
acquired 100 percent of Transtar. U. S. Steel previously accounted
for its investment in Transtar under the equity method of accounting.
The following unaudited pro forma data for U. S. Steel includes
the results of operations of the above acquisitions giving effect to
them as if they had been consummated at the beginning of the period
presented. The pro forma results exclude the $68 million gain and
$33 million deferred tax benefit recorded as a result of the Transtar
transaction. The pro forma data is based on historical information
and does not necessarily reflect the actual results that would have
occurred nor is it necessarily indicative of future results of
operations.
Nine
Months Ended
(In millions, except per share amounts) September 30,
2001
----------------------------------------------------------------
Revenues and other income $ 4,939
Net loss (147)
Net loss per common share (basic and diluted) (1.65)
10
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. Total comprehensive income (loss) was $106 million for the third
quarter of 2002, $(23) million for the third quarter of 2001,
$58 million for the nine months of 2002 and $(47) million for the
nine months of 2001.
6. In the second and third quarters of 2002, U. S. Steel recognized
pretax income of $33 million and $3 million, respectively, associated
with the recovery of black lung excise taxes that were paid on coal
export sales during the period 1993 through 1999. This income is
included in other income in the statement of operations and resulted
from a 1998 federal district court decision that found such taxes to
be unconstitutional. Of the $36 million of cash received,
$11 million represented interest.
7. During the first quarter of 2002, following the Separation,
U. S. Steel established a new internal reporting structure, which
resulted in a change in reportable segments. In addition, U. S.
Steel has revised the presentation of several items of income and
expense within income (loss) from reportable segments. Net pension
credits, costs related to former businesses and administrative
expenses previously not reported at the segment level are now
directly charged or allocated to the reportable segments and other
businesses. Prior year segment data has been conformed to the
current year presentation.
U. S. Steel has three reportable segments: Flat-rolled Products
(Flat-rolled), Tubular Products (Tubular) and U. S. Steel Kosice
(USSK).
The Flat-rolled segment includes the operating results of U. S.
Steel's domestic integrated steel mills and equity investees involved
in the production of sheet, plate and tin mill products. These
operations are principally located in the United States and primarily
serve customers in the transportation (including automotive),
appliance, service center, converter, container, industrial and
construction markets.
The Tubular segment includes the operating results of U. S.
Steel's domestic tubular production facilities and an equity investee
involved in the production of tubular goods. These operations
produce and sell both seamless and electric resistance weld tubular
products and primarily serve customers in the oil, gas and
petrochemicals markets.
The USSK segment includes the operating results of U. S. Steel's
integrated steel mill located in the Slovak Republic, a production
facility in Germany and equity investees, primarily located in
Central Europe. These operations produce and sell sheet, plate, tin,
tubular, precision tube and specialty steel products, as well as
coke. USSK primarily serves customers in the Central European
construction, appliance, transportation, service center, container,
and oil, gas and petrochemicals markets.
All other U. S. Steel businesses not included in U. S. Steel's
reportable segments are reflected in Other Businesses. These
businesses are involved in the production and sale of coal, coke and
taconite pellets (iron ore); transportation services; steel mill
products distribution; the management of mineral resources; the
management and development of real estate; and engineering and
consulting services.
11
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
The chief operating decision maker evaluates performance and
determines resource allocations based on a number of factors, the
primary measure being income (loss) from operations. Income (loss)
from operations for reportable segments and other businesses does not
include net interest and other financial costs, the income tax
provision (benefit), or special items. Information on segment assets
is not disclosed as it is not reviewed by the chief operating
decision maker.
The accounting principles applied at the operating segment level
in determining income (loss) from operations are generally the same
as those applied at the consolidated financial statement level.
Intersegment sales and transfers for some operations are accounted
for at cost, while others are accounted for at market-based prices,
and are eliminated at the corporate consolidation level. All
corporate-level selling, general and administrative expenses and
costs related to certain former businesses are allocated to the
reportable segments and other businesses based on measures of
activity that management believes are reasonable.
The results of segment operations for the third quarter of 2002 and 2001
are:
Total
Flat- Reportable
(In millions) rolled Tubular USSK Segments
- -----------------------------------------------------------------------
Third Quarter 2002
- ------------------
Revenues and other income:
Customer $1,149 $ 148 $ 322 $1,619
Intersegment 60 - 2 62
Equity in earnings (losses) of
unconsolidated investees 4 - - 4
Other - - - -
------ ------ ------ ------
Total revenues and other income $1,213 $ 148 $ 324 $1,685
====== ====== ====== ======
Income (loss) from operations $ 61 $ 4 $ 40 $ 105
====== ====== ====== ======
Third Quarter 2001
- ------------------
Revenues and other income:
Customer $ 958 $ 161 $ 284 $1,403
Intersegment 50 - - 50
Equity in earnings (losses) of
unconsolidated investees (9) - - (9)
Other - - 1 1
------ ------ ------ ------
Total revenues and other income $ 999 $ 161 $ 285 $1,445
====== ====== ====== ======
Income (loss) from operations $ (97) $ 18 $ 39 $ (40)
====== ====== ====== ======
12
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
Total
Reportable Other Reconciling Total
(In millions) Segments Businesses Items Corp.
-------------------------------------------------------------------------
Third Quarter 2002
------------------
Revenues and other income:
Customer $1,619 $ 286 $ - $1,905
Intersegment 62 252 (314) -
Equity in earnings (losses) of
unconsolidated investees 4 (4) 2 2
Other - 4 3 7
----- ----- ----- -----
Total revenues and other income $1,685 $ 538 $ (309) $1,914
===== ===== ===== =====
Income (loss) from operations $ 105 $ 30 $ 5 $ 140
===== ===== ===== =====
Third Quarter 2001
------------------
Revenues and other income:
Customer $1,403 $ 242 $ - $1,645
Intersegment 50 219 (269) -
Equity in earnings (losses) of
unconsolidated investees (9) (1) 21 11
Other 1 3 - 4
----- ----- ----- -----
Total revenues and other income $1,445 $ 463 $ (248) $1,660
===== ===== ===== =====
Income (loss) from operations $ (40) $ 24 $ (9) $ (25)
===== ===== ===== =====
The following is a schedule of reconciling items for the third quarter
of 2002 and 2001:
Revenues Income (Loss)
And From
Other Income Operations
(In millions) 2002 2001 2002 2001
------------------------------------------------------------------------
Elimination of intersegment revenues $(314) $(269) * *
----- -----
Special Items:
Federal excise tax refund 3 - $ 3 $ -
Insurance recoveries related to USS-POSCO 2 21 2 21
fire
Costs related to Separation - - - (1)
Costs related to Fairless shutdown - - - (29)
----- ----- ----- -----
5 21 5 (9)
----- ----- ----- -----
Total reconciling items $(309) $(248) $ 5 $ (9)
===== ===== ===== =====
* Elimination of intersegment revenues is offset by the elimination
of intersegment cost of revenues within income (loss) from operations
at the corporate consolidation level.
13
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
The results of segment operations for the nine months of
2002 and 2001 are:
Total
Flat- Reportable
(In millions) rolled Tubular USSK Segments
---------------------------------------------------------------------
Nine Months 2002
------------------
Revenues and other income:
Customer $3,138 $ 415 $ 823 $4,376
Intersegment 147 - 2 149
Equity in earnings (losses) of
unconsolidated investees (5) - 1 (4)
Other (1) - 3 2
------ ------ ------ ------
Total revenues and other income $3,279 $ 415 $ 829 $4,523
====== ====== ====== ======
Income (loss) from operations $ (39) $ 13 $ 65 $ 39
====== ====== ====== ======
Nine Months 2001
------------------
Revenues and other income:
Customer $2,815 $ 589 $ 814 $4,218
Intersegment 174 - 2 176
Equity in earnings (losses) of
unconsolidated investees (26) 1 1 (24)
Other - - 2 2
------ ------ ------ ------
Total revenues and other income $2,963 $ 590 $ 819 $4,372
====== ====== ====== ======
Income (loss) from operations $ (382) $ 79 $ 121 $ (182)
====== ====== ====== ======
14
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
Total
Reportable Other Reconciling Total
(In millions) Segments Businesses Items Corp.
-------------------------------------------------------------------------
Nine Months 2002
------------------
Revenues and other income:
Customer $4,376 $ 721 $ - $5,097
Intersegment 149 707 (856) -
Equity in earnings (losses) of
unconsolidated investees (4) (5) 20 11
Other 2 9 36 47
----- ----- ----- -----
Total revenues and other income $4,523 $1,432 $ (800) $5,155
===== ===== ===== =====
Income (loss) from operations $ 39 $ 47 $ 40 $ 126
===== ===== ===== =====
Nine Months 2001
------------------
Revenues and other income:
Customer $4,218 $ 744 $ (74) $4,888
Intersegment 176 588 (764) -
Equity in earnings (losses) of
unconsolidated investees (24) (16) 91 51
Other 2 20 - 22
----- ----- ----- -----
Total revenues and other income $4,372 $1,336 $ (747) $4,961
===== ===== ===== =====
Income (loss) from operations $ (182) $ 50 $ (21) $ (153)
===== ===== ===== =====
The following is a schedule of reconciling items for the nine months of
2002 and 2001:
Revenues Income (Loss)
And From
Other Income Operations
(In millions) 2002 2001 2002 2001
-----------------------------------------------------------------------
Elimination of intersegment revenues $(856) $(764) * *
----- -----
Special Items:
Federal excise tax refund 36 - $ 36 $ -
Pension settlement - - (10) -
Insurance recoveries related to USS-POSCO 20 23 20 23
fire
Gain on Transtar reorganization - 68 - 68
Asset impairment - receivables - (74) (14) (74)
Costs related to Separation - - - (9)
Costs related to Fairless shutdown - - (1) (29)
Reversal of litigation accrual - - 9 -
----- ----- ----- -----
56 17 40 (21)
----- ----- ----- -----
Total reconciling items $(800) $(747) $ 40 $ (21)
===== ===== ===== =====
* Elimination of intersegment revenues is offset by the elimination
of intersegment cost of revenues within income (loss) from operations
at the corporate consolidation level.
15
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. U. S. Steel has a 16% investment in Republic which was accounted
for under the equity method of accounting until the first quarter of
2001 when investments in and advances to Republic were reduced to
zero. On April 2, 2001, Republic filed a voluntary petition with the
U.S. Bankruptcy Court to reorganize its operations under Chapter 11 of
the U.S. Bankruptcy Code. In the first quarter of 2001 as a result of
Republic's petition, U. S. Steel recorded a pretax charge reflected as
a reduction in revenues of $74 million for potentially uncollectible
trade receivables and recognized certain debt obligations of $14
million which had been previously assumed by Republic. As a result of
further deterioration of Republic's financial condition during the
balance of 2001, an additional charge of $68 million was recorded in
the fourth quarter of 2001 to reserve the remaining balance of pre-
petition trade receivables and to reserve a portion of other
receivables established for retiree medical claim payments made by
U. S. Steel that were to be subsequently reimbursed by Republic.
These retiree medical cost reimbursements are the subject of a pending
request for treatment as administrative expenses in the bankruptcy
proceedings. U. S. Steel recorded a pre-tax charge of $14 million in
the second quarter of 2002 to reserve the remaining balance of the
retiree medical claim receivables as further developments occurred
within the bankruptcy proceedings, principally the Bankruptcy Court's
issuance of an order approving the sale of substantially all of
Republic's assets on July 11, 2002. The entire proceeds from the
sale, which closed on August 16, 2002, went towards satisfying a
portion of the liabilities of Republic's secured creditors.
Republic's remaining assets will be liquidated through the bankruptcy
proceedings and are not expected to produce sufficient cash proceeds
to satisfy even the outstanding administrative claims.
9. Revenues from related parties and receivables from related
parties primarily reflect sales of steel products, raw materials,
transportation services and fees for providing various management and
other support services to equity and certain other investees.
Generally, transactions are conducted under long-term market-based
contractual arrangements.
Receivables from related parties at September 30, 2002 and
December 31, 2001, also included $28 million due from Marathon for tax
settlements in accordance with the tax sharing agreement. An
additional $2 million was due from Marathon at September 30, 2002,
under the shared services agreement.
Long-term receivables from related parties at September 30, 2002,
reflect amounts due from Marathon related to contractual
reimbursements for the retirement of participants in the non-qualified
employee benefit plans. These amounts will be paid by Marathon as
participants retire. At December 31, 2001, long-term receivables from
related parties also included certain unreserved retiree medical cost
reimbursements from Republic as discussed in Note 8.
16
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. (Continued)
Accounts payable to related parties reflect the purchase of semi-
finished steel products and outside processing services from equity
and certain other investees. Accounts payable to related parties at
September 30, 2002, also included the net present value of the second
and final $37.5 million installment of contingent consideration
payable to VSZ a.s. (VSZ) related to the acquisition of USSK.
Accounts payable to related parties at December 31, 2001, also
included the net present value of the first $37.5 million installment
of contingent consideration paid to VSZ in July of 2002 related to the
acquisition of USSK, and $54 million due to Marathon that was paid in
the first quarter of 2002 in accordance with the terms of the
Separation.
Under an agreement with PRO-TEC Coating Company (PRO-TEC), U. S.
Steel provides exclusive marketing, selling and customer service
functions, including invoicing and receivables collection, for
substantially all of the products produced by PRO-TEC. U. S. Steel,
as PRO-TEC's exclusive sales agent, is responsible for credit risk
related to those receivables. Accounts payable to related parties
includes $54 million and $37 million at September 30, 2002, and
December 31, 2001, respectively, related to this agreement with PRO-
TEC.
The long-term payable to related parties at December 31, 2001,
reflects the net present value of the second $37.5 million installment
of contingent consideration payable in July 2003 related to the
acquisition of USSK.
10. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out
(LIFO) method.
(In millions)
--------------------
September December
30 31
2002 2001
--------- ---------
Raw materials $ 173 $ 184
Semi-finished products 444 388
Finished products 239 202
Supplies and sundry items 111 96
---- ----
Total $ 967 $ 870
==== ====
Costs of revenues increased by $2 million and were reduced by
$14 million in the nine months of 2002 and 2001, respectively, as a
result of liquidations of LIFO inventory pools.
11. The income tax benefit in the nine months of 2002 reflected an
estimated annual effective tax benefit rate for 2002 of approximately
31%. A $4 million deferred tax charge related to a newly enacted
state tax law was also recorded in the second quarter. An annual
forecasted pretax loss from domestic operations, which includes a
pension settlement loss for the fourth quarter of 2002, and pretax
income from USSK have been included in the development of U. S.
Steel's estimated annual effective tax rate for 2002.
17
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
11. (Continued)
The income tax benefit in the nine months of 2001 reflected an
estimated annual effective tax rate for 2001 of approximately 45%.
The tax benefit also included a $33 million deferred tax benefit
related to the Transtar reorganization. In addition, net interest and
other financial costs in the nine months of 2001 included a favorable
adjustment of $67 million and the income tax benefit included an
unfavorable adjustment of $15 million, both of which were related to
prior years' taxes.
The Slovak Income Tax Act provides an income tax credit which is
available to USSK if certain conditions are met. In order to claim
the tax credit in any year, 60% of USSK's sales must be export sales
and USSK must reinvest the tax credits claimed in qualifying capital
expenditures during the five years following the year in which the tax
credit is claimed. The provisions of the Slovak Income Tax Act permit
USSK to claim a tax credit of 100% of USSK's tax liability for years
2000 through 2004 and 50% for the years 2005 through 2009. Management
believes that USSK fulfilled all of the necessary conditions for
claiming the tax credit for the years for which it was claimed and
anticipates meeting such requirements in 2002. As a result of
claiming these tax credits and certain tax planning strategies to
reinvest earnings in foreign operations, virtually no income tax
provision is recorded for USSK income.
12. Net income per common share for the third quarter and nine months
of 2002 is based on the weighted average number of common shares
outstanding during the quarter. Net loss per common share for the
third quarter and nine months of 2001 is based on outstanding common
shares at December 31, 2001, the date of the Separation.
Diluted net income per share assumes the exercise of stock
options, provided the effect is dilutive. As of September 30, 2002,
the potential common stock related to employee options to purchase
6.2 million shares of common stock have been excluded from the
computation of diluted net income per share because their effect was
antidilutive.
13. At September 30, 2002, U. S. Steel had no borrowings against its
Inventory Facility that provides for borrowings of up to $400 million.
At September 30, 2002, $243 million was available under this facility.
At September 30, 2002, USSK had no borrowings against its
$10 million short-term credit facility or against its $40 million long-
term facility.
At September 30, 2002, in the event of a change in control of
U. S. Steel, debt obligations totaling $945 million may be declared
immediately due and payable. In such event, U. S. Steel may also be
required to either repurchase the leased Fairfield slab caster for
$90 million or provide a letter of credit to secure the remaining
obligation.
18
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
14. On November 28, 2001, U. S. Steel entered into a five-year
Receivables Purchase Agreement to sell a revolving interest in
eligible trade receivables generated by U. S. Steel and certain of its
subsidiaries through a commercial paper conduit program. Qualifying
accounts receivables are sold, on a daily basis, without recourse, to
U. S. Steel Receivables LLC (USSR), a consolidated wholly owned
special purpose entity. USSR then sells an undivided interest in
these receivables to certain conduits. The conduits issue commercial
paper to finance the purchase of their interest in the receivables.
U. S. Steel has agreed to continue servicing the sold receivables at
market rates. Because U. S. Steel receives adequate compensation for
these services, no servicing asset or liability has been recorded.
Sales of accounts receivable are reflected as a reduction of
receivables in the balance sheet and the proceeds received are
included in cash flows from operating activities in the statement of
cash flows. Under the facility, USSR may sell interests in the
receivables up to the lesser of a funding base, comprised of eligible
receivables, or $400 million. Generally, the facility provides that
as payments are collected from the sold accounts receivables, USSR may
elect to have the conduits reinvest the proceeds in new eligible
accounts receivable.
During the nine months ended September 30, 2002, USSR sold to
conduits and subsequently repurchased $320 million of revolving
interest in accounts receivable. As of September 30, 2002,
$400 million was available to be sold under this facility. The net
book value of U. S. Steel's retained interest in the receivables
represents the best estimate of the fair market value due to the short-
term nature of the receivables.
USSR pays the conduits a discount based on the conduits'
borrowing costs plus incremental fees. During the nine months ended
September 30, 2002, U. S. Steel incurred costs of $2 million on the
sale of its receivables. These costs are included in net interest and
other financial costs in the statement of operations.
The table below summarizes cash flows from and paid to USSR:
Nine Months
Ended
(In millions) September 30, 2002
-------------------------------------------------------------------
Proceeds from:
Collections reinvested $ 3,775
Securitizations -
Servicing fee 4
The table below summarizes the trade receivables for USSR:
(In millions) September 30, 2002
-------------------------------------------------------------------
Balance of accounts receivable, net, purchased by $ 572
USSR
Revolving interest sold to conduits -
---
Accounts receivable - net, included in the
Balance Sheet of U. S. Steel $ 572
===
While the term of the facility is five years, the facility also
terminates on the occurrence and failure to cure certain events,
including, among others, certain defaults with respect to the
Inventory Facility and other debt obligations, any failure of USSR to
maintain certain ratios related to the collectability of the
receivables, and failure to extend the commitments of the commercial
paper conduits' liquidity providers which currently terminate on
November 27, 2002.
19
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
15. In the second quarter of 2002, U. S. Steel sold 10,925,000 shares
of its common stock in a public equity offering for net proceeds of
$192 million. The net proceeds were used primarily to repurchase
receivables previously sold under the Receivables Purchase Agreement.
16. U. S. Steel is the subject of, or a party to, a number of pending
or threatened legal actions, contingencies and commitments involving a
variety of matters, including laws and regulations relating to the
environment. Certain of these matters are discussed below. The
ultimate resolution of these contingencies could, individually or in
the aggregate, be material to U. S. Steel's financial statements.
However, management believes that U. S. Steel will remain a viable and
competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably.
U. S. Steel is a party to several property tax disputes involving
its Gary Works property in Indiana, including claims for refunds of
approximately $65 million pertaining to tax years 1994-96 and 1999 and
assessments of approximately $110 million in excess of amounts paid
for the 2000 and 2001 tax years. In addition, interest may be imposed
upon any final assessment. The disputes involve property values and
tax rates and are in various stages of administrative appeals. U. S.
Steel is vigorously defending against the assessments and pursuing its
claims for refunds.
U. S. Steel is subject to federal, state, local and foreign
laws and regulations relating to the environment. These laws
generally provide for control of pollutants released into the
environment and require responsible parties to undertake remediation
of hazardous waste disposal sites. Penalties may be imposed for
noncompliance. At September 30, 2002, and December 31, 2001, accrued
liabilities for remediation totaled $131 million and $138 million,
respectively. It is not presently possible to estimate the ultimate
amount of all remediation costs that might be incurred or the
penalties that may be imposed.
For a number of years, U. S. Steel has made substantial capital
expenditures to bring existing facilities into compliance with various
laws relating to the environment. In the nine months of 2002 and 2001
and for the years 2001 and 2000, such capital expenditures totaled
$10 million, $11 million, $15 million and $18 million, respectively.
U. S. Steel anticipates making additional such expenditures in the
future; however, the exact amounts and timing of such expenditures are
uncertain because of the continuing evolution of specific regulatory
requirements.
Guarantees of the liabilities of unconsolidated entities of U. S.
Steel totaled $27 million at September 30, 2002, and $32 million at
December 31, 2001. In the event that any defaults of guaranteed
liabilities occur, U. S. Steel has access to its interest in the
assets of the investees to reduce potential losses resulting from
these guarantees. As of September 30, 2002, the largest guarantee for
a single affiliate was $19 million.
20
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
16. (Continued)
U. S. Steel was contingently liable for debt and other
obligations of Marathon in the amount of $166 million at September 30,
2002, compared to $359 million at December 31, 2001. In the event of
the bankruptcy of Marathon, these obligations for which U. S. Steel is
contingently liable, as well as obligations for industrial development
and environmental liabilities and notes in the amount of $471 million
that were assumed by U. S. Steel from Marathon, may be declared
immediately due and payable. If such event occurs, U. S. Steel may
not be able to satisfy such obligations.
U. S. Steel is contingently liable to its Chairman, Chief
Executive Officer and President for a $3 million retention bonus. The
bonus is payable on the third anniversary of the Separation and is
subject to certain performance measures.
U. S. Steel's domestic contract commitments to acquire property,
plant and equipment at September 30, 2002, totaled $22 million
compared with $28 million at December 31, 2001.
USSK has a commitment to the Slovak government for a capital
improvements program of $700 million, subject to certain conditions,
over a period commencing with the acquisition date of November 24,
2000, and ending on December 31, 2010. The remaining commitments
under this capital improvements program as of September 30, 2002, and
December 31, 2001, were $591 million and $634 million, respectively.
U. S. Steel entered into a 15-year take-or-pay arrangement in
1993, which requires it to accept pulverized coal each month or pay a
minimum monthly charge of approximately $1 million. If U. S. Steel
elects to terminate the contract early, a maximum termination payment
of $82 million, which declines over the duration of the agreement, may
be required.
U. S. Steel has the option, under certain operating lease
agreements covering locomotives and freight cars, to renew the leases
or to purchase the equipment during or at the end of the terms of the
leases. If U. S. Steel does not exercise the purchase options by the
end of the terms of the leases, U. S. Steel guarantees a residual
value of the equipment as determined at the lease inception date of
each agreement (approximately $29 million at September 30, 2002).
17. In October 2002, U. S. Steel granted an option to purchase its
shares of VSZ. U. S. Steel subsequently sold these shares. Cash
proceeds of approximately $31 million were received in consideration
for the option and the sale of the shares, which will result in a
pretax gain of approximately $21 million in the fourth quarter.
U. S. Steel previously accounted for its investment in VSZ under the
cost method.
21
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
18. On October 16, 2002, U. S. Steel announced that it had signed a
letter of intent to sell its raw materials and transportation
businesses to an entity formed by affiliates of Apollo Management,
L.P. The transaction is subject to the negotiation of definitive
agreements and other customary conditions, including approvals from
the board of directors, lenders and regulatory agencies, and
availability of financing. The parties plan to reach definitive
agreements by year-end 2002 with closing expected to follow in the
first quarter of 2003.
Under the terms of the letter of intent, it is anticipated that
U. S. Steel would receive approximately $500 million in cash and an
ownership interest in the new company of approximately 20%, with the
new company assuming all collective bargaining agreements, certain
employee benefit obligations and certain other liabilities.
U. S. Steel currently estimates the transaction would result in a
pretax loss of up to $300 million. A portion of this loss could be
recognized in the fourth quarter of 2002 if the SFAS No. 144 criteria
are met for held-for-sale classification or if an impairment charge is
triggered, both of which would require the carrying value of the
businesses to be written down to fair value. The held-for-sale
criteria would be met when, among other things, the board of directors
approves the transaction. If the held-for-sale criteria are not met,
the assets would be tested for recoverability which could result in an
impairment charge. The remainder of the loss on the transaction would
be recognized upon closing. U. S. Steel and the new company would
enter into long-term contracts to supply U. S. Steel's raw materials
and transportation requirements at market based prices.
22
UNITED STATES STEEL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
--------------------------------------------------
(Unaudited)
Nine Months Ended
September 30 Year Ended December 31
- ------------------- --------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
1.35 (a) (b) 1.05 2.10 5.15 4.72
==== ==== ==== ==== ==== ==== ====
(a) Earnings did not cover combined fixed charges and preferred stock
dividends by $277 million.
(b) Earnings did not cover combined fixed charges and preferred stock
dividends by $598 million.
UNITED STATES STEEL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
(Unaudited)
Nine Months Ended
September 30 Year Ended December 31
- ------------------- --------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
1.35 (a) (b) 1.13 2.33 5.89 5.39
==== ==== ==== ==== ==== ==== ====
(a) Earnings did not cover fixed charges by $267 million.
(b) Earnings did not cover fixed charges by $586 million.
23
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Effective with the first quarter of 2002, following the
separation from Marathon Oil Corporation (Marathon), formerly USX
Corporation (the Separation), United States Steel Corporation
(U. S. Steel) established a new internal financial reporting
structure, which resulted in a change in reportable segments. In
addition, U. S. Steel revised the presentation of several items of
income and expense within income (loss) from reportable segments. Net
pension credits, costs related to former businesses and administrative
expenses previously not reported at the segment level are now directly
charged or allocated to the reportable segments and other businesses.
Reported results for the third quarter and first nine months of 2001
have been conformed to the current year presentation.
U. S. Steel now has three reportable operating segments: Flat-
rolled Products (Flat-rolled), Tubular Products (Tubular), and
U. S. Steel Kosice (USSK).
The Flat-rolled segment includes the operating results of
U. S. Steel's domestic integrated steel mills and equity investees
involved in the production of sheet, plate and tin mill products.
These operations are principally located in the United States and
primarily serve customers in the transportation (including
automotive), appliance, service center, converter, container,
industrial, and construction markets.
The Tubular segment includes the operating results of
U. S. Steel's domestic tubular production facilities and an equity
investee involved in the production of tubular goods. These
operations produce and sell both seamless and electric resistance weld
tubular products and primarily serve customers in the oil, gas and
petrochemicals markets.
The USSK segment includes the operating results of U. S. Steel's
integrated steel mill located in the Slovak Republic, a production
facility in Germany, and equity investees, primarily located in
Central Europe. These operations produce and sell sheet, plate, tin,
tubular, precision tube and specialty steel products, as well as coke.
USSK primarily serves customers in the Central European construction,
appliance, transportation, service center, container, and oil, gas and
petrochemicals markets.
All other U. S. Steel businesses not included in reportable
segments are reflected in Other Businesses. These businesses are
involved in the production and sale of coal, coke and taconite pellets
(iron ore); transportation services; steel mill products distribution
("Straightline"); the management of mineral resources; the management
and development of real estate; and engineering and consulting
services.
Certain sections of Management's Discussion and Analysis include
forward-looking statements concerning trends or events potentially
affecting the businesses of U. S. Steel. These statements typically
contain words such as "anticipates," "believes," "estimates,"
"expects," "intends" or similar words indicating that future outcomes
are uncertain. In accordance with "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, these statements are
accompanied by cautionary language identifying important factors,
though not necessarily all such factors that could cause future
outcomes to differ materially from those set forth in forward-looking
statements. For additional risk factors affecting the businesses of
U. S. Steel, see Supplementary Data -- Disclosures About Forward-
24
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Looking Statements in the U. S. Steel Annual Report on Form 10-K for
the year ended December 31, 2001.
Results of Operations
- ---------------------
Revenues and other income was $1,914 million in the third quarter
of 2002 compared with $1,660 million in the same quarter last year.
The $254 million increase primarily reflected higher shipments and
average realized prices for domestic sheet products; higher average
realized prices for USSK; and the addition of shipment volumes for
Straightline. Revenues and other income in the first nine months of
2002 totaled $5,155 million compared with $4,961 million in the first
nine months of 2001. The increase primarily reflected higher
shipments and average realized prices for domestic sheet products; the
absence of the $74 million impairment of receivables from Republic
Technologies International Holdings, LLC (Republic), which was
included in the first nine months of 2001; the addition of
Straightline shipments; and the federal excise tax refund included in
the first nine months of 2002. These were partially offset by reduced
domestic tubular and plate shipment volumes; lower trade shipments of
coke; and lower income from investees which, in the first nine months
of 2001, included a gain of $68 million on the Transtar
reorganization.
Income (Loss) from operations for U. S. Steel for the third
quarter and first nine months of 2002 and 2001 is set forth in the
following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2002 2001 2002 2001
- --------------------------------------------------------------------------
Flat-rolled $61 $(97) $(39) $(382)
Tubular 4 18 13 79
USSK 40 39 65 121
------ ------ ------ ------
Total income (loss) from reportable 105 (40) 39 (182)
segments
Other Businesses:
Coal, Coke and Iron Ore 17 14 14 (4)
Straightline (11) (10) (28) (10)
All Other 24 20 61 64
------ ------ ------ ------
Income (Loss) from operations before 135 (16) 86 (132)
special items
Special Items:
Federal excise tax refund 3 - 36 -
Insurance recoveries related to USS-POSCO 2 21 20 23
fire
Asset impairments - receivables - - (14) (74)
Pension settlement loss - - (10) -
Costs related to Fairless shutdown - (29) (1) (29)
Reversal of litigation accrual - - 9 -
Costs related to Separation - (1) - (9)
Gain on Transtar reorganization - - - 68
------ ------ ------ ------
Total income (loss) from operations $140 $(25) $126 $(153)
====== ====== ====== ======
25
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Segment results for Flat-rolled
Segment income for Flat-rolled was $61 million in the third
quarter of 2002 compared with a loss of $97 million in the same
quarter of 2001. The improvement was mainly due to higher average
realized prices, operating efficiencies and increased shipment
volumes. Flat-rolled had a loss of $39 million in the first nine
months of 2002 compared with a loss of $382 million in the first nine
months last year. The substantially decreased loss primarily resulted
from improved operating efficiencies, higher average realized prices,
lower energy costs and higher shipment volumes.
Segment results for Tubular
Segment income for Tubular was $4 million in the third quarter of
2002, a decline of $14 million compared with the third quarter of
2001. Tubular reported income of $13 million for the first nine
months of 2002 compared with income of $79 million in the first nine
months of 2001. The declines resulted primarily from lower shipment
volumes and average realized prices.
Segment results for USSK
Segment income for USSK was $40 million in the third quarter of
2002 compared with income of $39 million in the third quarter of 2001.
The slight improvement was primarily due to higher average realized
prices, which were due in part to favorable exchange rate effects;
offset by the unfavorable effect on costs of foreign exchange rate
changes, higher freight costs and costs associated with the start-up
of conversion operations at Sartid in Serbia. Income for USSK for the
first nine months of 2002 was $65 million compared with income of
$121 million in the same period last year. The decrease was primarily
due to the unfavorable effect on costs of foreign exchange rate
changes, higher freight costs and costs associated with the start-up
of conversion operations at Sartid in Serbia, partially offset by
higher average realized prices due to favorable exchange rate effects.
Results for Other Businesses
Income for Other Businesses in the third quarter of 2002 was
$30 million compared with income of $24 million in the third quarter
of 2001. The increase resulted mainly from improved results from coal
operations and real estate operations, partially offset by lower
results for coke operations. Other Businesses recorded income of
$47 million in the first nine months of 2002 compared with income of
$50 million in the first nine months of 2001. The decline was
primarily due to lower results for real estate and coke operations and
Straightline's increased loss, partially offset by higher income from
iron ore and coal operations and the absence of U. S. Steel's share of
losses of Republic, which was included in the first nine months of
2001.
Net Periodic Pension Credit
Net periodic pension credits, which are primarily noncash and are
included in income (loss) from operations, were $28 million and $77
million for the third quarter and first nine months of 2002,
respectively, compared to $26 million and $98 million for the
corresponding periods of 2001. The increase in the third quarter of
2002 as compared to the third quarter of 2001 was primarily due to
26
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
pension settlement losses recorded in the third quarter of 2001
related to the Fairless shutdown, partially offset by a lower
expected return on plan assets as a result of lower market related
values in 2002. The decrease for the nine months of 2002 compared
with the nine months of 2001 was primarily due to a lower expected
return on plan assets in 2002 as mentioned above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses included in income
(loss) from operations were $74 million and $245 million for the third
quarter and first nine months of 2002, respectively, compared to $51
million and $154 million for the same periods of 2001. The increases
in costs in the 2002 periods were primarily due to the decrease in net
periodic pension credits as previously discussed, the impairment of
retiree medical cost reimbursements receivable from Republic,
increased legal and consulting expenses primarily due to the Section
201 trade cases and potential industry consolidation, and the ongoing
expansion of Straightline. Also contributing to the increases in 2002
were higher retiree medical costs primarily due to decreases in the
discount rate, higher escalation rates for medical expenses, and the
effects of the Fairless shutdown.
Special items:
Federal excise tax refund represents the recovery of black lung
excise taxes that were paid on coal export sales during the period
1993 through 1999. During the third quarter and first nine months of
2002, U. S. Steel received cash and recognized pretax income of $3
million and $36 million, respectively, which is included in other
income on the statement of operations. Of the $36 million cash
received, $11 million represented interest. The refunds resulted from
a 1998 federal district court decision that found such taxes to be
unconstitutional.
Insurance recoveries related to USS-POSCO fire represent
U. S. Steel's share of insurance recoveries in excess of facility
repair costs for the cold-rolling mill fire at USS-POSCO, which
occurred in May 2001.
Asset impairments - receivables were for charges related to
reserves established against receivables from Republic. The charge in
the first nine months of 2002 related to reserves against retiree
medical cost reimbursements owed by Republic, and the charge in the
first nine months of 2001 related to reserves against trade
receivables.
Pension settlement loss is related to retirements of personnel
covered under the non tax-qualified pension plan and the executive
management supplemental pension program.
Costs related to Fairless shutdown resulted from the permanent
shutdown of the pickling, cold-rolling and tin mill facilities at
Fairless Works in the fourth quarter of 2001.
Reversal of litigation accrual represents the reversal in the
first quarter of 2002 of a prior litigation accrual as a result of a
final court ruling in U. S. Steel's favor.
Costs related to Separation represent U. S. Steel's share of
professional fees and expenses and certain other costs directly
attributable to the Separation.
27
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Gain on Transtar reorganization represents U. S. Steel's share of
the gain recognized by Transtar in 2001.
Net interest and other financial costs were $32 million in the
third quarter of 2002 compared with $38 million during the same period
in 2001. Net interest and other financial costs in the first nine
months of 2002 were $85 million compared with $74 million in the same
period last year. Last year's first nine months included a favorable
adjustment to interest of $67 million that was related to prior years'
taxes. Excluding this favorable adjustment, net interest and other
financial costs in the first nine months of 2002 decreased $56 million
from the first nine months of 2001. The decreases in the 2002 periods
primarily reflect lower average debt levels following the December 31,
2001 value transfer of $900 million from Marathon. The change for the
first nine months also reflects favorable foreign currency effects.
These effects were primarily due to remeasurement of USSK net monetary
assets into the U.S. dollar, which is the functional currency, and
resulted in a net gain of approximately $14 million in the first nine
months of 2002, compared to a net gain of $4 million in the first nine
months of 2001.
The income tax provision (benefit) in the third quarter of 2002
was a provision of $2 million compared with a benefit of $40 million
in the third quarter last year. The benefit in the first nine months
of 2002 was $9 million compared with a benefit of $183 million in the
same period in 2001. The income tax benefit in the first nine months
of 2002 reflected an estimated annual effective tax benefit rate for
2002 of approximately 31 percent. A $4 million deferred tax charge
related to a newly enacted state tax law was also recorded in the
second quarter.
The tax benefit in the nine months of 2002 is based on an
estimated annual effective rate, which requires management to make its
best estimate of annual forecasted pretax income (loss) for the year.
During the year, management regularly updates the forecast estimate
based on changes in various factors such as prices, shipments, product
mix, plant operating performance, cost estimates and pension issues.
An annual forecasted pretax loss from domestic operations, which
includes a pension settlement loss for the fourth quarter of 2002, and
pretax income from USSK have been included in the development of
U. S. Steel's estimated annual effective tax rate for 2002 as of
September 30, 2002. To the extent that actual pretax results for
domestic and foreign income in 2002 vary from forecast estimates
applied at the end of the most recent interim period, the actual tax
benefit recognized in 2002 can be materially different from the
forecasted annual tax benefit as of the end of the third quarter.
The income tax benefit in the first nine months of 2001 reflected
an estimated annual effective tax rate for 2001 of approximately 45
percent. The tax benefit in the first nine months of 2001 also
included a $33 million deferred tax benefit associated with the
Transtar reorganization and an unfavorable adjustment of $15 million
related to the settlement of prior years' taxes.
The Slovak Income Tax Act provides an income tax credit which is
available to USSK if certain conditions are met. In order to claim
the tax credit in any year, 60% of USSK's sales must be export sales
and USSK must reinvest the tax credits claimed in qualifying capital
expenditures during the five years following the year in which the tax
credit is claimed. The provisions of the Slovak Income Tax Act permit
USSK to claim a tax credit of 100% of USSK's tax liability for years
2000
28
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
through 2004 and 50% for the years 2005 through 2009. Management
believes that USSK fulfilled all of the necessary conditions for
claiming the tax credit for the years for which it was claimed and
anticipates meeting such requirements in 2002. As a result of
claiming these tax credits and certain tax planning strategies to
reinvest earnings in foreign operations, virtually no income tax
provision is recorded for USSK income.
In October 2002, a tax credit limit was negotiated by the Slovak
government as part of an agreement required for the Slovak Republic's
entry into the European Union. Effective upon the Slovak Republic's
entry into the European Union, the agreement will limit to
$500 million the total tax credit to be granted to USSK during the
period 2000 through 2009. The impact of the tax credit limit is
expected to be minimal since Slovak tax laws have been modified and
tax rates have been reduced since the acquisition of USSK. The
agreement also places limits upon total production and export sales to
the European Union, allowing for modest growth during the period
covered by the investment incentive. Management believes that the
agreement will not have a significant impact on future USSK production
and results of operations.
Net income was $106 million in the third quarter of 2002 compared
with a net loss of $23 million in the third quarter of 2001. Net
income in the first nine months of 2002 was $50 million compared to a
net loss of $44 million in the same period in 2001. The changes
primarily reflected the factors discussed above.
Operating Statistics
- --------------------
Flat-rolled shipments of 2.6 million tons for the third quarter
of 2002 increased about 12 percent from the third quarter 2001, and
one percent from the second quarter of 2002. Tubular shipments of
216,000 tons for the third quarter of 2002 decreased about seven
percent from the same period in 2001, but were virtually unchanged
from the second quarter of 2002. At USSK, third quarter 2002
shipments of 1.0 million tons were about the same as in third quarter
2001, but were nine percent lower than shipments in the second quarter
of 2002.
Raw steel capability utilization for domestic facilities and USSK
in the third quarter of 2002 averaged 93.7 percent and 90.8 percent,
respectively, compared with 83.3 percent and 89.7 percent in the third
quarter of 2001 and 93.9 percent and 95.5 percent in the second
quarter of 2002. Raw steel capability utilization for domestic
facilities and USSK in the first nine months of 2002 averaged 93.2
percent and 87.0 percent, respectively, compared with 82.9 percent and
85.9 percent in the first nine months of 2001.
Balance Sheet
- -------------
Cash and cash equivalents of $105 million at September 30, 2002
decreased $42 million from year-end 2001 as cash used in investing
activities exceeded cash provided from operating and financing
activities. For details, see cash flow discussion following.
Receivables, less allowance for doubtful accounts increased $265
million from year-end 2001 primarily due to increased sales volumes
and prices in third quarter 2002 as compared to fourth quarter 2001.
29
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Receivables from related parties, less allowance for doubtful
accounts decreased $37 million from year-end 2001 primarily due to
lower shipments and changes in the shipment mix to USS-POSCO.
Inventories increased $97 million from December 31, 2001 due
mainly to higher recent operating rates and the ongoing expansion of
Straightline.
Other noncurrent assets increased $52 million from December 31,
2001 due mainly to an increase in restricted cash deposits used to
collateralize letters of credit to provide financial assurance.
Accounts payable of $695 million at September 30, 2002 increased
$136 million from year-end 2001, mainly due to an increase in trade
payables resulting from increased operating levels.
Accounts payable to related parties at September 30, 2002
decreased by $34 million from December 31, 2001 due primarily to the
payment of a cash settlement to Marathon during the first quarter of
2002 in accordance with the terms of the Separation, partially offset
by increased payables to PRO-TEC Coating Company
(PRO-TEC) under an agreement to serve as PRO-TEC's exclusive sales
agent.
Long-term payable to related parties at December 31, 2001
reflects the net present value of the second $38 million installment
of contingent consideration payable in July 2003 related to the
acquisition of USSK.
Additional paid-in capital increased by $208 million from
December 31, 2001 due primarily to an equity offering of 10,925,000
common shares that was completed in May 2002 for net proceeds of $192
million.
Cash Flow
- ---------
Net cash provided from operating activities was $76 million for
the first nine months of 2002 compared with $193 million in the same
period of 2001. Net income adjusted for depreciation, depletion and
amortization in the nine months of 2002 was partially offset by
increases in working capital primarily as a result of the increased
operating levels. Cash provided from operating activities in the nine
months of 2001 was favorably impacted by a $379 million cash income
tax settlement from Marathon in accordance with Marathon's tax
allocation policy.
Capital expenditures in the first nine months of 2002 were
$150 million compared with $197 million in the same period in 2001.
Major projects in the first nine months of 2002 included the quench
and temper line project at Lorain Tubular and various projects at
USSK, including the sinter plant dedusting project, the upgrade of a
hot strip mill reheat furnace, the addition of tin mill facilities,
and the vacuum degassing facility.
U. S. Steel's domestic contract commitments to acquire property,
plant and equipment at September 30, 2002, totaled $22 million
compared with $28 million at December 31, 2001.
USSK has a commitment to the Slovak government for a capital
improvements program of $700 million, subject to certain conditions,
over a period commencing
30
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
with the acquisition date of November 24, 2000, and ending on
December 31, 2010. The remaining commitments under this capital
improvements program as of September 30, 2002, and December 31, 2001,
were $591 million and $634 million, respectively.
Acquisition of U. S. Steel Kosice for the nine months ended
September 30, 2002 represents the payment in July of the first of two
installments of contingent consideration related to the acquisition.
Restricted cash - deposits of $60 million in the first nine
months of 2002 were mainly used to collateralize letters of credit to
meet financial assurance requirements.
Net change in attributed portion of Marathon consolidated debt
and other financial obligations in the first nine months of 2001
reflects an increase of $300 million in the amount of debt and other
financial obligations attributed to U. S. Steel by Marathon. Prior to
the Separation, debt and certain other financial obligations that were
centrally managed by Marathon were attributed to U. S. Steel based on
U. S. Steel's cash flows and capital structure.
Repayment of long-term debt in the first nine months of 2002 was
mainly on the USSK loan.
Settlement with Marathon in the first nine months of 2002
reflected a $54 million cash payment made during the first quarter of
2002 in accordance with the terms of the Separation.
Common stock issued in the first nine months of 2002 reflects
$192 million of net proceeds from U. S. Steel's equity offering
completed in May 2002, proceeds from stock sales to the U. S. Steel
Corporation Savings Fund Plan for Salaried Employees and sales through
the Dividend Reinvestment and Stock Purchase Plan.
Dividends paid in the first nine months of 2002 were $14 million,
reflecting the quarterly dividend rate of five cents per share
established by U. S. Steel after the Separation. Dividends paid in
the first nine months of 2001 resulted from quarterly dividend rates
of 25 cents per share in the first quarter and 10 cents per share in
the second and third quarters paid to USX-U. S. Steel Group common
shareholders. Dividends paid in the first nine months of 2001 also
included quarterly dividends on the 6.50% Cumulative Convertible
Preferred Stock that was retired by Marathon as part of the
Separation.
U. S. Steel's 10 3/4% Senior Notes due 2008 (Senior Notes) impose
limitations on the ability to make restricted payments, which include
the declaration and payment of dividends. In order to make restricted
payments, U. S. Steel must satisfy certain requirements such as a
consolidated coverage ratio based on EBITDA and consolidated interest
expense for the four most recent quarters. In addition, the total of
all restricted payments made since the Senior Notes were issued,
excluding up to $50 million of dividends paid through the end of 2003,
cannot exceed the cumulative cash proceeds from the sale of capital
stock and certain investments plus 50% of consolidated net income from
October 1, 2001 through the most recent quarter-end treated as one
accounting period, or, if there is a consolidated net
31
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
loss for the period, less 100% of such consolidated net loss. A
complete description of the requirements and defined terms such as
restricted payments, EBITDA and consolidated net income can be found
in the indenture for the Senior Notes that was filed as Exhibit 4(f)
to our Annual Report on Form 10-K for the year ended December 31,
2001.
As of September 30, 2002, U. S. Steel does not meet the
Restricted Payments incurrence test referenced above, and accordingly
otherwise would not be able to declare and pay dividends without
violating this covenant. However, exclusive of the limitations
imposed, U. S. Steel can make aggregate dividend payments of up to
$50 million from the third quarter of 2001 through the end of 2003, of
which U. S. Steel has paid $32 million as of September 30, 2002. In
addition to the remaining $18 million available through the end of
2003, U. S. Steel has the ability to make other restricted payments of
up to $28 million as of September 30, 2002, which could also be used
for dividend payments. U. S. Steel's ability to declare and pay
dividends after these amounts are utilized is subject to U. S. Steel's
ability to satisfy these requirements in the future.
Liquidity
- ---------
In November 2001, U. S. Steel entered into a five-year
Receivables Purchase Agreement with financial institutions.
U. S. Steel established a wholly owned subsidiary, United States Steel
Receivables LLC (USSR), which is a special-purpose, bankruptcy-remote
entity that acquires, on a daily basis, eligible trade receivables
generated by U. S. Steel and certain of its subsidiaries. USSR can
sell an undivided interest in these receivables to certain commercial
paper conduits. Fundings under the facility are limited to the lesser
of eligible receivables or $400 million. As of September 30, 2002,
U. S. Steel had $400 million of eligible receivables, none of which
were sold.
In addition, U. S. Steel entered into a three-year revolving
credit facility expiring December 31, 2004, that provides for
borrowings of up to $400 million secured by all domestic inventory and
related assets (Inventory Facility), including receivables other than
those sold under the Receivables Purchase Agreement. As of September
30, 2002, $243 million was available to U. S. Steel under the
Inventory Facility. Effective with the delivery of financial
statements, certified by a financial officer, for the fiscal quarter
ended September 30, 2002, an availability block will be eliminated,
which will increase availability under this facility by $100 million.
While the term of the Receivables Purchase Agreement is five
years, the facility also terminates on the occurrence and failure to
cure certain events, including, among others, certain defaults with
respect to the Inventory Facility and other debt obligations, any
failure of USSR to maintain certain ratios related to the
collectability of the receivables, and failure to extend the
commitments of the commercial paper conduits' liquidity providers,
which currently terminate on November 27, 2002. U. S. Steel has
requested a renewal of the 364-day commitments of the liquidity
providers and anticipates completing the renewals before the
termination date.
USSK has a $10 million short-term credit facility and a
$40 million long-term credit facility. At September 30, 2002,
$48 million was available under these
32
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
facilities. USSK has requested a one-year extension of the short-term
facility, which is set to expire on November 27, 2002, and anticipates
completing the renewal before the termination date.
On July 2, 2002, U. S. Steel initiated an exchange offer for the
Senior Notes. The offer expired on August 5, 2002, and 100 percent of
the notes were tendered for exchange. The new notes received in the
exchange are identical in all material aspects to the tendered notes
except that the new notes have been registered under the Securities
Act of 1933 as amended. As of September 30, 2002, the aggregate
principal amount of Senior Notes outstanding was $535 million.
The Senior Notes impose significant restrictions on U. S. Steel
such as the following: restrictions on payments of dividends; limits
on additional borrowings, including limiting the amount of borrowings
secured by inventories or accounts receivable; limits on
sale/leasebacks; limits on the use of funds from asset sales and
sale of the stock of subsidiaries; and restrictions on our ability
to invest in joint ventures or make certain acquisitions. The
Inventory Facility imposes additional restrictions on U. S. Steel
including the following: effective September 30, 2002, U. S. Steel
must meet an interest expense coverage ratio of at least 2 to 1
through March 30, 2003 and 2.5 to 1 thereafter and a debt to EBITDA
leverage ratio of no more than 6 to 1 through December 30, 2002, 5.5
to 1 through March 30, 2003, 5 to 1 through June 29, 2003, 4.5 to 1
through September 29, 2003, 4 to 1 through March 30, 2004 and 3.75 to
1 thereafter; limitations on capital expenditures; and restrictions on
investments. If these covenants are breached or if U. S. Steel fails
to make payments under our material debt obligations or the
Receivables Purchase Agreement, creditors would be able to terminate
their commitments to make further loans, declare their outstanding
obligations immediately due and payable and foreclose on any
collateral, and it may also cause termination events to occur under
the Receivables Purchase Agreement and a default under the Senior
Notes. Additional indebtedness that U. S. Steel may incur in the
future may also contain similar covenants, as well as other
restrictive provisions. Cross-default and cross-acceleration clauses
in the Receivables Purchase Agreement, the Inventory Facility, the
Senior Notes and any future additional indebtedness could have an
adverse effect upon our financial position and liquidity.
U. S. Steel was in compliance with all of its debt covenants at
September 30, 2002.
U. S. Steel currently has two outstanding universal shelf
registration statements. Under these shelf registration statements,
U. S. Steel may issue various debt and or equity securities in an
aggregate principal amount of up to $798 million.
U. S. Steel has utilized surety bonds to provide financial
assurance for certain transactions and business activities. The total
amount of active surety bonds currently being used for financial
assurance purposes is approximately $73 million. Events over the last
year have caused major changes in the surety bond market including
significant increases in surety bond premiums and reduced market
capacity. These factors, together with our non-investment grade
credit rating, have caused U. S. Steel to replace some surety bonds
with other forms of financial assurance. The use of other forms of
financial assurance and collateral have a negative impact on
liquidity. During the first nine months of 2002, U. S. Steel
33
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
used $60 million of liquidity sources to provide financial assurance
and expects to use approximately $70 million of additional liquidity
sources for these purposes in 2003.
As previously disclosed, the very high property taxes at
U. S. Steel's Gary Works facility in Indiana continue to be
detrimental to Gary Work's competitive position, both when compared to
competitors in Indiana and with other steel facilities in the United
States and abroad. U. S. Steel is a party to several property tax
disputes involving Gary Works, including claims for refunds of
approximately $65 million pertaining to tax years 1994-96 and 1999 and
assessments of approximately $110 million in excess of amounts paid
for the 2000 and 2001 tax years. In addition, interest may be imposed
upon any final assessment. The disputes involve property values and
tax rates and are in various stages of administrative appeals.
U. S. Steel is vigorously defending against the assessments and
pursuing its claims for refunds.
U. S. Steel was contingently liable for debt and other
obligations of Marathon in the amount of $166 million as of September
30, 2002. In the event of the bankruptcy of Marathon, these
obligations for which U. S. Steel is contingently liable, as well as
obligations relating to Industrial Development and Environmental
Improvement Bonds and Notes in the amount of $471 million that were
assumed by U. S. Steel from Marathon, may be declared immediately due
and payable. If that occurs, U. S. Steel may not be able to satisfy
such obligations. In addition, if Marathon loses its investment grade
ratings, certain of these obligations will be considered indebtedness
under the Senior Notes indenture and for covenant calculations under
the Inventory Facility. This occurrence could prevent U. S. Steel
from incurring additional indebtedness under the Senior Notes or may
cause a default under the Inventory Facility.
The following table summarizes U. S. Steel's liquidity as of
September 30, 2002:
(Dollars in millions)
- ----------------------------------------------------------------------
Cash and cash equivalents....................... $105
Amount available under Receivables
Purchase Agreement........................... 400
Amount available under Inventory Facility....... 243
Amounts available under USSK credit facilities.. 48
----
Total estimated liquidity..................... $796
U. S. Steel's liquidity has improved by $81 million since June
30, 2002, primarily reflecting improved operations.
34
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following table summarizes U. S. Steel's contractual
obligations at September 30, 2002, and the effect such obligations are
expected to have on its liquidity and cash flow in future periods.
(Dollars in millions)
- -----------------------------------------------------------------------
Payments Due by Period
---------------------------------------------
Last 3 2003 2005
Months through through Beyond
Contractual Obligations Total of 2002 2004 2006 2006
- -----------------------------------------------------------------------
Long-term debt $1,352 $- $40 $40 $1,272
Capital leases 83 - 12 11 60
Operating leases 408 23 130 79 176
Capital commitments(a) 613 55 267 162 129
Environmental commitments(a) 131 - - - 131(b)
Usher Separation bonus(a) 3 - 3 - -
Additional consideration
for USSK purchase(c) 38 - 38 - -
Other post-retirement (d) - 225 475 (d)
benefits
------ ------ ------ ------ ------
Total contractual
obligations (e) $78 $715 $767 (e)
- -----------------------------------------------------------------------
(a) See Note 16 to the Financial Statements.
(b) Timing of potential cash outflows is not determinable.
(c) See Note 9 to the Financial Statements.
(d) U. S. Steel accrues an annual cost for these benefit obligations
under plans covering its active and retiree populations in
accordance with generally accepted accounting principles. These
obligations will require corporate cash in future years to the
extent that trust assets are restricted or insufficient and to the
extent that company contributions are required by law or union
labor agreement. Amounts in the year 2002 through 2006 reflect our
current estimate of corporate cash outflows and are net of the use
of significant funds available from a Voluntary Employee Benefit
Agreement (VEBA) trust. The accuracy of this forecast of future
cash flows depends on various factors such as actual asset returns,
the mix of assets within the asset trusts, medical escalation and
discount rates used to calculate obligations, the availability of
surplus pension assets allowable for transfer to pay retiree
medical claims and company decisions or VEBA restrictions that
impact the timing of the use of trust assets. Also, as such, the
amounts shown could differ significantly from what is actually
expended and, at this time, it is impossible to make an accurate
prediction of cash requirements beyond five years.
(e) Amount of contractual cash obligations is not determinable
because other post-retirement benefit cash obligations are not
estimable beyond five years, as discussed in (d) above.
Contingent lease payments have been excluded from the above
table. Contingent lease payments relate to operating lease agreements
that include a floating rental charge, which is associated to a
variable component. Future contingent lease payments are not
determinable to any degree of certainty. U. S. Steel's annual
incurred contingent lease expense is disclosed in Note 17 to the
Financial Statements in the Form 10-K for the year ended December 31,
2001. Additionally, recorded liabilities related to deferred income
taxes and other liabilities that may
35
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
have an impact on liquidity and cash flow in future periods are
excluded from the above table.
Pension obligations have been excluded from the above table.
U. S. Steel does not currently anticipate any required cash
contributions to its major pension plans during 2002 or 2003.
However, the sharp decline in the value of the equity holdings of the
company's major pension trusts thus far during 2002 and market
performance from now until the end of 2002 will likely have an impact
on future funding needs of the main pension plan for union employees,
including any required minimum contributions or voluntary company
contributions, which we evaluate on an annual basis. Future funding
requirements are dependent upon factors such as funded status,
regulatory requirements for funding purposes that necessitate
different and more restrictive assumptions for measuring obligations
than those used for accounting, and the level and timing of asset
returns as compared with the level and timing of expected benefit
disbursements. As such, until year-end 2002 asset and benefit
obligation levels are known and fully assessed, it is impossible to
make an accurate prediction of minimum cash funding requirements, if
any, beyond 2003. The funded status of U. S. Steel's pension plans is
disclosed in Note 12 to the Financial Statements in the Form 10-K for
the year ended December 31, 2001.
The following table summarizes U. S. Steel's commercial
commitments at September 30, 2002, and the effect such commitments
could have on its liquidity and cash flow in future periods.
(Dollars in millions)
- -------------------------------------------------------------------------
Scheduled Reductions by Period
--------------------------------------------
Last 3 2003 2005
Months of through through Beyond
Commercial Commitments Total 2002 2004 2006 2006
- -------------------------------------------------------------------------
Standby letters of credit(a) $53 $- $53 $- $-
Surety bonds and funded trusts(a) 81 2 60 - 19(b)
Clairton 1314B partnership(a) 150 - - - 150(b)
Guarantees of indebtedness
of unconsolidated entities(a)(c) 27 - 12 - 15
Contingent liabilities:
- Marathon obligations(a)(c) 166 6 44 47 69
- Unconditional purchase
obligations 741 58 318 307 58
------ ------ ------ ------ ------
Total commercial $1,218 $66 $487 $354 $311
commitments
- -------------------------------------------------------------------------
(a) Reflects a commitment or guarantee for which future cash outflow
is not considered likely.
(b) Timing of potential cash outflows is not determinable.
(c) See Note 16 to the Financial Statements.
36
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In October 2002, U. S. Steel granted an option to purchase its
shares of VSZ a.s. (VSZ). U. S. Steel subsequently sold these shares.
Cash proceeds of approximately $31 million were received in
consideration for the option and the sale of the shares, which will
result in a pretax gain of approximately $21 million in the fourth
quarter. U. S. Steel previously accounted for its investment in VSZ
under the cost method.
U. S. Steel management believes that U. S. Steel's liquidity will
be adequate to satisfy its obligations for the foreseeable future,
including obligations to complete currently authorized capital
spending programs. Future requirements for U. S. Steel's business
needs, including the funding of capital expenditures, debt service for
outstanding financings, and any amounts that may ultimately be paid in
connection with contingencies, are expected to be financed by a
combination of internally generated funds (including asset sales),
proceeds from the sale of stock, borrowings and other external
financing sources. However, there is no assurance that our business
will generate sufficient operating cash flow or that external
financing sources will be available in an amount sufficient to enable
us to service or refinance our indebtedness or to fund other liquidity
needs. If there is a prolonged delay in the recovery of the
manufacturing sector of the U.S. economy, U. S. Steel believes that it
can maintain adequate liquidity through a combination of deferral of
nonessential capital spending, sales of non-strategic assets and other
cash conservation measures.
U. S. Steel management's opinion concerning liquidity and
U. S. Steel's ability to avail itself in the future of the financing
options mentioned in the above forward-looking statements are based on
currently available information. To the extent that this information
proves to be inaccurate, future availability of financing may be
adversely affected. Factors that could affect the availability of
financing include the performance of U. S. Steel (as measured by
various factors including cash provided from operating activities),
levels of inventories and accounts receivable, the state of worldwide
debt and equity markets, investor perceptions and expectations of past
and future performance, the overall U.S. financial clima