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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 March 31, 2003
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
incorporation) No.)
600 Grant Street, Pittsburgh, PA 15219-2800
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 433-1121
-------------------------------
(Registrant's telephone number,
including area code)
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes..X..No.....
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes..X..No.....
Common stock outstanding at April 30, 2003 - 103,145,305 shares
2
UNITED STATES STEEL CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED MARCH 31, 2003
--------------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Statement of Operations (Unaudited) 3
Balance Sheet (Unaudited) 4
Statement of Cash Flows (Unaudited) 5
Selected Notes to Financial Statements 6
(Unaudited)
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends and Ratio of
Earnings to Fixed Charges 20
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 21
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 45
Item 4. Controls and Procedures 48
Supplemental Statistics 49
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 50
Item 6. Exhibits and Reports on Form 8-K 53
SIGNATURE 54
CERTIFICATIONS 55
WEB SITE POSTING 57
3
Part I - Financial Information:
UNITED STATES STEEL CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
First Quarter
Ended
March 31
(Dollars in millions, except per share amounts) 2003 2002
- -------------------------------------------------------------------------
REVENUES AND OTHER INCOME:
Revenues $ 1,661 $1,204
Revenues from related parties 237 227
Income from investees 1 2
Net gains on disposal of assets 2 1
Other income 6 -
------ ------
Total revenues and other income 1,907 1,434
------ ------
COSTS AND EXPENSES:
Cost of revenues (excludes items shown below) 1,732 1,336
Selling, general and administrative expenses 129 71
Depreciation, depletion and amortization 90 88
------ ------
Total costs and expenses 1,951 1,495
------ ------
LOSS FROM OPERATIONS (44) (61)
Net interest and other financial costs 38 34
------ ------
LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (82) (95)
Benefit for income taxes (49) (12)
------ ------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING (33) (83)
PRINCIPLE
Cumulative effect of change in accounting principle, (5) -
net of tax ------ ------
NET LOSS (38) (83)
Dividends on preferred stock (2) -
------ ------
NET LOSS APPLICABLE TO COMMON STOCK $ (40) $ (83)
====== =======
COMMON STOCK DATA:
Per share - basic and diluted:
Loss before cumulative effect of change in accounting $ (.35) $(.93)
principle
Cumulative effect of change in accounting principle, (.05) -
net of tax
------ ------
Net loss $ (.40) $ (.93)
====== ======
Weighted average shares, in thousands
- - Basic and diluted 102,731 89,569
Dividends paid per share $ .05 $ .05
PROFORMA AMOUNTS ASSUMING CHANGE IN ACCOUNTING
PRINCIPLE WAS APPLIED RETROACTIVELY:
Net loss adjusted $ (38) $ (84)
Net loss per share adjusted (basic and diluted) (.40) (.94)
Selected notes to financial statements appear on pages 6-19.
4
UNITED STATES STEEL CORPORATION
BALANCE SHEET (Unaudited)
-------------------------------
March 31 December 31
(Dollars in millions) 2003 2002
- -----------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 367 $ 243
Receivables, less allowance of $65 and $57 959 805
Receivables from related parties 145 129
Inventories 1,077 1,030
Deferred income tax benefits 227 217
Other current assets 33 16
------ ------
Total current assets 2,808 2,440
Investments and long-term receivables,
less allowance of $2 and $2 339 341
Long-term receivables from related parties 6 6
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$7,184 and $7,095 2,958 2,978
Pension asset 1,642 1,654
Intangible pension asset 414 414
Other noncurrent assets 158 144
------ ------
Total assets $8,325 $7,977
====== ======
LIABILITIES
Current liabilities:
Accounts payable $ 788 $ 677
Accounts payable to related parties 104 90
Payroll and benefits payable 265 254
Accrued taxes 307 281
Accrued interest 40 44
Long-term debt due within one year 26 26
------ ------
Total current liabilities 1,530 1,372
Long-term debt, less unamortized discount 1,408 1,408
Deferred income taxes 184 223
Employee benefits 2,638 2,601
Deferred credits and other liabilities 336 346
------ ------
Total liabilities 6,096 5,950
------ ------
Contingencies and commitments (See Note 15) - -
STOCKHOLDERS' EQUITY
Preferred stock -
7% Series B Mandatory Convertible
Preferred issued - 5,000,000 shares
and -0- shares (no par value, liquidation
preference $50 per share) 242 -
Common stock issued - 102,988,069 shares and
102,485,246 shares 103 102
Additional paid-in capital 2,692 2,689
Retained earnings (deficit) (4) 42
Accumulated other comprehensive loss (803) (803)
Deferred compensation (1) (3)
------ ------
Total stockholders' equity 2,229 2,027
------ ------
Total liabilities and stockholders' equity $8,325 $7,977
====== ======
Selected notes to financial statements appear on pages 6-19.
5
UNITED STATES STEEL CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
First Quarter
Ended
March 31
(Dollars in millions) 2003 2002
- --------------------------------------------------------------------
INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net loss $ (38) $ (83)
Adjustments to reconcile to net cash provided
from (used in) operating activities:
Cumulative effect of change in accounting 5 -
principle, net of tax
Depreciation, depletion and amortization 90 88
Pensions and other postretirement benefits 53 (10)
Deferred income taxes (49) (9)
Net gains on disposal of assets (2) (1)
Income from equity investees, net of distributions 3 (2)
Changes in:
Current receivables
- sold - 215
- repurchased - (15)
- operating turnover (171) (142)
Inventories (47) (31)
Current accounts payable and accrued expenses 156 69
All other - net (44) (60)
------ ------
Net cash provided from (used in) operating (44) 19
activities ------ ------
INVESTING ACTIVITIES:
Capital expenditures (63) (56)
Disposal of assets 12 3
Restricted cash - withdrawals - 1
- deposits (23) (15)
Investees - investments (1) -
- loans and advances - (3)
------ ------
Net cash used in investing activities (75) (70)
------ ------
FINANCING ACTIVITIES:
Repayment of long-term debt - (1)
Settlement with Marathon - (54)
Preferred stock issued 242 -
Common stock issued 6 19
Dividends paid (5) (4)
------ ------
Net cash provided from (used in) financing 243 (40)
activities
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - 1
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH 124 (90)
EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 243 147
------ ------
CASH AND EQUIVALENTS AT END OF PERIOD $ 367 $ 57
====== ======
Cash provided from (used in) operating activities
included:
Interest and other financial costs paid (net of
amount capitalized) $ (34) $ (51)
Income taxes paid to tax authorities (1) (1)
Selected notes to financial statements appear on pages 6-19.
6
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information in these financial statements is unaudited but, in the
opinion of management, reflects all adjustments necessary for a fair
presentation of the results for the periods covered. All such adjustments
are of a normal recurring nature unless disclosed otherwise. These
financial statements, including 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 2003 classifications.
Additional information is contained in the United States Steel Corporation
Annual Report on Form 10-K for the year ended December 31, 2002.
2. United States Steel Corporation (U. S. Steel) is engaged domestically
in the production, sale and transportation of steel mill products, coal,
coke and taconite pellets (iron ore); steel mill products distribution; the
management of mineral resources; the management and development of real
estate; and engineering and consulting services and, through U. S. Steel
Kosice (USSK) in the Slovak Republic, in the production and sale of steel
mill products and coke primarily for the central and western European
markets.
3. U. S. Steel has various stock-based employee compensation plans. The
Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based employee
compensation cost is reflected in net income for stock options or stock
appreciation rights (SARs) at the date of grant, as all options and SARs
granted had an exercise price equal to the market value of the underlying
common stock. When the stock price exceeds the grant price, SARs are
adjusted for changes in the market value and compensation expense is
recorded. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation."
First Quarter
Ended
March 31
(In millions, except per share data) 2003 2002
-------------------------------------------------------------------------
Net loss as reported $ (38) $ (83)
Add: Stock-based employee compensation expense included
in reported net loss, net of related tax effects 1 1
Deduct: Total stock-based employee compensation
expense determined under fair value methods for all
awards, net of related tax effects (2) (2)
------ ------
Pro forma net loss $ (39) $ (84)
====== ======
Basic and diluted net loss per share:
- As reported $ (.40) $ (.93)
- Pro forma (.41) (.94)
7
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
The above pro forma amounts were based on a Black-Scholes option-
pricing model, which included the following information and assumptions:
First Quarter
Ended
March 31
2003 2002
-----------------------------------------------------------------------
Weighted average grant date exercise price per share $ 17.92 $ 19.89
Expected annual dividends per share $ .20 $ .20
Expected life in years 5 5
Expected volatility 43.7 39.8
Risk-free interest rate 3.9 4.9
Weighted-average grant date fair value of options
granted during the period, as calculated from above $ 7.13 $ 7.71
4. In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143 "Accounting for
Asset Retirement Obligations." SFAS No. 143 established 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. SFAS No. 143 requires proforma disclosure
of the amount of the liability for obligations as if the statement had been
applied during all periods affected, using current information, current
assumptions and current interest rates. In addition, the effect of
adopting a new accounting principle on net income and on the related per
share amounts is required to be shown on the face of the statement of
operations for all periods presented under Accounting Principles Board
Opinion No. 20.
On January 1, 2003, the date of adoption, asset retirement
obligations, primarily related to mine and landfill closure and post
closure costs of $14 million were recorded (in addition to $15 million
already accrued), compared to the associated long-lived asset, net of
accumulated depreciation, of $7 million that was recorded, resulting in a
cumulative effect of adopting this Statement of $5 million, net of tax of
$2 million. There were no changes in the carrying value of the asset
retirement obligations during the first quarter of 2003 other than
accretion expense of $1 million, leaving a balance for these obligations of
$30 million at March 31, 2003. Had this Statement been applied during the
first quarter 2002, the asset retirement obligation at January 1, 2002,
would have been $26 million, with accretion expense of $1 million during
the quarter, leaving a balance of $27 million at March 31, 2002.
Certain asset retirement obligations related to disposal costs of
fixed assets at our steel facilities were not recorded because they have an
indeterminate settlement date. These asset retirement obligations will be
initially recognized in the period in which sufficient information exists
to estimate fair value.
8
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. (Continued)
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The Interpretation elaborates on the
disclosure to be made by a guarantor about obligations under certain
guarantees that it has issued. It also clarifies that at the inception of
a guarantee, the company must recognize liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements were adopted
for the 2002 annual financial statements. U. S. Steel will apply the
remaining provisions of the Interpretation prospectively as required.
FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities," was issued in January 2003 and addresses consolidation by
business enterprises of variable interest entities that do not have
sufficient equity investment to permit the entity to finance its activities
without additional subordinated financial support from other parties or
whose equity investors lack the characteristics of a controlling financial
interest. This statement was adopted in the first quarter of 2003 with no
initial impact to U. S. Steel.
5. In February 2003, U. S. Steel sold 5 million shares of 7% Series B
Mandatory Convertible Preferred Shares (liquidation preference $50 per
share) (Series B Preferred) for net proceeds of $242 million. The
Series B Preferred have a dividend yield of 7%, a 20% conversion premium
(for an equivalent conversion price of $15.66 per common share) and will
mandatorily convert into shares of U. S. Steel common stock on June 15,
2006. The net proceeds of the offering will be used for general corporate
purposes, including funding working capital, financing potential
acquisitions, debt reduction and voluntary contributions to employee
benefit plans. The number of common shares that could be issued upon
conversion of the 5 million shares of Series B Preferred ranges from
approximately 16.0 million shares to 19.2 million shares, based upon the
timing of the conversion and the average market price of U. S. Steel's
common stock.
6. Total comprehensive loss was $38 million for the first quarter of 2003
and $83 million for the first quarter of 2002.
7. Net interest and other financial costs include amounts related to the
remeasurement of USSK's net monetary assets into the U.S. dollar, which is
USSK's functional currency. During the first quarter of 2003, a net loss
of $5 million was recorded as compared with a net loss of less than
$1 million in the first quarter of 2002.
8. Due to the relationship between domestic and USSK forecasted annual
pretax results, the application of the annual effective tax rate created an
unusual relationship between income tax benefits and pretax losses in the
first quarter of 2003. Therefore, the actual tax benefit rate of 59%
applicable to the first quarter 2003 pretax losses, which was developed
using first quarter 2003 domestic pretax losses with a tax benefit of
approximately 35% and USSK pretax earnings with virtually no income tax
provision, was considered the best estimate of the income tax benefit for
the period. The income tax benefit in the first quarter of 2002 reflected
an estimated annual effective tax rate for 2002 of approximately 13%.
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
9
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. (Continued)
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 2003. 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.
9. U. S. Steel has five reportable segments: Flat-rolled, Tubular, USSK,
Straightline Source (Straightline) and USS Real Estate (Real Estate).
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,
conversion, container 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 petrochemical markets. In May 2003,
U. S. Steel sold its interest in the equity investee.
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; operations under facility management and support agreements in
Serbia; 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 and western European construction, conversion, appliance,
transportation, service center, container, and oil, gas and petrochemical
markets.
The Straightline segment includes the operating results of
U. S. Steel's technology-enabled distribution business that serves steel
customers primarily in the eastern and central United States. Straightline
competes in the steel service center marketplace using a nontraditional
business process to sell, process and deliver flat-rolled steel products in
small to medium sized order quantities primarily to job shops, contract
manufacturers and original equipment manufacturers across an array of
industries.
The Real Estate segment includes the operating results of
U. S. Steel's domestic mineral interests that are not assigned to other
operating units; timber properties; and residential, commercial and
industrial real estate that is managed or developed for sale or lease.
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 iron-bearing
taconite pellets; transportation services; and engineering and consulting
services.
10
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. (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 first quarter of 2003 and 2002 are:
Total
Flat- Straight- Real Reportable
(In millions) rolled Tubular USSK line Estate Segments
- ------------------------------------------------------------------------
First Quarter 2003
- ------------------
Revenues and
other income:
Customer $ 1,055 $ 136 $ 426 $ 25 $ 27 $ 1,669
Intersegment 52 - 5 - 3 60
Equity income
(loss)(a) 5 - - - - 5
Other 6 - - - 1 7
------ ------ ------ ------ ------ ------
Total $ 1,118 $ 136 $ 431 $ 25 $ 31 $ 1,741
====== ====== ====== ====== ====== ======
Income (loss)
from operations $ (40) $ (5) $ 64 $ (15) $ 13 $ 17
====== ====== ====== ====== ====== ======
First Quarter 2002
- ------------------
Revenues and
other income:
Customer $ 926 $ 124 $ 201 $ 6 $ 15 $ 1,272
Intersegment 38 - - - 2 40
Equity income
(loss)(a) (11) - 1 - - (10)
Other - - 1 - - 1
------ ------ ------ ------ ------ ------
Total $ 953 $ 124 $ 203 $ 6 $ 17 $ 1,303
====== ====== ====== ====== ====== ======
Income (loss)
from operations $ (74) $ 3 $ (1) $ (8) $ 10 $ (70)
====== ====== ====== ====== ====== ======
(a)Represents equity in earnings (losses) of unconsolidated investees.
11
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. (Continued)
Total
Reportable Other Reconciling Total
(In millions) Segments Businesses Items Corp.
-----------------------------------------------------------------------------
First Quarter 2003
------------------
Revenues and other income:
Customer $ 1,669 $ 229 $ - $ 1,898
Intersegment 60 157 (217) -
Equity income (loss)(a) 5 (4) - 1
Other 7 1 - 8
------ ------ ------ ------
Total $ 1,741 $ 383 $ (217) $ 1,907
====== ====== ====== ======
Income (loss) from operations $ 17 $ (36) $ (25) $ (44)
====== ====== ====== ======
First Quarter 2002
------------------
Revenues and other income:
Customer $ 1,272 $ 159 $ - $ 1,431
Intersegment 40 186 (226) -
Equity income (loss)(a) (10) - 12 2
Other 1 - - 1
------ ------ ------ ------
Total $ 1,303 $ 345 $ (214) $ 1,434
====== ====== ====== ======
Income (loss) from operations $ (70) $ (11) $ 20 $ (61)
====== ====== ====== ======
(a)Represents equity in earnings (losses) of unconsolidated investees.
The following is a schedule of reconciling items for the first quarter of
2003 and 2002:
Revenues Income (Loss)
And From
Other Income Operations
(In millions) 2003 2002 2003 2002
---------------------------------------------------------------------------
Elimination of intersegment revenues $ (217) $ (226) * *
----- -----
Special Items:
Litigation items - - $ (25) $ 9
Insurance recoveries related to USS- - 12 - 12
POSCO fire
Costs related to Fairless shutdown - - - (1)
----- ----- ----- -----
- 12 (25) 20
----- ----- ----- -----
Total reconciling items $ (217) $ (214) $ (25) $ 20
===== ===== ===== =====
* Elimination of intersegment revenues is offset by the elimination of
intersegment cost of revenues within income (loss) from operations at the
corporate consolidation level.
12
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
10. 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 March 31, 2003 and
December 31, 2002, also included $28 million due from Marathon for tax
settlements in accordance with the tax sharing agreement.
Long-term receivables from related parties at March 31, 2003 and
December 31, 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.
Accounts payable to related parties reflect balances due to PRO-TEC
Coating Company (PRO-TEC) under an agreement whereby U. S. Steel provides
marketing, selling and customer service functions, including invoicing and
receivables collection, for PRO-TEC. U. S. Steel, as PRO-TEC's exclusive
sales agent, is responsible for credit risk associated with the
receivables. Payables to PRO-TEC under the agreement were $57 million and
$42 million at March 31, 2003 and December 31, 2002, respectively.
Accounts payable to related parties at both March 31, 2003 and
December 31, 2002, also included amounts related to the purchase of outside
processing services from equity investees and the net present value of the
second and final $37.5 million installment of contingent consideration
payable in July 2003 to VSZ a.s. related to the acquisition of USSK.
11. 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)
--------------------
March 31 December 31
2003 2002
--------- ---------
Raw materials $ 208 $ 228
Semi-finished products 507 472
Finished products 306 271
Supplies and sundry items 56 59
----- -----
Total $1,077 $1,030
===== =====
Costs of revenues increased by $2 million and were reduced by $3 million in
the three months of 2003 and 2002, respectively, as a result of
liquidations of LIFO inventories.
13
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
12. Net loss per common share was calculated by adjusting net loss for
dividend requirements of preferred stock and is based on the weighted
average number of common shares outstanding during the quarter.
Diluted net loss per share assumes the exercise of stock options and
conversion of preferred stock, provided in each case, the effect is
dilutive. As of March 31, 2003 and March 31, 2002, the potential common
stock related to employee options to purchase 5.8 million shares and
3.5 million shares of common stock, respectively, and 10.6 million shares
of common stock applicable to the conversion of preferred stock at
March 31, 2003, have been excluded from the computation of diluted net
income per share because their effect was antidilutive.
13. At March 31, 2003, U. S. Steel had no borrowings against its Inventory
Facility that provides for borrowings of up to $400 million. At March 31,
2003, only $397 million was available under this facility due to a letter
of credit issued against the facility.
At March 31, 2003, USSK had no borrowings against its $10 million
short-term credit facility or against its $40 million long-term facility.
At March 31, 2003, only $46 million was available under these facilities as
a result of customs guarantees issued against the short-term credit
facility.
At March 31, 2003, in the event of a change in control of U. S. Steel,
debt obligations totaling $885 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 $87 million or provide a
letter of credit to secure the remaining obligation.
14. On November 28, 2001, U. S. Steel entered into a five-year Receivables
Purchase Agreement to sell a revolving interest in eligible trade
receivables generated by U. S. Steel and certain of its subsidiaries
through a commercial paper conduit program. Qualifying accounts
receivables are sold, on a daily basis, without recourse, to U. S. Steel
Receivables LLC (USSR), a consolidated wholly owned special purpose entity.
USSR then sells an undivided interest in these receivables to certain
conduits. The conduits issue commercial paper to finance the purchase of
their interest in the receivables. U. S. Steel has agreed to continue
servicing the sold receivables at market rates. Because U. S. Steel
receives adequate compensation for these services, no servicing asset or
liability has been recorded.
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.
14
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
14. (Continued)
During the first quarter ended March 31, 2003, no revolving interest
in accounts receivable were sold to or repurchased from conduits. During
the first quarter of 2002, USSR sold $215 million of revolving interest in
accounts receivable to the conduits, of which $15 million was subsequently
repurchased prior to March 31, 2002. As of March 31, 2003, $343 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 first quarters ended
March 31, 2003 and 2002, U. S. Steel incurred costs of less than $1 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:
First Quarter
Ended
March 31
(In millions) 2003 2002
-------------------------------------------------------------------
Proceeds from:
Collections reinvested $1,207 $1,018
Securitizations - 200
Servicing fee 1 1
The table below summarizes the trade receivables for USSR:
March 31 December 31
(In millions) 2003 2002
-------------------------------------------------------------------
Balance of accounts receivable, net, purchased by $ 555 $ 451
USSR
Revolving interest sold to conduits - -
---- ----
Accounts receivable - net, included in the
balance sheet of U. S. Steel $ 555 $ 451
==== ====
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 26, 2003.
15
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
15. U. S. Steel is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments involving a variety
of matters, including laws and regulations relating to the environment.
Certain of these matters are discussed below. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material
to the consolidated financial statements. However, management believes
that U. S. Steel will remain a viable and competitive enterprise even though
it is possible that these contingencies could be resolved unfavorably.
U. S. Steel accrues for estimated costs related to existing lawsuits,
claims and proceedings when it is probable that it will incur these costs in
the future. On March 28, 2003, a jury in Madison County, Illinois returned
a verdict against U. S. Steel related to an asbestos lawsuit for $50 million
in compensatory damages and $200 million in punitive damages. U. S. Steel
believes that the plaintiff's exclusive remedy was provided by the Indiana
workers' compensation law and this issue and other errors at trial would
have enabled U. S. Steel to succeed on appeal. However, in order to avoid
the delay and uncertainties of further litigation and posting an appeal
bond equal to the amount of the verdict, U. S. Steel settled this case for
an amount substantially less than the compensatory damages award, which
represented a small fraction of the total award. This settlement is
reflected in the first quarter 2003 results.
While it is not possible to predict the ultimate outcome of asbestos-
related lawsuits, claims and proceedings, the Company believes that the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial position.
Property taxes - 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.
Environmental matters - U. S. Steel is subject to federal, state,
local and foreign laws and regulations relating to the environment. These
laws generally provide for control of pollutants released into the
environment and require responsible parties to undertake remediation of
hazardous waste disposal sites. Penalties may be imposed for noncompliance.
Accrued liabilities for remediation totaled $140 million and $135 million
at March 31, 2003 and December 31, 2002, 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 first quarter of 2003 and for the years
2002 and 2001, such capital expenditures totaled $3 million, $14 million
and $15 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.
16
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
15. (Continued)
Throughout its history, U. S. Steel has sold numerous properties and
businesses and has provided various indemnifications with respect to many
of the assets that were sold. These indemnifications have been associated
with the condition of the property, the approved use, certain
representations and warranties, matters of title and environmental matters.
While the vast majority of indemnifications have not covered environmental
issues, there have been a few transactions in which U. S. Steel indemnified
the buyer for non-compliance with past, current and future environmental
laws related to existing conditions; however, most recent indemnifications
are of a limited nature only applying to non-compliance with past and/or
current laws. Some indemnifications only run for a specified period of
time after the transactions close and others run indefinitely. The amount
of potential liability associated with these transactions is not estimable
due to the nature and extent of the unknown conditions related to the
properties sold. Aside from approximately $14 million of liabilities
already recorded as a result of these indemnifications due to specific
environmental remediation cases (included in the $140 million of accrued
liabilities for remediation discussed above), there are no other known
liabilities related to these indemnifications.
Guarantees - Guarantees of the liabilities of unconsolidated entities
of U. S. Steel totaled $23 million at March 31, 2003 and $27 million at
December 31, 2002. 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
March 31, 2003, the largest guarantee for a single such entity was
$15 million, which represents the maximum exposure to loss under a
guarantee of debt service payments of an equity investee. No liability has
been recorded for these guarantees as management believes the likelihood of
occurrence is remote.
Contingencies related to Separation from Marathon - U. S. Steel was
contingently liable for debt and other obligations of Marathon in the
amount of approximately $167 million at March 31, 2003, compared to
$168 million at December 31, 2002. In the event of the bankruptcy of
Marathon, these obligations for which U. S. Steel is contingently liable
may be declared immediately due and payable. If such event occurs,
U. S. Steel may not be able to satisfy such obligations. No liability has
been recorded for these contingencies as management believes the likelihood
of occurrence is remote.
If the Separation is determined to be a taxable distribution of the
stock of U. S. Steel, but there is no breach of a representation or
covenant by either U. S. Steel or Marathon, U. S. Steel would be liable for
any resulting taxes (Separation No-Fault Taxes) incurred by Marathon.
U. S. Steel's indemnity obligation for Separation No-Fault Taxes survives
until the expiration of the applicable statute of limitations. The maximum
potential amount of U. S. Steel's indemnity obligation for Separation
No-Fault Taxes at March 31, 2003 and December 31, 2002, was estimated to be
approximately $90 million. No liability has been recorded for this
indemnity obligation as management believes that the likelihood of the
Separation being determined to be a taxable distribution of the stock of
U. S. Steel is remote.
Other contingencies - U. S. Steel is contingently liable to its
Chairman and Chief Executive Officer for a $3 million retention bonus. The
bonus is payable upon the earlier of his retirement from active employment
or December 31, 2004, and is subject to certain performance measures.
17
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
15. (Continued)
Under certain operating lease agreements covering various equipment,
U. S. Steel has the option to renew the lease or to purchase the equipment
at the end of the lease term. If U. S. Steel does not exercise the
purchase option by the end of the lease term, U. S. Steel guarantees a
residual value of the equipment as determined at the lease inception date
(totaling approximately $52 million at March 31, 2003 and $51 million at
December 31, 2002). No liability has been recorded for these guarantees as
either management believes that the potential recovery of value from the
equipment when sold is greater than the residual value guarantee, or the
potential loss is not probable and/or estimable.
Transtar reorganization - The 2001 reorganization of Transtar was
intended to be tax-free for federal income tax purposes, with U. S. Steel
and Transtar Holdings, L.P. (Holdings) agreeing through various
representations and covenants to protect the reorganization's tax-free
status. If the reorganization is determined to be taxable, but there is no
breach of a representation or covenant by either U. S. Steel or Holdings,
U. S. Steel is liable for 44% of any resulting Holdings taxes (Transtar No-
Fault Taxes), and Holdings is responsible for 56% of any resulting
U. S. Steel taxes. U. S. Steel's indemnity obligation for Transtar No-
Fault Taxes survives until 30 days after the expiration of the applicable
statute of limitations. The maximum potential amount of U. S. Steel's
indemnity obligation for Transtar No-Fault Taxes at March 31, 2003 and
December 31, 2002, was estimated to be approximately $70 million. No
liability has been recorded for this indemnity obligation as management
believes that the likelihood of the reorganization being determined to be
taxable is remote. U. S. Steel can recover all or a portion of any
indemnified Transtar No-Fault Taxes if Holdings receives a future tax
benefit as a result of the Transtar reorganization being taxable.
Clairton 1314B partnership - U. S. Steel has a commitment to fund
operating cash shortfalls of the partnership of up to $150 million.
Additionally, U. S. Steel, under certain circumstances, is required to
indemnify the limited partners if the partnership product sales fail to
qualify for the credit under Section 29 of the Internal Revenue Code. This
indemnity will effectively survive until the expiration of the applicable
statute of limitations. The maximum potential amount of this indemnity
obligation at March 31, 2003 and December 31, 2002, including interest and
tax gross-up, was approximately $600 million. Furthermore, U. S. Steel
under certain circumstances has indemnified the partnership for
environmental obligations. See discussion of environmental matters above.
The maximum potential amount of this indemnity obligation is not estimable.
Management believes that the $150 million deferred gain related to the
partnership, which is recorded in deferred credits and other liabilities,
is more than sufficient to cover any probable exposure under these
commitments and indemnifications.
Self-insurance - U. S. Steel is self-insured for certain liabilities
including workers' compensation, auto liability and general liability,
within specified deductible and retainage levels. Certain equipment that
is leased by U. S. Steel is also self-insured within specified deductible
and retainage levels. Liabilities are recorded for workers' compensation
and personal injury obligations. Other costs resulting from self-insured
losses are charged against income upon occurrence.
18
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
15. (Continued)
U. S. Steel uses surety bonds, trusts and letters of credit to
provide whole or partial financial assurance for certain obligations such
as workers' compensation. The total amount of active surety bonds, trusts
and letters of credit being used for financial assurance purposes was
approximately $147 million as of March 31, 2003 and $144 million as of
December 31, 2002, which reflects our maximum exposure under these
financial guarantees, but not our total exposure for the underlying
obligations. Most of the trust arrangements and letters of credit are
collateralized by restricted cash that is recorded in other noncurrent
assets.
Commitments - At March 31, 2003 and December 31, 2002, U. S. Steel's
domestic contract commitments to acquire property, plant and equipment
totaled $41 million and $24 million, respectively.
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 March 31, 2003 and December 31, 2002, were
$523 million and $541 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 $80 million
as of March 31, 2003, which declines over the duration of the agreement,
may be required.
16. On March 31, 2003, U. S. Steel Balkan d.o.o., a wholly owned Serbian
subsidiary of U. S. Steel, agreed to purchase out of bankruptcy, Serbian
steel producer Sartid a.d. and six of its subsidiaries for a total purchase
price of $23 million and other financial and employee commitments. The
transaction is targeted for completion during the third quarter of 2003 and
is subject to several conditions including the successful completion of
anti-monopoly review by competition authorities in several countries.
In an associated agreement, which will become effective upon the completion
of the acquisition, U. S. Steel Balkan committed to future spending of up
to $150 million over five years for working capital and the repair,
rehabilitation, improvement, modification and upgrade of the facilities. A
portion of this spending is subject to certain conditions related to
Sartid's commercial operations, cash flow and viability. U. S. Steel
Balkan will conduct economic development activities over the course of
three years and spend no less than $1.5 million on these efforts, and has
agreed to support community, charitable and sport activities in a total
amount of not less than $5 million during the three-year period following
closing of the transaction. In addition, U. S. Steel Balkan has agreed to
refrain from layoffs for a period of three years. The agreement also
requires U. S. Steel Balkan to obtain the consent of the Serbian government
prior to a transfer of a controlling interest of Sartid within five years
of the closing date.
19
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
17. On April 21, 2003, U. S. Steel announced that the U.S. Bankruptcy
Court in Chicago approved its purchase of National Steel Corporation's
(National) integrated steel assets. U. S. Steel also announced that it has
signed a definitive Asset Purchase Agreement with National, which was
approved by the bankruptcy court on that date.
Under the terms of the agreement, U. S. Steel will purchase substantially
all of National's assets for a contractual purchase price of $1.05 billion,
which includes $850 million in cash and the assumption of certain of
National's lease and contractual obligations that the contract values at
$200 million. The $200 million in obligations will not be considered part
of the purchase consideration for National's assets under accounting rules
and will not be recorded on the opening balance sheet because of the nature
of these obligations. The agreement provides that net working capital
(accounts receivable plus inventory minus accounts payable) will be at
least $450 million on the closing date and the cash purchase price will be
reduced on a dollar for dollar basis for any amount of working capital less
than $450 million. Additional cash payments of approximately $21 million
related to certain operating lease payments to be made by U. S. Steel at or
near closing will be considered part of the cash purchase price, as will
direct external costs incurred related to the acquisition, which are
broadly estimated at $10 million. Additional amounts that will be
reflected as part of the purchase consideration for National's assets are
discussed in the following paragraph.
In connection with the acquisition of National's assets, U. S. Steel has
reached a new labor agreement with the United Steelworkers of America
(USWA). This agreement will cover employees at U. S. Steel's existing
facilities and the acquired National facilities. The agreement is
scheduled for a ratification vote by the USWA in May. The purchase
consideration for National will include liabilities that will be recorded
on the opening balance sheet related to benefits granted to current active
National employees under this new labor agreement. These liabilities,
primarily related to future retiree medical costs, are broadly estimated at
$290 million. The purchase consideration will also include approximately
$100 million related to the estimated fair value of future contributions to
a trust to be administered by the USWA to assist current National retirees
with healthcare costs. U. S. Steel will not assume any liabilities related
to National's pension plans, which have been terminated by the Pension
Benefit Guaranty Corporation, nor will it assume National's defined benefit
retiree medical and life insurance plans, and consistent with the U.S.
Bankruptcy Code, the transaction will exclude all liabilities except as
have been agreed to by U. S. Steel.
U. S. Steel intends to fund the cash component of the acquisition through a
combination of existing cash balances, the sale of accounts receivable
under the receivables sales program and the issuance of debt securities.
The transaction is expected to close in May and is subject to customary
closing conditions.
18. On April 25, 2003, U. S. Steel sold certain coal seam gas interests in
Alabama for net cash proceeds of approximately $34 million, which will be
reflected in other income.
20
UNITED STATES STEEL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
--------------------------------------------------
(Unaudited)
First Quarter Ended
March 31 Year Ended December 31
- ------------------- --------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
(a) (b) 1.04 (c) 1.05 2.10 5.15
==== ==== ==== ==== ==== ==== ====
(a) Earnings did not cover combined fixed charges and preferred stock
dividends by $83 million.
(b) Earnings did not cover combined fixed charges and preferred stock
dividends by $96 million.
(c) Earnings did not cover combined fixed charges and preferred stock
dividends by $598 million.
UNITED STATES STEEL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
(Unaudited)
First Quarter Ended
March 31 Year Ended December 31
- ------------------- --------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
(a) (b) 1.04 (c) 1.13 2.33 5.89
==== ==== ==== ==== ==== ==== ====
(a) Earnings did not cover fixed charges by $79 million.
(b) Earnings did not cover fixed charges by $96 million.
(c) Earnings did not cover fixed charges by $586 million.
21
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
U. S. Steel has five reportable operating segments: Flat-rolled Products
(Flat-rolled), Tubular Products (Tubular), U. S. Steel Kosice (USSK),
Straightline Source (Straightline) and USS Real Estate (Real Estate).
Prior to December 31, 2001, the businesses of U. S. Steel comprised an
operating unit of USX Corporation, now named Marathon Oil Corporation
(Marathon). On December 31, 2001, U. S. Steel was capitalized through the
issuance of 89.2 million shares of common stock to holders of USX-U. S. Steel
Group common stock (Steel Stock) in exchange for all outstanding shares of Steel
Stock on a one-for-one basis (the Separation).
Effective with the first quarter of 2002, following the Separation,
U. S. Steel established a new internal financial reporting structure, which
resulted in a change in reportable segments from Domestic Steel and USSK to
Flat-rolled, Tubular and USSK. 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.
Effective with the fourth quarter of 2002, the Straightline and Real Estate
reportable segments, which were previously reflected in Other Businesses, were
added. The presentation of Straightline and Real Estate as separate segments
resulted from the application of quantitative threshold tests under Statement of
Financial Accounting Standards (SFAS) No. 131 rather than any fundamental change
in the management or structure of the businesses. The composition of the Flat-
rolled, Tubular and USSK segments remained unchanged from prior periods.
Comparative results for 2002 have been conformed to the current year
presentation.
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, conversion, container, 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 petrochemical markets. In May 2003, U. S. Steel sold its
investment in the equity investee.
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;
operations under facility management and support agreements in Serbia; 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 and
western European construction, conversion, appliance, transportation, service
center, container, and oil, gas and petrochemical markets.
22
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Straightline segment includes the operating results of U. S. Steel's
technology-enabled distribution business that serves steel customers primarily
in the eastern and central United States. Straightline competes in the steel
service center marketplace using a nontraditional business process to sell,
process and deliver flat-rolled steel products in small to medium sized order
quantities primarily to job shops, contract manufacturers and original
equipment manufacturers across an array of industries.
The Real Estate segment includes the operating results of U. S. Steel's
domestic mineral interests that are not assigned to other operating units;
timber properties; and residential, commercial and industrial real estate that
is managed or developed for sale or lease.
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 iron-bearing taconite pellets; transportation
services; 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 not known with certainty and are subject to
risk factors that could cause these outcomes to differ significantly from those
projected. In accordance with "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, these statements are accompanied by
cautionary language identifying important factors, though not necessarily all
such factors, that could cause future outcomes to differ materially from those
set forth in forward-looking statements. For discussion of risk factors
affecting the businesses of U. S. Steel, see Supplementary Data -- Disclosures
About Forward-Looking Statements in the U. S. Steel Annual Report on Form 10-K
for the year ended December 31, 2002.
Results of Operations
- ---------------------
Revenues and other income was $1,907 million in the first quarter of 2003,
compared with $1,434 million in the same quarter last year. The $473 million
increase primarily reflected higher shipments and average realized prices for
USSK; increased prices for domestic sheet products; and higher commercial
shipments of coke. The improvement also reflected increased Straightline
shipments and higher shipments of slabs.
23
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income (Loss) from operations for U. S. Steel for the first quarter of 2003
and 2002 is set forth in the following table:
First Quarter
Ended
March 31
(Dollars in millions) 2003 2002
- -------------------------------------------------- ------ ------
Flat-rolled $(40) $(74)
Tubular (5) 3
USSK 64 (1)
Straightline (15) (8)
Real Estate 13 10
------ ------
Total income (loss) from reportable segments 17 (70)
Other Businesses (36) (11)
------ ------
Income (Loss) from operations before special (19) (81)
items
Special Items:
Litigation items (25) 9
Costs related to Fairless shutdown - (1)
Insurance recoveries related to USS-POSCO fire - 12
------ ------
Total income (loss) from operations $(44) $(61)
====== ======
Segment results for Flat-rolled
The segment loss for Flat-rolled was $40 million in the first quarter of
2003, compared with a loss of $74 million in the same quarter of 2002. The
improvement was mainly due to higher average realized prices and improved
product mixes for sheet and plate products, partially offset by increased prices
for natural gas and higher employee benefit costs.
Segment results for Tubular
The segment loss for Tubular was $5 million in the first quarter of 2003, a
decline of $8 million compared with the first quarter of 2002. The decline
resulted primarily from lower average realized prices for seamless products,
higher natural gas prices and increased employee benefit costs, partially offset
by increased shipment volumes for seamless products.
Segment results for USSK
Segment income for USSK was $64 million in the first quarter of 2003,
compared with a loss of $1 million in the first quarter of 2002. The
improvement was primarily due to higher average realized prices, which were due
in large part to favorable exchange rate effects, and increased shipment
volumes, which were up significantly because of a blast furnace outage in last
year's first quarter.
24
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
These were partially offset by the unfavorable effect on costs of foreign
exchange rate changes, and costs associated with conversion and facility
management agreements with Sartid in Serbia.
Segment results for Straightline
The Straightline segment loss increased to $15 million in the first quarter
2003, compared to $8 million in the year earlier quarter. The decline was
primarily due to higher first quarter 2003 sales at negative margins. The
negative margins were driven by sales from inventory, much of which was
purchased at higher prices in the second half of 2002.
Segment results for Real Estate
Segment income for Real Estate was $13 million in the first quarter of
2003, compared with income of $10 million in the first quarter of 2002. The
increase resulted mainly from higher coal seam gas and coal royalties.
Results for Other Businesses
The loss for Other Businesses in the first quarter of 2003 was $36 million,
compared with a loss of $11 million in the first quarter of 2002. Increased
losses at iron ore operations and higher employee benefit costs across all units
were partially offset by improved results at coke operations. Iron ore
operations were negatively affected by increased prices for natural gas as well
as a particularly harsh winter. Coke operations benefited from higher
commercial shipments and increased prices for coke and certain by-products.
Net Periodic Pension Costs
Net periodic pension costs, which are primarily noncash and are included in
income (loss) from operations, were $16 million for the first quarter of 2003,
compared to a credit of $29 million for the corresponding period of 2002. The
increase was primarily due to lower plan assets, reduced asset return
assumptions and a lower discount rate.
Selling, General and Administrative Expenses
Selling, general and administrative expenses included in income (loss) from
operations were $129 million for the first quarter of 2003, compared to $71
million in the first quarter of 2002. The increase in 2003 was primarily due to
the increase in net periodic pension costs as previously discussed; higher
expenses at USSK due mainly to the unfavorable effects of foreign currency
exchange rate differences and increased business development expenses; and
higher retiree medical and life insurance costs resulting mainly from higher
actual base claim costs and a higher assumed escalation trend applied to those
claim costs.
25
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Items not allocated to segments:
Litigation items are a charge of $25 million in the first quarter of 2003
and a credit of $9 million in the first quarter of 2002.
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.
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.
Net interest and other financial costs were $38 million in the first
quarter of 2003, compared with $34 million during the same period in 2002. The
increase in 2003 primarily reflects unfavorable 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 loss of
approximately $5 million in the first quarter of 2003, compared to an immaterial
net loss in the first quarter of 2002.
The benefit for income taxes in the first quarter of 2003 was $49 million,
compared with a benefit of $12 million in the first quarter last year.
Due to the relationship between domestic and USSK forecasted annual pretax
results, the application of the annual effective tax rate created an unusual
relationship between income tax benefits and pretax losses in the first quarter
of 2003. Therefore, the actual tax benefit rate of 59% applicable to the first
quarter 2003 pretax losses, which was developed using first quarter 2003
domestic pretax losses with a tax benefit of approximately 35% and USSK pretax
earnings with virtually no income tax provision, was considered the best
estimate of the income tax benefit for the period. The income tax benefit in
the first quarter of 2002 reflected an estimated annual effective tax rate for
2002 of approximately 13%.
During the year, management regularly updates the forecast estimate based
on changes in various factors such as prices, shipments, product mix, plant
operating performance, and cost estimates. These factors will be considered
each quarter to ascertain whether an annual effective tax rate approach produces
a better estimate of income taxes for the year-to-date period.
The cumulative effect of change in accounting principle, net of tax was a
charge of $5 million and resulted from the adoption on January 1, 2003, of
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations."
U. S. Steel's net loss was $38 million in the first quarter of 2003,
compared with a net loss of $83 million in the first quarter of 2002. The
improvement primarily reflected the factors discussed above.
26
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Operating Statistics
- --------------------
Flat-rolled shipments of 2.4 million tons for the first quarter of 2003
increased about five percent from the first quarter 2002, and two percent from
the fourth quarter of 2002. Tubular shipments of 206,000 tons for the first
quarter of 2003 increased about 10 percent from the same period in 2002, and 36
percent from the fourth quarter of 2002. At USSK, first quarter 2003 shipments
of 1.2 million net tons were up significantly from first quarter 2002 shipments
of 0.8 million net tons, which were negatively impacted by a blast furnace
outage, and up about 10 percent from shipments in the fourth quarter of 2002.
Raw steel capability utilization for domestic facilities and USSK in the
first quarter of 2003 averaged 91.7 percent and 97.3 percent, respectively,
compared with 92.1 percent and 74.4 percent in the first quarter of 2002 and
80.8 percent and 90.6 percent in the fourth quarter of 2002.
Balance Sheet
- -------------
Cash and cash equivalents of $367 million at March 31, 2003, increased
$124 million from year-end 2002. For details, see cash flow discussion
following.
Receivables, less allowance for doubtful accounts increased $154 million
from year-end 2002, primarily due to increases in trade accounts receivable
resulting from increasing sales throughout the quarter.
Receivables from related parties, less allowance for doubtful accounts
increased $16 million from year-end 2002, primarily due to increased shipments
to PRO-TEC Coating Company (PRO-TEC).
Inventories increased $47 million from December 31, 2002, due mainly to
higher operating rates than in the fourth quarter of 2002 and the expansion of
Straightline.
Accounts payable of $788 million at March 31, 2003, increased $111 million
from year-end 2002, mainly due to an increase in trade payables resulting from
increased operating levels as compared to late 2002.
Accounts payable to related parties at March 31, 2003, increased by
$14 million from December 31, 2002, due primarily to increased payables to PRO-
TEC under an agreement for U. S Steel to serve as PRO-TEC's exclusive sales
agent. The increase reflected higher PRO-TEC shipments in the first quarter of
2003 compared to last year's fourth quarter.
Preferred stock increased by $242 million from December 31, 2002, due to an
offering of 5 million shares of 7% Series B Mandatory Convertible Preferred
Stock (Series B Preferred) that was completed in February 2003.
27
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Cash Flow
- ---------
Net cash used in operating activities was $44 million for the first quarter
of 2003, compared with cash provided from operating activities of $19 million in
the same period of 2002. Last year's results were favorably affected by the net
receipt of $200 million cash for the sale of accounts receivable. Excluding the
$200 million from net receivable sales, cash used in operating activities
improved by $137 million from last year's first quarter, due mainly to a
decreased loss adjusted for non-cash items and lower working capital
requirements.
Capital expenditures in the first quarter of 2003 were $63 million,
compared with $56 million in the same period in 2002. Major projects in the
first quarter of 2003 included the quench and temper line project at Lorain
Tubular and various projects at USSK, including a new dynamo line, the sinter
plant dedusting project and the installation of additional tin mill facilities.
U. S. Steel's domestic contract commitments to acquire property, plant and
equipment at March 31, 2003, totaled $41 million compared with $24 million at
December 31, 2002.
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
March 31, 2003, and December 31, 2002, were $523 million and $541 million,
respectively.
Capital expenditures for 2003 are expected to be approximately
$350 million, including approximately $100 million for USSK and $25 million for
the assets of National Steel Corporation (National). U. S. Steel broadly
estimates that average annual capital expenditures for the acquired National
facilities will be between $75 million and $100 million.
Restricted cash - deposits of $23 million in the first quarter of 2003 and
$15 million in the corresponding 2002 period were mainly used to collateralize
letters of credit to meet financial assurance requirements. The 2003 period
also included a deposit of $7 million related to the planned acquisition of the
integrated steel assets of National (National transaction) (see discussion in
"Outlook").
Settlement with Marathon of $54 million in the first quarter of 2002
reflected a cash payment made in accordance with the terms of the Separation.
Preferred stock issued in the first quarter of 2003 reflected net proceeds
from the offering of 5 million shares of Series B Preferred.
Common stock issued in the first three months of 2003 and 2002 reflected
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 quarter of 2003 were $5 million, compared with
$4 million in the same period in 2002. Payments in both periods reflected the
quarterly dividend rate of five cents per share established by U. S. Steel after
the Separation.
28
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In February 2003, U. S. Steel issued 5 million shares of Series B
Preferred, which are expected to increase annual dividend payments by
$18 million.
For discussion of restrictions on future dividend payments, see
"Liquidity."
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, U. S. Steel Receivables LLC (USSR), which is a consolidated 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. USSR pays the conduits a discount based on the conduits'
borrowing costs plus incremental fees, certain of which are determined by credit
ratings of U. S. Steel.
Fundings under the facility are limited to the lesser of eligible
receivables or $400 million. U. S. Steel expects to enter into an amendment to
the receivables sales program, which would increase fundings under the facility
to the lesser of eligible receivables or $500 million, effective upon the
closing of the National transaction (see discussion in "Outlook"). Eligible
receivables exclude certain obligors, amounts in excess of defined percentages
for certain obligors, and amounts past due or due beyond a defined period. In
addition, eligible receivables are calculated by deducting certain reserves,
which are based on various determinants including concentration, dilution and
loss percentages, as well as the credit ratings of U. S. Steel. As of March 31,
2003, U. S. Steel had $343 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. The amount outstanding under the Inventory Facility cannot
exceed the permitted "borrowing base," calculated on percentages of the value of
eligible inventory. Borrowings under the facility bear interest at a rate equal
to LIBOR or the prime rate plus an applicable margin determined by credit
ratings of U. S. Steel. As of March 31, 2003, $397 million was available to
U. S. Steel under the Inventory Facility. Effective upon the closing of the
National transaction, U. S. Steel will enter into a new revolving inventory
credit facility, which provides for borrowings of up to $600 million. This
facility will expire in May 2007 and will contain a number of covenants that
require lender consent to incur debt or make capital expenditures above certain
limits; sell assets used in the production of steel or steel products or incur
liens on assets; and to limit dividends and other restricted payments if
available borrowings drop below certain levels. The facility is also expected
to contain a provision reducing borrowing availability if U. S. Steel fails to
meet an earnings to fixed charge ratio.
In July 2001, U. S. Steel issued $385 million of 10-3/4% senior notes due
August 1, 2008 (Senior Notes), and in September 2001, U. S. Steel issued an
additional $150 million of Senior Notes. As of March 31, 2003, the aggregate
principal amount of Senior Notes outstanding was $535 million.
29
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Senior Notes impose limitations on U. S. Steel's ability to make
restricted payments. Restricted payments under the indenture include the
declaration or payment of dividends on capital stock; the purchase, redemption
or other acquisition or retirement for value of capital stock; the retirement of
any subordinated obligations prior to their scheduled maturity; and the making
of any investments other than those specifically permitted under the indenture.
In order to make restricted payments, U. S. Steel must satisfy certain
requirements which include 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 on common stock 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 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 U. S Steel's Annual Report on Form 10-K for the year ended
December 31, 2001.
As of March 31, 2003, U. S. Steel met the consolidated coverage ratio and
had in excess of $300 million of availability to make restricted payments under
the calculation described in the preceding paragraph. Also, exclusive of any
limitations imposed, U. S. Steel can make aggregate dividend payments of up to
$50 million on common stock from the third quarter of 2001 through the end of
2003, of which U. S. Steel has paid $38 million as of March 31, 2003. In
addition to the remaining $12 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 March 31, 2003, which could also be used for dividend
payments. U. S. Steel's ability to declare and pay dividends or make other
restricted payments in the future is subject to U. S. Steel's ability to
continue to meet the consolidated coverage ratio and have amounts available
under the calculation or one of the exclusions just discussed.
The Senior Notes also impose other significant restrictions on U. S. Steel
such as the following: 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 U. S. Steel's ability to invest in
joint ventures or make certain acquisitions. The new inventory credit facility
includes a fixed charge coverage ratio, calculated as the ratio of operating
cash flow to cash charges as defined in the agreement, of not less than
1.25 times on the last day of any fiscal quarter. This coverage ratio must be
met if availability, as defined in the agreement, is less than $100 million.
If these covenants are breached or if U. S. Steel fails to make payments
under its 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
30
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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
U. S. Steel's financial position and liquidity.
U. S. Steel was in compliance with all of its debt covenants at
March 31, 2003.
In conjunction with the closing of the National transaction, U. S. Steel
intends to sell $350 million of new senior notes (New Notes). The New Notes
will be issued under an outstanding universal shelf registration statement.
Proceeds from the offering will be used to partially fund the National
transaction. The New Notes will also impose certain restrictions that limit
U. S. Steel's ability to, among other things: incur debt; restrict dividend or
other payments from our subsidiaries; issue and sell capital stock of our
subsidiaries; engage in transactions with affiliates; create liens on assets to
secure indebtedness; transfer or sell assets; and consolidate, merge or transfer
all or substantially all of U. S. Steel's assets or the assets of its
subsidiaries.
U. S. Steel is soliciting the consent of the holders of its Senior Notes to
modify certain terms of the Senior Notes to conform to the terms of the New
Notes. Those conforming changes modify the definitions of Consolidated Net
Income and EBITDA, permit dividend payments on the Series B Preferred and expand
permitted investments to include loans made for the purpose of facilitating
like-kind exchange transactions.
On May 6, 2003, Moody's Investors Service reduced its ratings assigned to
U. S. Steel's senior unsecured debt from Ba3 to B1 and assigned a stable
outlook, and Fitch Ratings reduced its ratings from BB to BB- and assigned a
negative outlook. On May 7, 2003, Standard & Poor's Ratings Services reduced
its ratings assigned to U. S. Steel's senior unsecured debt from BB to BB- and
assigned a negative outlook.
U. S. Steel has utilized surety bonds, trusts and letters of credit to
provide financial assurance for certain transactions and business activities.
The total amount of active surety bonds, trusts and letters of credit currently
being used for financial assurance purposes is approximately $147 million.
Events over the last two years have caused major changes in the surety bond
market including significant increases in surety bond premiums and reduced
market capacity. These factors, together with U. S. Steel's 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. U. S. Steel
expects to use approximately $25 million to $60 million of liquidity sources for
financial assurance purposes during 2003, depending upon the requirements of the
various authorities involved. During the first quarter, U. S. Steel used
$12 million of the estimated total for 2003. These amounts do not reflect any
additional requirements for the acquired National facilities, which are
currently expected to approximate $10 million.
31
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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. See discussion in "Outlook"
regarding recently enacted Indiana property tax legislation that will affect
U. S. Steel's tax expense in future periods. The legislation has no impact on
the property taxes that are currently being disputed.
U. S. Steel was contingently liable for debt and other obligations of
Marathon in the amount of $167 million as of March 31, 2003. 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
March 31, 2003:
(Dollars in millions)
- ----------------------------------------------------------------------------
Cash and cash equivalents....................... $ 367
Amount available under Receivables
Purchase Agreement........................... 343
Amount available under Inventory Facility....... 397
Amounts available under USSK credit facilities.. 46
------
Total estimated liquidity..................... $1,153
U. S. Steel's liquidity has improved by $122 million since December 31,
2002, primarily reflecting net proceeds of $242 million from U. S. Steel's
offering of Series B Preferred, partially offset by first quarter cash
requirements.
32
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
U. S. Steel management believes that U. S. Steel's liquidity will be
adequate to satisfy its obligations for the foreseeable future, including
obligations to complete currently authorized capital spending programs. Future
requirements for U. S. Steel's business needs, including the funding of
acquisitions and 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 climate, and, in particular, with respect to
borrowings, the level of U. S. Steel's outstanding debt and credit ratings by
rating agencies.
33
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Environmental Matters, Litigation and Contingencies
- ---------------------------------------------------
U. S. Steel has incurred and will continue to incur substantial capital,
operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. In recent years, these expenditures have
been mainly for process changes in order to meet Clean Air Act obligations,
although ongoing compliance costs have also been significant. To the extent
these expenditures, as with all costs, are not ultimately reflected in the
prices of U. S. Steel's products and services, operating results will be
adversely affected. U. S. Steel believes that its major domestic integrated
steel competitors are confronted by substantially similar conditions and thus
does not believe that its relative position with regard to such competitors is
materially affected by the impact of environmental laws and regulations.
However, the costs and operating restrictions necessary for compliance with
environmental laws and regulations may have an adverse effect on U. S. Steel's
competitive position with regard to domestic mini-mills and some foreign steel
producers and producers of materials which compete with steel, which may not be
required to undertake equivalent costs in their operations. In addition, the
specific impact on each competitor may vary depending on a number of factors,
including the age and location of its operating facilities and its production
methods.
USSK is subject to the laws of the Slovak Republic. The environmental laws
of the Slovak Republic generally follow the requirements of the European Union,
which are comparable to domestic standards. USSK has also entered into an
agreement with the Slovak government to bring, over time, its facilities into
European Union environmental compliance.
U. S. Steel has been notified that it is a potentially responsible party
(PRP) at 21 waste sites under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) as of March 31, 2003. In addition,
there are 18 sites related to U. S. Steel where it has received information
requests or other indications that it may be a PRP under CERCLA but where
sufficient information is not presently available to confirm the existence of
liability or make any judgment as to the amount thereof. There are also 37
additional sites related to U. S. Steel where remediation is being sought under
other environmental statutes, both federal and state, or where private parties
are seeking remediation through discussions or litigation. At many of these
sites, U. S. Steel is one of a number of parties involved and the total cost of
remediation, as well as U. S. Steel's share thereof, is frequently dependent
upon the outcome of investigations and remedial studies. U. S. Steel accrues
for environmental remediation activities when the responsibility to remediate is
probable and the amount of associated costs is reasonably determinable. As
environmental remediation matters proceed toward ultimate resolution or as
additional remediation obligations arise, charges in excess of those previously
accrued may be required.
34
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In 1988, U. S. Steel and two other PRPs (Bethlehem Steel Corporation and
William Fiore) agreed to the issuance of an administrative order by the U.S.
Environmental Protection Agency (EPA) to undertake emergency removal work at the
Municipal & Industrial Disposal Co. site in Elizabeth, Pa. The cost of such
removal, which has been completed, was approximately $4.2 million, of which
U. S. Steel paid $3.4 million. The EPA indicated that further remediation of
this site would be required. In October 1991, the Pennsylvania Department of
Environmental Resources (PADER) placed the site on the Pennsylvania State
Superfund list and began a Remedial Investigation, which was issued in 1997.
After a feasibility study by the Pennsylvania Department of Environmental
Protection (PADEP) and submission of a conceptual remediation plan in 2001 by
U. S. Steel, U. S. Steel submitted a revised remedial action plan on May 31,
2002. U. S. Steel and the PADEP signed a Consent Order and Agreement on August
30, 2002, under which U. S. Steel is responsible for remediation of this site.
On March 18, 2003, the PADEP notified U. S. Steel that the public comment period
was concluded and the Consent Order and Agreement is final.
On January 26, 1998, pursuant to an action filed by the EPA in the United
States District Court for the Northern District of Indiana titled United States
of America v. USX, U. S. Steel entered into a consent decree with the EPA which
resolved alleged violations of the Clean Water Act National Pollution Discharge
Elimination System (NPDES) permit at Gary Works and provides for a sediment
remediation project for a five mile section of the Grand Calumet River that runs
through and beyond Gary Works. Contemporaneously, U. S. Steel entered into a
consent decree with the public trustees, which resolves potential liability for
natural resource damages on the same section of the Grand Calumet River. In
1999, U. S. Steel paid civil penalties of $2.9 million for the alleged water act
violations and $0.5 million in natural resource damages assessment costs. In
addition, U. S. Steel will pay the public trustees $1.0 million at the end of
the remediation project for future monitoring costs and U. S. Steel is obligated
to purchase and restore several parcels of property that have been or will be
conveyed to the trustees. During the negotiations leading up to the settlement
with the EPA, capital improvements were made to upgrade plant systems to comply
with the NPDES requirements. The sediment remediation project is an approved
final interim measure under the corrective action program for Gary Works. As of
March 15, 2003, project costs have amounted to $34.4 million with another $8.8
million presently projected to complete the project, over the next seven months.
Construction began in January 2002 on a Corrective Action Management Unit (CAMU)
to contain the dredged material on company property and construction was
completed in February 2003. The water treatment plant, specific to this
project, was completed in November 2002, and placed into operation in March
2003. Phase 1 removal of PCB-contaminated sediment was completed in December
2002. Dredging resumed in February 2003 and will continue until dredging on the
river is concluded, which is expected to occur in October 2003. Closure costs
for the CAMU are estimated to be an additional $4.9 million.
On March 11, 2003, Gary Works received a notice of violation from the EPA
alleging construction of the two desulfurization facilities without proper
installation permitting. Negotiations began April 24, 2003 and the cost of
settlement of this matter is currently indeterminable.
35
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
On February 12, 1987, U. S. Steel and the PADER entered into a Consent
Order to resolve an incident in January 1985 involving the alleged unauthorized
discharge of benzene and other organic pollutants from Clairton Works in
Clairton, Pa. That Consent Order required U. S. Steel to pay a penalty of
$50,000 and a monthly payment of $2,500 for five years. In 1990, U. S. Steel
and the PADER reached agreement to amend the Consent Order. Under the amended
Order, U. S. Steel agreed to remediate the Peters Creek Lagoon (a former coke
plant waste disposal site); to pay a penalty of $300,000; and to pay a monthly
penalty of up to $1,500 each month until the former disposal site is closed.
Remediation costs have amounted to $10.2 million with another $1.4 million
presently estimated to complete the project.
U. S. Steel is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments involving a variety of
matters, including laws and regulations relating to the environment. The
ultimate resolution of these contingencies could, individually or in the
aggregate, be material to the U. S. Steel Financial Statements. However,
management believes that U. S. Steel will remain a viable and competitive
enterprise even though it is possible that these contingencies could be resolved
unfavorably to U. S. Steel.
36
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Outlook
- -------
Looking ahead, even though U. S. Steel is experiencing a softening of
the order book that is expected to have an impact late in the second
quarter, shipments for the Flat-rolled segment are expected to improve
somewhat from first quarter levels. Second quarter average realized prices
are expected to decline slightly primarily due to weakening spot markets.
Second quarter natural gas prices, while significantly higher than in last
year's second quarter, are expected to decline from the first quarter of
2003. Costs in the second quarter will be negatively impacted by
approximately $40 million for scheduled repair outages for U. S. Steel's
largest blast furnace, the hot strip mill and other major units at Gary
Works. For full-year 2003, Flat-rolled shipments are expected to
approximate 10.0 million net tons.
For the Tubular segment, second quarter shipments are project