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1
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 No.)
incorporation)
600 Grant Street, Pittsburgh, PA 15219-2800
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 433-1121
----------------------------
(Registrant's telephone number,
including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes..X..No.....
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 October 31, 2003 - 103,277,374 shares
2
UNITED STATES STEEL CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
-----------------------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Statement of Operations (Unaudited) 3
Balance Sheet (Unaudited) 5
Statement of Cash Flows (Unaudited) 6
Selected Notes to Financial Statements 7
(Unaudited)
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends and Ratio of
Earnings to Fixed Charges 33
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 34
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 65
Item 4. Controls and Procedures 68
Supplemental Statistics 69
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 70
Item 6. Exhibits and Reports on Form 8-K 75
SIGNATURE 76
WEB SITE POSTING 77
3
Part I - Financial Information:
UNITED STATES STEEL CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 2003 2002 2003 2002
- ------------------------------------------------------------------------------
REVENUES AND OTHER INCOME:
Revenues $2,267 $1,648 $5,993 $4,381
Revenues from related parties 239 257 722 716
Income (loss) from investees (2) 2 (10) 11
Net gains on disposal of assets 4 2 27 7
Other income - 5 45 40
----- ----- ----- -----
Total revenues and other income 2,508 1,914 6,777 5,155
----- ----- ----- -----
COSTS AND EXPENSES:
Cost of revenues (excludes items shown below) 2,743 1,611 6,566 4,518
Selling, general and administrative expenses 319 74 590 245
Depreciation, depletion and amortization 140 89 317 266
----- ----- ----- -----
Total costs and expenses 3,202 1,774 7,473 5,029
----- ----- ----- -----
INCOME (LOSS) FROM OPERATIONS (694) 140 (696) 126
Net interest and other financial costs 26 32 106 85
----- ----- ----- -----
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (720) 108 (802) 41
Provision (benefit) for income taxes (366) 2 (418) (9)
----- ----- ----- -----
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (354) 106 (384) 50
Extraordinary loss, net of tax - - (52) -
Cumulative effect of change in accounting
principle, net of tax - - (5) -
----- ----- ----- -----
NET INCOME (LOSS) (354) 106 (441) 50
Dividends on preferred stock (4) - (11) -
----- ----- ----- -----
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $(358) $ 106 $(452) $ 50
===== ===== ===== =====
Selected notes to financial statements appear on pages 7-32.
4
UNITED STATES STEEL CORPORATION
STATEMENT OF OPERATIONS (Continued) (Unaudited)
COMMON STOCK DATA
------------------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 2003 2002 2003 2002
- -------------------------------------------------------------------------------
COMMON STOCK DATA:
Per share - basic and diluted:
Income (loss) before extraordinary loss and
cumulative effect of change in
accounting principle $(3.47) $ 1.04 $(3.84) $ .52
Extraordinary loss, net of tax - - (.50) -
Cumulative effect of change in accounting
principle, net of tax - - (.05) -
------ ------ ------ ------
Net income (loss) $(3.47) $ 1.04 $(4.39) $ .52
====== ====== ====== ======
Weighted average shares, in thousands
- Basic 103,321 101,926 103,096 95,767
- Diluted 103,321 101,926 103,096 95,769
Dividends paid per share $ .05 $ .05 $ .15 $ .15
PRO FORMA AMOUNTS ASSUMING CHANGE IN
ACCOUNTING PRINCIPLE WAS APPLIED
RETROACTIVELY:
Income (loss) before extraordinary loss
and cumulative effect of change in
accounting principle, as reported $(354) $ 106 $(384) $ 50
SFAS No. 143 pro forma effect - (1) 5 (2)
------ ------ ------ ------
Income (loss) before extraordinary loss
and cumulative effect of change in
accounting principle, adjusted $(354) $ 105 $(379) $ 48
Per share adjusted - basic and diluted (3.47) 1.03 (3.80) .50
Net income (loss) adjusted (354) 105 (431) 48
Per share adjusted - basic and diluted (3.47) 1.03 (4.30) .50
Selected notes to financial statements appear on pages 7-32.
5
UNITED STATES STEEL CORPORATION
BALANCE SHEET (Unaudited)
-------------------------------
September 30 December 31
(Dollars in millions) 2003 2002
- --------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 160 $ 243
Receivables, less allowance of $129 and $57 1,126 796
Receivables from related parties 148 138
Inventories 1,394 1,030
Deferred income tax benefits 203 217
Other current assets 35 16
------ ------
Total current assets 3,066 2,440
Investments and long-term receivables,
less allowance of $3 and $2 303 341
Long-term receivables from related parties 6 6
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$7,089 and $7,095 3,367 2,978
Pension asset 1,518 1,654
Intangible pension asset 374 414
Other intangible assets, net 39 -
Deferred income tax benefits 366 -
Other noncurrent assets 202 144
------ ------
Total assets $ 9,241 $ 7,977
====== ======
LIABILITIES
Current liabilities:
Accounts payable $ 940 $ 677
Accounts payable to related parties 72 90
Payroll and benefits payable 420 254
Accrued taxes 344 281
Accrued interest 49 44
Long-term debt due within one year 28 26
------ ------
Total current liabilities 1,853 1,372
Long-term debt, less unamortized discount 1,853 1,408
Deferred income taxes 2 223
Employee benefits 3,539 2,601
Deferred credits and other liabilities 349 346
------ ------
Total liabilities 7,596 5,950
------ ------
Contingencies and commitments (See Note 23) - -
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) 231 -
Common stock issued - 103,296,600 shares and
102,485,246 shares 103 102
Additional paid-in capital 2,679 2,689
Retained earnings (deficit) (399) 42
Accumulated other comprehensive loss (968) (803)
Deferred compensation (1) (3)
------ ------
Total stockholders' equity 1,645 2,027
------ ------
Total liabilities and stockholders' equity $ 9,241 $ 7,977
====== ======
Selected notes to financial statements appear on pages 7-32.
6
UNITED STATES STEEL CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
Nine Months
Ended
September 30
(Dollars in millions) 2003 2002
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss) $ (441) $ 50
Adjustments to reconcile to net cash provided from
operating activities:
Extraordinary loss, net of tax 52 -
Cumulative effect of change in accounting principle, 5 -
net of tax
Depreciation, depletion and amortization 317 266
Pensions and other postretirement benefits 638 (35)
Deferred income taxes (408) (12)
Net gains on disposal of assets (27) (7)
Income from sale of coal seam gas interests (34) -
Loss (income) from equity investees and distributions 35 -
received
Changes in:
Current receivables
- sold 190 320
- repurchased (190) (320)
- operating turnover (74) (228)
Inventories 123 (97)
Current accounts payable and accrued expenses 266 193
All other - net (120) (54)
------ ------
Net cash provided from operating activities 332 76
------ ------
INVESTING ACTIVITIES:
Capital expenditures (205) (150)
Acquisition - National Steel Corporation assets (873) -
- U. S. Steel Balkan (6) -
- U. S. Steel Kosice (37) (38)
Disposal of assets 76 12
Sale of coal seam gas interests 34 -
Restricted cash - withdrawals 42 3
- deposits (93) (60)
Investees - investments (4) (15)
- loans and advances - (3)
- repayments of loans and advances 1 7
------ ------
Net cash used in investing activities (1,065) (244)
------ ------
FINANCING ACTIVITIES:
Issuance of long-term debt, net of deferred financing 427 -
costs
Repayment of long-term debt (3) (31)
Settlement with Marathon Oil Corporation - (54)
Preferred stock issued 242 -
Common stock issued 11 223
Dividends paid (26) (14)
------ ------
Net cash provided from financing activities 651 124
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) 2
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (83) (42)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 243 147
------ ------
CASH AND EQUIVALENTS AT END OF PERIOD $ 160 $ 105
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $ (107) $ (105)
Income taxes paid to tax authorities (3) (4)
Selected notes to financial statements appear on pages 7-32.
7
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, 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) and U. S. Steel Balkan (USSB) in the Slovak Republic and
Serbia, respectively, in the production and sale of steel mill products and
coke primarily for the central and western European markets. As reported
in Note 5, until June 30, 2003, U. S. Steel was also engaged in the mining,
processing and sale of coal.
3. On May 20, 2003, U. S. Steel acquired substantially all of the
integrated steelmaking assets of National Steel Corporation (National).
The facilities acquired include two integrated steel plants, Granite City
in Granite City, Illinois and Great Lakes, in Ecorse and River Rouge,
Michigan; the Midwest finishing facility in Portage, Indiana; ProCoil, a
steel-processing facility in Canton, Michigan; a 50% equity interest in
Double G Coatings, L.P. near Jackson, Mississippi; a taconite pellet
operation near Keewatin, Minnesota; and the Delray Connecting Railroad.
The acquisition of National's assets has made U. S. Steel the largest steel
producer in North America and has strengthened U. S. Steel's overall
position in providing value-added products to the automotive, container and
construction markets. Results of operations include the operations of
National from May 20, 2003.
The aggregate purchase price for National's assets was $1,269 million,
consisting of $839 million in cash and the assumption or recognition of
$430 million in liabilities. The $839 million in cash reflects $844
million paid to National at closing and transaction costs of $29 million,
less a working capital adjustment of $34 million in accordance with the
terms of the Asset Purchase Agreement. The working capital adjustment was
collected in October 2003. The opening balance sheet reflects certain
direct obligations of National assumed by U. S. Steel and certain employee
benefit liabilities for employees hired from National resulting from the
new labor agreement with the United Steelworkers of America (USWA). The
new labor agreement and these liabilities are discussed in more detail
below.
8
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
In connection with the acquisition of National's assets, U. S.
Steel reached a new labor agreement with the USWA, which covers employees
at the U. S. Steel facilities and the acquired National facilities. The
agreement was ratified by the USWA membership in May 2003, expires in 2008
and provides for a workforce restructuring through a Transition Assistance
Program (TAP). U. S. Steel calculated the estimated fair value of the
obligations recorded for benefits granted under the labor agreement to
former active National employees represented by the USWA and hired by U. S.
Steel. The liabilities included $145 million for future retiree medical
and retiree life costs, $17 million related to future payments for
employees who participate in the TAP, and $24 million for accrued vacation
benefits. U. S. Steel also recognized a $17 million liability related to
two irrevocable cash contributions to be made to the Steelworkers Pension
Trust (SPT) in 2003 and 2004 based on the number of National's represented
employees as of the date of the acquisition, less the number of these
employees estimated to participate in the TAP. The SPT is a multiemployer
pension plan to which U. S. Steel will make contributions for all former
National represented employees who join U. S. Steel and, after July 1,
2003, for all new U. S. Steel employees represented by the USWA.
The following is a summary of the allocation of the purchase price to
the assets acquired and liabilities assumed or recognized based on their
fair market values. Appraisals were obtained for inventory; property,
plant and equipment; intangible assets and other noncurrent assets. Based
on the appraisals, the fair value of the net assets acquired were in excess
of the purchase price, resulting in negative goodwill. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations," the negative goodwill was allocated as a pro rata reduction
to the amounts that would have otherwise been assigned to the acquired
noncurrent assets, based on their relative fair values.
Allocated
Purchase Price
---------------
Acquired assets: (In millions)
Accounts receivable $ 222
Inventory 500
Other current assets 22
Property, plant & equipment 480
Intangible assets 42
Other noncurrent assets 3
------
Total assets 1,269
------
Acquired liabilities:
Accounts payable 157
Payroll and benefits payable 57
Other current liabilities 30
Employee benefits 150
Other noncurrent liabilities 36
------
Total liabilities 430
------
Purchase price-cash $ 839
======
9
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
Refinements to the allocated purchase price are expected to be made as
additional information becomes available, primarily relating to
environmental contingencies. These contingencies were identified as of the
closing of the transaction and include matters that are currently being
negotiated with government agencies, and matters for which technical
studies are being completed. Relevant information that is required to
finalize the determination of the fair value of environmental liabilities
for opening balance sheet purposes is expected to be received by May 2004.
The $42 million of intangible assets is primarily comprised of
proprietary software with a weighted average useful life of approximately
6 years. U. S. Steel recognized $2 million and $3 million, respectively,
of amortization expense in the third quarter and nine months of 2003
related to these intangible assets.
The following unaudited pro forma data for U. S. Steel includes the
results of operations of National as if it had been acquired at the
beginning of the periods presented, including the effects of the new labor
agreement as it pertains to the former National facilities and the
financings incurred to fund the acquisition. (See Notes 17 and 21.) The
unaudited pro forma data is based on historical information and does not
necessarily reflect the actual results that would have occurred nor is it
necessarily indicative of future results of operations.
Pro Forma Pro Forma
Nine Months Third Quarter
Ended Ended
September 30 September 30
(In millions, except per share data) 2003 2002 2002
- ----------------------------------------------------------------------
Revenues and other income $ 7,783 $ 7,067 $ 2,573
Income (loss) before extraordinary loss
loss and cumulative effect of change
in accounting principle (378) 60 137
Per share - basic (3.79) .49 1.30
- diluted (3.79) .49 1.13
Net income (loss), applicable to (450) 47 132
commmon stock
Per share - basic (4.37) .49 1.30
- diluted (4.37) .49 1.13
10
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. On September 12, 2003, USSB, a wholly owned Serbian subsidiary of
U. S. Steel, acquired Sartid a.d. (In Bankruptcy), an integrated steel
company majority-owned by the Government of the Union of Serbia and
Montenegro, and certain of its subsidiaries (collectively "Sartid") out of
bankruptcy. Sartid, headquartered in the Republic of Serbia, primarily
manufactures hot-rolled, cold-rolled, and tin-coated flat-rolled steel
products, and complements the operations of USSK. The completion of this
purchase resulted in the termination of a toll conversion agreement, a
facility management agreement and a commercial and technical support
agreement with Sartid.
The aggregate purchase price was $33 million consisting of $23 million in
cash, transaction costs of $6 million and the recognition of $4 million in
liabilities. In October 2003, $21 million of the cash portion of the
purchase price was disbursed and the remainder is expected to be disbursed
in the fourth quarter of 2003. Upon consummation of the purchase of two
small remaining subsidiaries of Sartid, a.d. (In Bankruptcy), whose
operations are currently being conducted by USSB pursuant to an interim
agreement, the transaction requires the following commitments by USSB; (i)
spending during the first five years for working capital, the repair,
rehabilitation, improvement, modification and upgrade of facilities and
community support and economic development of up to $157 million, subject
to certain conditions; (ii) a stable employment policy for three years
assuring employment of the approximately 9,000 employees, excluding natural
attrition and terminations for cause; and (iii) an agreement not to sell,
transfer or assign a controlling interest in the former Sartid assets to
any third party without government consent for a period of five years.
USSB did not assume or acquire any pre-acquisition liabilities including
environmental, tax, social insurance liabilities, product liabilities and
employee claims, other than $4 million in pension and other employee
related liabilities.
The acquisition was accounted for by the purchase method of accounting
under SFAS No. 141 and, accordingly, the statement of operations includes
the results of USSB beginning September 12, 2003. Prior to the acquisition,
the operating results of activities under facility management and support
agreements with Sartid were included in the results of USSK.
11
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. (Continued)
The following is a summary of the allocation of the purchase price to
the assets acquired and liabilities assumed or recognized based on their
fair market values. Based on appraisals, the fair value of the net
assets acquired was in excess of the purchase price, resulting in negative
goodwill. In accordance with SFAS No. 141, the negative goodwill was
allocated as a pro rata reduction to the amounts that would have otherwise
been assigned to the acquired noncurrent assets based on their relative
fair values.
Allocated
Purchase
Price
----------
Acquired assets: (In millions)
Accounts receivable $ 1
Inventory 6
Property, plant & equipment 26
------
Total assets 33
------
Acquired liabilities:
Employee benefits 4
------
Total liabilities 4
------
Purchase price-cash $ 29
======
From 1992 to 1995 and again from 1999 to October 2000 political and
economic sanctions were enforced against Serbia by the United Nations. As
a result of operating under the sanctions and government control, these
facilities have been operating at levels well below capacity and are in
disrepair. The limited financial data available for Sartid is not reliable
nor is it believed that reliable historical financial statements could be
prepared from the data that exists. In addition, any historical
information provided would not reflect a market-based operation. Therefore,
U. S. Steel management believes that historical financial information for
Sartid is irrelevant to investors and consequently, no historical
information for Sartid is presented nor will it be provided in future
filings. In addition, pro forma financial data is not presented for the
current or prior years because there is no reliable historical information
on which to base pro forma amounts.
5. On June 30, 2003, U. S. Steel completed the sale of the coal mines and
related assets of U. S. Steel Mining Company, LLC (Mining Sale) to PinnOak
Resources, LLC (PinnOak), which is not affiliated with U. S. Steel.
PinnOak acquired the Pinnacle No. 50 mine complex located near Pineville,
West Virginia and the Oak Grove mine complex located near Birmingham,
Alabama. In conjunction with the sale, U. S. Steel and PinnOak entered
into a long-term coal supply agreement, which runs through
December 31, 2006.
12
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
The gross proceeds from the sale were $56 million, of which
$50 million was received at closing and $6 million, relating to an
adjustment to the purchase price based on inventory levels at
June 30, 2003, is due to be received in the fourth quarter of 2003.
U. S. Steel recognized a pretax gain of $13 million on the sale in the
second quarter of 2003. In addition, EITF 92-13, "Accounting for Estimated
Payments in Connection with the Coal Industry Retiree Health Benefit Act of
1992" requires that enterprises that no longer have operations in the coal
industry must account for their entire obligation related to the
multiemployer health care benefit plans created by the Act as a loss in
accordance with SFAS No. 5, "Accounting for Contingencies." Accordingly,
U. S. Steel recognized the present value of these obligations in the amount
of $85 million, resulting in the recognition of an extraordinary loss of
$52 million, net of tax of $33 million in the second quarter of 2003. See
further information in Note 23.
6. 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 tables illustrate the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Third Quarter Ended
September 30
(In millions, except per share data) 2003 2002
--------------------------------------------------------------------
Net income (loss) $ (354) $ 106
Add: Stock-based employee compensation expense
included in reported net income (loss),
net of related tax effects 2 -
Deduct: Total stock-based employee compensation
expense determined under fair value methods for
all awards, net of related tax effects (1) (1)
----- -----
Pro forma net income (loss) $ (353) $ 105
===== =====
Basic and diluted net income (loss) per share:
- As reported $ (3.47) $ 1.04
- Pro forma (3.46) 1.03
13
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. (Continued)
The above pro forma amounts were based on a Black-Scholes option-
pricing model, which included the following information and assumptions:
Third Quarter
Ended
September 30
2003 2002
--------------------------------------------------------------------
Weighted average grant date exercise price per $ 14.38 $ 20.42
share
Expected annual dividends per share $ .20 $ .20
Expected life in years 5 5
Expected volatility 45.3 43.4
Risk-free interest rate 2.4 4.4
Weighted-average grant date fair value of options
granted during the period, as calculated from above $ 5.41 $ 8.29
Nine Months
Ended
September 30
(In millions, except per share data) 2003 2002
--------------------------------------------------------------------
Net income (loss) $ (441) $ 50
Add: Stock-based employee compensation expense
included in reported net loss, net of related
tax effects 3 -
Deduct: Total stock-based employee compensation
expense determined under fair value methods
for all awards, net of related tax effects (3) (3)
----- -----
Pro forma net income (loss) $ (441) $ 47
===== =====
Basic and diluted net income (loss) per share:
- As reported $ (4.39) $ .52
- Pro forma (4.39) .49
The above pro forma amounts were based on a Black-Scholes option-
pricing model, which included the following information and assumptions:
Nine Months
Ended
September 30
2003 2002
--------------------------------------------------------------------
Weighted average grant date exercise price per $ 16.97 $ 20.22
share
Expected annual dividends per share $ .20 $ .20
Expected life in years 5 5
Expected volatility 44.5 42.0
Risk-free interest rate 3.3 4.6
Weighted-average grant date fair value of options
granted during the period, as calculated from above $ 6.65 $ 8.07
14
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. In November 2002, the Financial Accounting Standards Board (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 is applying 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. The FASB delayed the application of this Interpretation until
December 31, 2003. At this time U. S. Steel has not completed its
assessment of the effects of the application of this Interpretation on
either its financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Accounting for
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. The amendments set forth in SFAS No. 149
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, except for certain
outlined exceptions. This Statement was adopted with no initial impact.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 changes the accounting for certain financial instruments that,
under previous guidance, could be classified as equity or "mezzanine"
equity, by now requiring these instruments be classified as liabilities (or
assets in some circumstances) in the balance sheet. Further, SFAS No. 150
requires disclosure regarding the terms of those instruments and settlement
alternatives. The guidance in the Statement is generally effective for all
financial instruments entered into or modified after May 31, 2003, and is
otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. This Statement was adopted with no initial impact.
15
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. In June 2001, the FASB issued 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 pro forma 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, "Accounting Changes."
On January 1, 2003, the date of adoption, U. S. Steel recorded asset
retirement obligations (AROs) of $14 million (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. The obligations recorded on January 1, 2003, and the amounts
acquired from National primarily relate to mine and landfill closure and
post-closure costs.
The following table reflects changes in the carrying values of AROs
for the nine months ended September 30, 2003, and the pro forma impacts for
the year ended December 31, 2002, as if SFAS No. 143 had been adopted on
January 1, 2002:
Nine
Months (Pro Forma)
Ended Year Ended
(In millions) Sept. 30, 2003 Dec. 31, 2002
- --------------------------------------------------------------------
Balance at beginning of period $ 29 $ 26
Liabilities acquired with National's assets 2 -
Accretion expense 2 3
Liabilities removed with Mining Sale (14) -
------- -------
Balance at end of period $ 19 $ 29
======= =======
Certain asset retirement obligations related to disposal costs of
fixed assets at our steel facilities have not been 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.
9. U. S. Steel has five reportable segments: Flat-rolled, Tubular, U. S.
Steel Europe (USSE), Straightline Source (Straightline) and USS Real Estate
(Real Estate). Effective with the acquisition of Sartid, the U. S. Steel
Kosice (USSK) segment was renamed U. S. Steel Europe (USSE) and includes
the operating results of USSB.
Effective with the third quarter of 2003, the composition of the Flat-
rolled segment was changed to include the results of the coke operations
that were previously reported in Other Businesses. This change reflects
the recent management consolidations. Comparative results for 2002 have
been conformed to the current year presentation.
16
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. (Continued)
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, as well as all
domestic coke production facilities. 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. Effective May 20, 2003,
the Flat-rolled segment includes the operating results of Granite City,
Great Lakes, the Midwest finishing facility, ProCoil and U. S. Steel's
equity interest in Double G Coatings, which were acquired from National.
The Tubular segment includes the operating results of U. S. Steel's
domestic tubular production facilities and prior to May 2003, included
U. S. Steel's equity interest in Delta Tubular Processing (Delta). 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
Delta.
The USSE segment includes the operating results of USSK, U. S. Steel's
integrated steel mill in the Slovak Republic; and, effective September 12,
2003, the former Sartid facilities in Serbia, now operated as USSB. Prior
to September 12, 2003, this segment included the operating results of
activities under facility management and support agreements with Sartid.
These agreements were terminated in conjunction with the acquisition of
these assets. USSE operations produce and sell sheet, plate, tin, tubular,
precision tube and specialty steel products, as well as coke. USSE
primarily serves customers in the central and western European
construction, conversion, appliance, transportation, service center,
container, and oil, gas and petrochemical markets. In June 2003, USSK sold
its equity interest in Rannila Kosice, s.r.o.
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. In
April of 2003, U. S. Steel sold certain coal seam gas interests in Alabama.
Prior to the sale, income generated from these interests was reported in
the Real Estate segment.
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 iron-bearing taconite pellets; transportation
services; and engineering and consulting services. Prior to the Mining Sale
on June 30, 2003, Other Businesses were involved in the mining, processing
and sale of coal. Effective May 20, 2003, Other Businesses include the
operating results of the Keewatin, Minnesota taconite pellet operations and
the Delray Connecting Railroad, which were acquired from National.
17
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 items not
allocated to segments. Information on segment assets is not disclosed as
it is not reviewed by the chief operating decision maker.
The accounting principles applied at the operating segment level in
determining income (loss) from operations are generally the same as those
applied at the consolidated financial statement level. Intersegment sales
and transfers for some operations are accounted for at cost, while others
are accounted for at market-based prices, and are eliminated at the
corporate consolidation level. All corporate-level selling, general and
administrative expenses and costs related to certain former businesses are
allocated to the reportable segments and Other Businesses based on measures
of activity that management believes are reasonable.
The results of segment operations for the third quarter of 2003 and 2002 are:
Total
Flat- Straight- Real Reportable
(In millions) rolled Tubular USSE line Estate Segments
- --------------------------------------------------------------------------------
Third Quarter 2003
- ------------------
Revenues and
other income:
Customer $ 1,820 $ 149 $ 440 $ 36 $ 19 $ 2,464
Intersegment 55 - 4 - 3 62
Equity income
(loss)(a) 1 - - - - 1
Other (1) - 1 - 3 3
----- ----- ----- ----- ----- -----
Total $ 1,875 $ 149 $ 445 $ 36 $ 25 $ 2,530
===== ===== ===== ===== ===== =====
Income (loss)
from operations $ (50) $ (10) $ 35 $ (15) $ 12 $ (28)
===== ===== ===== ===== ===== =====
Third Quarter 2002
- ------------------
Revenues and
other income:
Customer $ 1,261 $ 148 $ 322 $ 26 $ 22 $ 1,779
Intersegment 60 - 2 - 2 64
Equity income
(loss)(a) 4 - - - - 4
Other - - - - 2 2
----- ----- ----- ----- ----- -----
Total $ 1,325 $ 148 $ 324 $ 26 $ 26 $ 1,849
===== ===== ===== ===== ===== =====
Income (loss)
from operations $ 57 $ 3 $ 40 $ (11) $ 16 $ 105
===== ===== ===== ===== ===== =====
(a)Represents equity in earnings (losses) of unconsolidated investees.
18
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. (Continued)
Total
Reportable Other Reconciling Total
(In millions) Segments Businesses Items Corp.
----------------------------------------------------------------------------
Third Quarter 2003
------------------
Revenues and other income:
Customer $ 2,464 $ 42 $ - $ 2,506
Intersegment 62 189 (251) -
Equity income (loss)(a) 1 (3) - (2)
Other 3 1 - 4
------ ------ ------ ------
Total $ 2,530 $ 229 $ (251) $ 2,508
====== ====== ====== ======
Income (loss) from operations $ (28) $ (2) $ (664) $ (694)
====== ====== ====== ======
Third Quarter 2002
------------------
Revenues and other income:
Customer $ 1,779 $ 126 $ - $ 1,905
Intersegment 64 166 (230) -
Equity income (loss)(a) 4 (4) 2 2
Other 2 2 3 7
------ ------ ------ ------
Total $ 1,849 $ 290 $ (225) $ 1,914
====== ====== ====== ======
Income (loss) from operations $ 105 $ 30 $ 5 $ 140
====== ====== ====== ======
(a)Represents equity in earnings (losses) of unconsolidated investees.
The following is a schedule of reconciling items for the third quarter of
2003 and 2002:
Revenues Income (Loss)
And From
Other Income Operations
(In millions) 2003 2002 2003 2002
-------------------------------------------------------------------------
Elimination of intersegment revenues $ (251) $ (230) * *
----- -----
Items not allocated to segments:
Workforce reduction charge - - $ (618) $ -
Asset impairments - - (46) -
Federal excise tax refund - 3 - 3
Insurance recoveries related to USS- - 2 - 2
POSCO fire
----- ----- ----- -----
- 5 (664) 5
----- ----- ----- -----
Total reconciling items $ (251) $ (225) $ (664) $ 5
===== ===== ===== =====
* Elimination of intersegment revenues is offset by the elimination of
intersegment cost of revenues within income (loss) from operations at the
corporate consolidation level.
19
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. (Continued)
The results of segment operations for the nine months of 2003 and 2002 are:
Total
Flat- Straight- Real Reportable
(In millions) Rolled Tubular USSE line Estate Segments
- --------------------------------------------------------------------------------
Nine Months 2003
- ----------------
Revenues and
other income:
Customer $ 4,539 $ 425 $ 1,333 $ 96 $ 70 $ 6,463
Intersegment 157 - 11 - 8 176
Equity income
(loss)(a) 11 - 1 - - 12
Other 7 5 3 - 7 22
----- ----- ----- ----- ----- -----
Total $ 4,714 $ 430 $ 1,348 $ 96 $ 85 $ 6,673
===== ===== ===== ===== ===== =====
Income (loss)
from operations $ (144) $ (20) $ 166 $ (49) $ 42 $ (5)
===== ===== ===== ===== ===== =====
Nine Months 2002
- ---------------
Revenues and
other income:
Customer $ 3,434 $ 415 $ 823 $ 51 $ 53 $ 4,776
Intersegment 147 - 2 - 6 155
Equity income
(loss)(a) (5) - 1 - - (4)
Other (1) - 3 - 6 8
----- ----- ----- ----- ----- -----
Total $ 3,575 $ 415 $ 829 $ 51 $ 65 $ 4,935
===== ===== ===== ===== ===== =====
Income (loss)
from operations $ (57) $ 10 $ 65 $ (28) $ 37 $ 27
===== ===== ===== ===== ===== =====
(a)Represents equity in earnings (losses) of unconsolidated investees.
20
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. (Continued)
Total
Reportable Other Reconciling Total
(In millions) Segments Businesses Items Corp.
----------------------------------------------------------------------------
Nine Months 2003
------------------
Revenues and other income:
Customer $ 6,463 $ 252 $ - $ 6,715
Intersegment 176 453 (629) -
Equity income (loss)(a) 12 (11) (11) (10)
Other 22 3 47 72
---- ---- ---- ----
Total $ 6,673 $ 697 $ (593) $ 6,777
==== ==== ==== ====
Income (loss) from operations $ (5) $ (38) $ (653) $ (696)
==== ==== ==== ====
Nine Months 2002
------------------
Revenues and other income:
Customer $ 4,776 $ 321 $ - $ 5,097
Intersegment 155 434 (589) -
Equity income (loss)(a) (4) (5) 20 11
Other 8 3 36 47
---- ---- ---- ----
Total $ 4,935 $ 753 $ (533) $ 5,155
==== ==== ==== ====
Income (loss) from operations $ 27 $ 59 $ 40 $ 126
==== ==== ==== ====
(a)Represents equity in earnings (losses) of unconsolidated investees.
The following is a schedule of reconciling items for the nine months of
2003 and 2002:
Revenues Income (Loss)
And From
Other Income Operations
(In millions) 2003 2002 2003 2002
-------------------------------------------------------------------------
Elimination of intersegment revenues $ (629) $ (589) * *
----- -----
Items not allocated to segments:
Workforce reduction charges - - $ (618) $ (10)
Asset impairments (11) - (57) (14)
Income from sale of coal seam gas 34 - 34 -
interests
Gain on sale of coal mining assets 13 - 13 -
Litigation items - - (25) 9
Federal excise tax refund - 36 - 36
Insurance recoveries related to US- - 20 - 20
POSCO fire
Costs related to Fairless shutdown - - - (1)
----- ----- ----- -----
36 56 (653) 40
----- ----- ----- -----
Total reconciling items $ (593) $ (533) $ (653) $ 40
===== ===== ===== =====
* Elimination of intersegment revenues is offset by the elimination of
intersegment cost of revenues within income (loss) from operations at the
corporate consolidation level.
21
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
10. In the nine months of 2003, U. S. Steel sold certain coal seam gas
interests in Alabama for net cash proceeds of $34 million, which is
reflected in other income.
In the second and third quarters of 2002, U. S. Steel recognized
pretax gains of $33 million and $3 million, respectively, associated with
the recovery of black lung excise taxes that were paid on coal export sales
during the period 1993 through 1999. These gains are included in other
income in the statement of operations and resulted from a 1998 federal
district court decision that found such taxes to be unconstitutional. Of
the $36 million recognized, $11 million represents the interest component
of the gain.
11. In the third quarter of 2003, U. S. Steel recorded curtailment
expenses of $310 million for pensions and $64 million for other post-
postretirement benefits related to employee reductions under the TAP for
employees (excluding former National employees retiring under the TAP),
other retirements, layoffs and pending asset dispositions. Termination
benefit harges of $34 million were recorded primarily for enhanced pension
benefits provided to U. S. Steel employees retiring under the TAP. Of the
above total charges, $336 million was recorded in cost of revenues
and $72 million was recorded in selling, general and administrative
expenses. Further charges of $105 million for early retirement cash
incentives related to the TAP, excluding amounts associated with former
National employees, were recorded in cost of revenues. Selling, general
and administrative expenses for the nine months of 2003 and nine months of
2002 also included pension settlement losses of $97 million and $10 million,
respectively, related to retirements of salaried personnel. Selling, general
and administrative expenses in the third quarter of 2003 also included $8
million for an accrual for salaried benefits under the layoff benefit plan.
12. Net interest and other financial costs include amounts related to the
remeasurement of USSK's and USSB's net monetary assets into the U.S. dollar,
which is their functional currency. During the third quarter and nine
months of 2003, net gains of $8 million and $5 million, respectively, were
recorded as compared with net gains of $1 million and $14 million,
respectively, in the third quarter and nine months of 2002. Additionally,
net interest and other financial costs in the third quarter and nine months
of 2003 included a favorable adjustment of $13 million related to
interest accrued for prior years' income taxes.
13. U. S. Steel records depreciation on a modified straight-line method
for domestic steel-producing assets based upon production levels. Applying
modification factors decreased expenses by $4 million and $1 million for
the third quarter of 2003 and 2002, respectively, and $15 million and $4
million for the nine months of 2003 and 2002, respectively.
22
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
14. Income from investees for the nine months of 2003 included an $11
million impairment of a cost method investment. Income from investees for
the nine months of 2002 includes a pretax gain of $20 million for
U. S. Steel's share of insurance recoveries related to the May 31, 2001
fire at the USS-POSCO joint venture.
15. Comprehensive Income
Third Quarter Nine Months
Ended Ended
Sept. 30 Sept. 30
(In millions) 2003 2002 2003 2002
- ----------------------------------------------------------------------------
Net income (loss) $(354) $ 106 $(441) $ 50
Other comprehensive income (loss):
Changes in (net of tax):
Minimum pension liability (167) - (160) 7
Foreign currency translation adjustments - - 1 1
State tax valuation allowance - - (6) -
---- ---- ---- ----
Comprehensive income (loss) $(521) $ 106 $(606) $ 58
==== ==== ==== ====
The change in the minimum pension liability recorded in the third quarter
2003 reflects $(169) million for the union pension plan and $2 million for
the non-union excess-supplemental pension plan. These plans were remeasured
in the third quarter 2003. See further information in Note 11.
16. The income tax benefit in the nine months of 2003 reflected an
estimated annual effective tax rate of 49%. The first nine months of 2003
included a $14 million favorable effect relating to an adjustment of prior
years' taxes, in addition to a $4 million deferred tax benefit relating to
the reversal of a state valuation allowance.
The tax benefit in the nine months of 2003 is based on an estimated
annual effective rate, which requires management to make its best estimate
of annual forecasted pretax income (loss) for the year. During the year,
management regularly updates forecast estimates based on changes in various
factors such as prices, shipments, product mix, plant operating performance
and cost estimates, including pension and other postretirement benefits.
To the extent that actual pretax results for domestic and foreign income in
2003 vary from forecast estimates applied at the end of the most recent
interim period, the actual tax benefit recognized in 2003 could be
materially different from the forecasted annual tax benefit as of the end
of the third quarter.
The income tax benefit in the nine months of 2002 reflected an
estimated annual effective tax benefit rate for 2002 of approximately 31%
and included a $4 million deferred tax charge related to a newly enacted
state tax law.
23
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
16. (Continued)
As of September 30, 2003, U. S. Steel had net federal and state deferred
tax assets of $470 million and $92 million, respectively, which are
expected to increase during the fourth quarter. Although U. S. Steel has
experienced domestic losses in the current and prior year, management
believes that it is more likely than not that tax planning strategies
generating future taxable income can be utilized to realize the deferred
tax assets recorded at September 30, 2003. Tax planning strategies include
the implementation of the previously announced plan to dispose of non-
strategic assets, as well as the ability to elect alternative tax
accounting methods to provide future taxable income to assure realization
of the anticipated deferred tax assets. During the fourth quarter, U. S.
Steel intends to merge two of its defined benefit pension plans. Depending
on the discount rate in effect on the measurement date and the growth in
plan assets during the fourth quarter, the additional minimum pension
liability determination at year end may increase federal and state deferred
tax assets substantially or may result in a net deferred tax liability if a
significant reversal of federal and state deferred tax assets occurs. The
amount of the realizable deferred tax assets at September 30, 2003, and
those expected to be recognized in the fourth quarter of the year could be
adversely affected to the extent that losses continue in the future, if
future events affect the ability to implement tax planning strategies or if
further charges result from an increase in the minimum pension liability.
Management will reassess the need for a valuation allowance at December 31,
2003.
The Slovak Income Tax Act provides an income tax credit which is
available to USSK if certain conditions are met. In order to claim the tax
credit in any year, 60% of USSK's sales must be export sales and USSK must
reinvest the tax credits claimed in qualifying capital expenditures during
the five years following the year in which the tax credit is claimed. The
provisions of the Slovak Income Tax Act permit USSK to claim a tax credit
of 100% of USSK's tax liability for years 2000 through 2004 and 50% for the
years 2005 through 2009. Management believes that USSK fulfilled all of
the necessary conditions for claiming the tax credit for the years for
which it was claimed and anticipates meeting such requirements in 2003. As
a result of claiming these tax credits and management's intent to reinvest
earnings in foreign operations, virtually no income tax provision is
recorded for USSK income.
In October 2002, a tax credit limit was negotiated by the Slovak government
as part of the Accession Treaty governing the Slovak Republic's entry into
the European Union (EU). The Treaty limits to $500 million the total tax
credit to be granted to USSK during the period 2000 through 2009. The
impact of the tax credit limit is expected to be minimal since Slovak tax
laws have been modified and tax rates have been reduced since the
acquisition of USSK. The Treaty also places limits upon USSK's flat-rolled
production and export sales to the EU, allowing for modest growth each year
through 2009. The limits upon export sales to the EU take effect upon the
Slovak Republic's entry into the EU, which is expected to occur in May
2004. A question has recently arisen with respect to the effective date of
the production limits. Slovak Republic representatives have stated their
belief that the Treaty intended that these limits take effect upon entry
into the EU, whereas the European Commission has taken the position that
the flat-rolled production limitations apply as of 2002. Discussions
between representatives of the Slovak Republic and the European Commission
are ongoing. Although it is not possible to predict the outcome of those
discussions, an agreement resolving this issue may be reached prior to the
end of 2003. That agreement could result in a reduction in USSK's tax
credit and/or the acceleration of the restrictions upon USSK's flat-rolled
production and/or sales into the EU. At this time, it is not possible to
predict the impact of such a settlement upon U. S. Steel's financial
position, results of operations or cash flows.
24
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
17. In February 2003, U. S. Steel sold 5 million shares of 7% Series B
Mandatory Convertible Preferred Shares (no par value, 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 were used for general
corporate purposes and to fund a portion of the cash purchase price for the
acquisition of National's assets. 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. Preferred stock dividends of $11 million paid
during 2003 reduced the paid-in capital of the Series B Preferred because
of the retained deficit.
18. Revenues from related parties and receivables from related parties
primarily reflect sales of steel products, raw materials and fees for
providing various management and other support services to equity and
certain other investees. Generally, transactions are conducted under long-
term market-based contractual arrangements.
Receivables from related parties at September 30, 2003 and
December 31, 2002, also included $16 million and $28 million, respectively,
due from Marathon Oil Corporation (Marathon) for tax settlements in
accordance with the tax sharing agreement.
Long-term receivables from related parties at September 30, 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 $62 million and
$42 million at September 30, 2003 and December 31, 2002, respectively.
Accounts payable to related parties at September 30, 2003 and
December 31, 2002, also included amounts related to the purchase of outside
processing services from equity investees. At December 31, 2002, accounts
payable to related parties also included the net present value of the
second and final $37 million installment of contingent consideration
payable to VSZ a.s. related to the acquisition of USSK, which was paid in
July 2003.
25
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
19. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
(In millions)
-------------------------
September 30 December 31
2003 2002
--------- ---------
Raw materials $ 221 $ 228
Semi-finished products 613 472
Finished products 499 271
Supplies and sundry items 61 59
---- ----
Total $ 1,394 $ 1,030
==== ====
Costs of revenues decreased by $11 million and increased by $2 million in
the nine months of 2003 and 2002, respectively, as a result of liquidations
of LIFO inventories.
20. Net income (loss) per common share was calculated by adjusting net
income (loss) for dividend requirements of preferred stock and is based on
the weighted average number of common shares outstanding during the
quarter.
Diluted net income (loss) assumes the exercise of stock options and
conversion of preferred stock, provided in each case, the effect is
dilutive. For the third quarters ended September 30, 2003 and 2002, the
potential common stock related to employee options to purchase 6,776,877
shares and 5,073,601 shares of common stock, respectively, and 15,964,000
shares applicable to the conversion of preferred stock at
September 30, 2003, have been excluded from the computation of diluted net
income (loss) because the effect was antidilutive. For the nine months
ended September 30, 2003 and 2002, the potential common stock related to
employee options to purchase 6,871,324 shares and 5,071,380 shares of
common stock, respectively, and 13,624,952 shares applicable to the
conversion of preferred stock at September 30, 2003, have been excluded
from the computation of diluted net income (loss) because their effect was
antidilutive.
21. On May 20, 2003, U. S. Steel entered into a new revolving credit
facility that provides for borrowings of up to $600 million that replaced a
similar $400 million facility entered into on November 30, 2001. The new
facility, which is secured by a lien on U. S. Steel's inventory and
receivables (to the extent not sold under the Receivables Purchase
Agreement) expires in May 2007 and contains 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 limit dividends and other restricted
payments if the amount available for borrowings drops below certain levels.
The facility also contains a fixed charge coverage ratio, calculated as the
ratio of operating cash flow to cash charges as defined in the agreement,
which effectively reduces availability by $100 million if not met. At
September 30, 2003, $530 million was available under this facility.
At September 30, 2003, USSK had no borrowings against its $50 million
credit facilities. In addition, USSK had $3 million of customs guarantees
outstanding, reducing availability under these facilities to $47 million.
These facilities expire in the fourth quarter of 2004.
26
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
21. (Continued)
At September 30, 2003, in the event of a change in control of
U. S. Steel, debt obligations totaling $1,335 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 $84
million or provide a letter of credit to secure the remaining obligation.
In May 2003, in connection with the National acquisition, U. S. Steel
issued $450 million of Senior Notes due May 15, 2010 (9-3/4% Senior Notes).
These notes have an interest rate of 9-3/4% per annum payable semi-annually
on May 15 and November 15, commencing November 15, 2003. The 9-3/4% Senior
Notes were issued under U. S. Steel's shelf registration statement and were
not listed on any national securities exchange. Proceeds from the sale of
the 9-3/4% Senior Notes were used to finance a portion of the purchase price
to acquire National's assets. In 2001, U. S. Steel issued $535 million of
10-3/4% Senior Notes. As of September 30, 2003, the aggregate principal
amount of 9-3/4% and 10-3/4% Senior Notes outstanding was $450 million and
$535 million, respectively. As of December 31, 2002, the aggregate
principal amount outstanding of the 10-3/4% Senior Notes was $535 million.
In conjunction with issuing the 9-3/4% Senior Notes, U. S. Steel
solicited the consent of the holders of the 10-3/4% Senior Notes to modify
certain terms of the notes to conform to the terms of the 9-3/4% Senior
Notes. Those conforming changes modified the definitions of Consolidated
Net Income, EBITDA and Like-Kind Exchange, permitted dividend payments on
the 7.00% Series B Mandatory Convertible Preferred Shares and expanded
permitted investments to include loans made for the purpose of facilitating
like-kind exchange transactions. U. S. Steel received the consent from
holders of more than 90% of the principal amount of the 10-3/4% Senior
Notes and the amendments were effective May 20, 2003.
The 9-3/4% and 10-3/4% Senior Notes impose certain restrictions that
limit U. S. Steel's ability to, among other things: incur debt; pay
dividends or make other payments from its subsidiaries; issue and sell
capital stock of its 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 was in compliance with all of its debt covenants at
September 30, 2003.
22. On May 19, 2003, U. S. Steel entered into an amendment to the
Receivables Purchase Agreement, which increased fundings under the facility
to the lesser of eligible receivables or $500 million. During the nine
months ended September 30, 2003, U. S. Steel Receivables LLC (USSR) sold to
conduits and subsequently repurchased $190 million of revolving interest in
accounts receivable under the Receivables Purchase Agreement. During the
nine months ended September 30, 2002, USSR sold to conduits and
subsequently repurchased $320 million of revolving interest in accounts
receivable. As of September 30, 2003, $489 million was available to be
sold under this facility.
USSR pays the conduits a discount based on the conduits' borrowing
costs plus incremental fees. During the nine months ended
September 30, 2003 and 2002, U. S. Steel incurred costs on the sale of its
receivables of $1 million and $2 million, respectively.
27
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
22. (Continued)
While the facility expires in November 2006, 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 collectibility of the receivables, and failure to extend the
commitments of the commercial paper conduits' liquidity providers which
currently terminate on November 26, 2003. U. S. Steel is negotiating a
renewal of the 364-day commitments of the liquidity providers in accordance
with the terms of the facility.
23. U. S. Steel is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments involving a variety
of matters, including laws and regulations relating to the environment.
Certain of these matters are discussed below. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material to
the consolidated financial statements. However, management believes that
U. S. Steel will remain a viable and competitive enterprise even though it
is possible that these contingencies could be resolved unfavorably.
U. S. Steel accrues for estimated costs related to existing lawsuits,
claims and proceedings when it is probable that it will incur these costs
in the future.
Asbestos matters - U. S. Steel is a defendant in a large number of cases in
which approximately 14,000 claimants actively allege injury resulting from
exposure to asbestos. Almost all these cases involve multiple plaintiffs
and multiple defendants. These claims fall into three major groups: (1)
claims made under certain federal and general maritime laws by employees of
the Great Lakes Fleet or Intercoastal Fleet, former operations of
U. S. Steel; (2) claims made by persons who performed work at U. S. Steel
facilities (referred to as "premises claims"); and (3) claims made by
industrial workers allegedly exposed to an electrical cable product
formerly manufactured by U. S. Steel. While U. S. Steel has excess
casualty insurance, these policies have multi-million dollar self insured
retentions and, to date, U. S. Steel has not received any payments under
these policies relating to asbestos claims. In most cases, this excess
casualty insurance is the only insurance applicable to asbestos claims.
These cases allege a variety of respiratory and other diseases based on
alleged exposure to asbestos contained in a U. S. Steel electric cable
product or to asbestos on U. S. Steel's premises; approximately 200
plaintiffs allege they are suffering from mesothelioma. In many cases, the
plaintiffs cannot demonstrate that they have suffered any compensable loss
as a result of such exposure or that any injuries they have incurred did in
fact result from such exposure. Virtually all asbestos cases seek monetary
damages from multiple defendants. U. S. Steel is unable to provide
meaningful disclosure about the total amount of such damages alleged in
these cases for the following reasons: (1) many cases do not claim a
specific demand for damages, or contain a demand that is stated only as
being in excess of the minimum jurisdictional limit of the relevant court;
(2) even where there are specific demands for damages, there is no
meaningful way to determine what amount of the damages would or could be
assessed against any particular defendant; (3) plaintiffs' lawyers often
allege the same amount of damages irrespective of the specific harm that
has been alleged, even though the ultimate outcome of any claim may depend
upon the actual disease, if any, that the plaintiff is able to prove and
the actual exposure, if any, to the U. S. Steel product or the duration of
exposure, if any, on U. S. Steel's premises. U. S. Steel believes the
amount of any damages alleged in the complaints initially filed in these
cases is not relevant in assessing its potential liability.
28
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
23. (Continued)
Until March 2003, U. S. Steel was successful in all asbestos cases that it
tried to final judgment. On March 28, 2003, a jury in Madison County,
Illinois returned a verdict against U. S. Steel for $50 million in
compensatory damages and $200 million in punitive damages. The plaintiff,
an Indiana resident, alleged he was exposed to asbestos while working as a
U. S. Steel employee at Gary Works in Gary, Indiana from 1950 to 1981 and
that he suffers from mesothelioma as a result. U. S. Steel believes the
plaintiff's exclusive remedy was provided by the Indiana workers'
compensation law and that 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 having to post an appeal
bond equal to the amount of the verdict and to allow U. S. Steel to
actively pursue its acquisition activities and other strategic initiatives,
U. S. Steel settled this case and the settlement was reflected in financial
results for the first quarter of 2003.
It is not possible to predict the ultimate outcome of asbestos-related
lawsuits, claims and proceedings due to the unpredictable nature of
personal injury litigation. Despite this and although our results of
operations or cash flows for a given period could be adversely affected by
asbestos-related lawsuits, claims and proceedings, the Company believes the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial condition.
Property taxes - U. S. Steel is a party to several property tax
disputes involving its Gary Works property in Indiana, including claims for
refunds totaling approximately $65 million pertaining to tax years 1994-96
and 1999, and assessments totaling approximately $133 million in excess of
amounts paid for the 2000, 2001 and 2002 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 appeal.
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 $125 million and $135 million
at September 30, 2003 and December 31, 2002, respectively. Remediation
liabilities at September 30, 2003, included liabilities recorded for asset
retirement obligations under SFAS No. 143. 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.
29
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
23. (Continued)
For a number of years, U. S. Steel has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In the nine months of 2003 and for the years
2002 and 2001, such capital expenditures totaled $15 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.
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 $15 million of liabilities
already recorded as a result of these indemnifications due to specific
environmental remediation cases (included in the $125 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 $30 million at September 30, 2003, including $7
million related to an equity interest acquired as part of the National
asset purchase, and $27 million at December 31, 2002. If any defaults of
guaranteed liabilities occur, U. S. Steel has access to its interest in the
assets of the investees to reduce potential losses resulting from these
guarantees. As of September 30, 2003, the largest guarantee for a single
such entity was $14 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.
Contingencies related to Separation from Marathon - U. S. Steel was
contingently liable for debt and other obligations of Marathon in the
amount of approximately $68 million at September 30, 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 because management believes the
likelihood of occurrence is remote.
30
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
23. (Continued)
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 September 30, 2003 and December 31, 2002, was estimated
to be approximately $140 million. No liability has been recorded for this
indemnity obligation because 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.
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 $51 million at both September 30, 2003 and
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.
Mining sale - U. S. Steel remains secondarily liable in the event that
a withdrawal from a multiemployer pension plan is triggered within five
years of the sale. A withdrawal is triggered when annual contributions to
the plan are substantially less than contributions made in prior years.
The maximum exposure for the fee that would be assessed upon a withdrawal
is $79 million. U. S. Steel recorded the fair value of this liability as
of June 30, 2003. U. S. Steel has agreed to indemnify the purchaser for
certain environmental matters, which are included in the environmental
matters discussion above.
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 September 30, 2003 and
December 31, 2002, was estimated to be approximately $70 million. No
liability has been recorded for this indemnity obligation because
management believes that the likelihood of the reorganization being
determined to be taxable resulting in Transtar No-Fault Taxes is remote.
31
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
23. (Continued)
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 September 30, 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
exposures including workers' compensation, auto liability and general
liability, as well as property damage and business interruption, 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.
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 $140 million as of September 30, 2003 and $144 million as of
December 31, 2002, which reflects U. S. Steel's maximum exposure under
these financial guarantees, but not its 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 September 30, 2003 and December 31, 2002,
U. S. Steel's domestic contract commitments to acquire property, plant and
equipment totaled $34 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 September 30, 2003 and December 31, 2002, were
$477 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 $77 million
as of September 30, 2003, which declines over the duration of the
agreement, may be required.
32
UNITED STATES STEEL CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
24. On September 30, 2003, U. S. Steel and International Steel Group Inc.
(ISG) reached an agreement to exchange the assets of U. S. Steel's plate
mill at Gary Works for the assets of ISG's No. 2 pickle line at its
Indiana Harbor Works. As a result of this non-monetary exchange, which
closed effective November 1, 2003, U. S. Steel recognized in the third
quarter of 2003, a pretax impairment charge of $46 million, which was
recorded in depreciation, depletion and amortization.
33
UNITED STATES STEEL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
--------------------------------------------------
(Unaudited)
Nine Months Ended
September 30 Year Ended December 31
- ------------------- --------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
(a) 1.34 1.04 (b) 1.05 2.10 5.15
==== ==== ==== ==== ==== ==== ====
(a) Earnings did not cover combined fixed charges and preferred stock
dividends by $789 million.
(b) Earnings did not cover combined fixed charges and preferred stock
dividends by $598 million.
UNITED STATES STEEL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
(Unaudited)
Nine Months Ended
September 30 Year Ended December 31
- ------------------- --------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
(a) 1.34 1.04 (b) 1.13 2.33 5.89
==== ==== ==== ==== ==== ==== ====
(a) Earnings did not cover fixed charges by $767 million.
(b) Earnings did not cover fixed charges by $586 million.
34
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
On May 20, 2003, United States Steel Corporation (U. S. Steel) acquired
substantially all of the integrated steelmaking assets of National Steel
Corporation (National). See Note 3 of Selected Notes to Financial Statements
for information regarding the acquisition. The facilities that were acquired
included two integrated steel plants, Granite City in Granite City, Illinois,
and Great Lakes in Ecorse and River Rouge, Michigan; the Midwest finishing
facility in Portage, Indiana; ProCoil in Canton, Michigan; a 50% equity interest
in Double G Coatings, L.P. near Jackson, Mississippi; the taconite pellet
operations in Keewatin, Minnesota; and the Delray Connecting Railroad.
Granite City has annual raw steel production capability of approximately
2.8 million tons. Principal products include hot-rolled, hot-dipped galvanized
and Galvalume steel.
Great Lakes has annual raw steel production capability of approximately
3.8 million tons. Principal products include hot-rolled, cold-rolled,
electrolytic galvanized and hot dip galvanized.
The Midwest facility finishes hot-rolled bands. Principal products include
tin mill products, hot dip galvanized and Galvalume steel, cold-rolled and
electrical lamination steels.
ProCoil slits and cuts steel coils to desired specifications, provides
laser welding services and warehouses material to service automotive market
customers.
Double G Coatings, L.P. is a 300,000 ton per year hot dip galvanizing and
Galvalume facility.
The taconite pellet operations are located on the western end of the Mesabi
Iron Ore Range and have current annual effective iron ore pellet capacity of
over five million gross tons.
On June 30, 2003, U. S. Steel completed the sale of the coal mines and
related assets of U. S. Steel Mining Company, LLC (Mining Sale). See Note 5 of
Selected Notes to Financial Statements for details regarding the sale.
On September 12, 2003, U. S. Steel Balkan, d.o.o. (USSB), a wholly owned
Serbian subsidiary of U. S. Steel, acquired Sartid a.d. (In Bankruptcy), an
integrated steel company majority-owned by the Government of the Union of Serbia
and Montenegro, and certain of its subsidiaries (collectively "Sartid") out of
bankruptcy. U. S. Steel's technical assessment has determined that, with the
introduction of market-driven operating practices, an extensive rehabilitation
program and a capital spending program, the assets acquired have annual raw
steel design production capability of about 2.4 million tons. See Note 4 of
Selected Notes to Financial Statements for further information regarding the
acquisition.
The acquisition of the assets of National (National Acquisition) and the
acquisition of Sartid increased U. S. Steel's domestic and global annual raw
steel production capability to 19.4 million tons and 26.8 million tons,
respectively, making it the largest domestic producer and the sixth largest in
the world based upon raw steel production.
35
UNITED STATES STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
U. S. Steel has five reportable segments: Flat-rolled Products (Flat-
rolled), Tubular Products (Tubular), U. S. Steel Europe (USSE), Straightline
Source (Straightline) and USS Real Estate (Real Estate). Businesses not
included in the reportable segments are reflected in Other Businesses. The
National Acquisition changed the composition of the Flat-rolled segment and
Other Businesses as described below, but did not result in a change in
U. S. Steel's reportable segments. Effective with the Mining Sale, Other
Businesses are no longer involved in the mining, processing and sale of coal.
Effective with the acquisition of Sartid, the U. S. Steel Kosice (USSK) segment
was renamed U. S. Steel Europe (USSE) and includes the operating results of
USSB.
Effective with the third quarter of 2003, the composition of the Flat-
rolled segment was changed to include the results of the coke operations at
Clairton Works and Gary Works, which were previously reported in Other
Businesses. This change reflects our recent management consolidations.
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, as well as all domestic coke production
facilities. 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.
Effective May 20, 2003, the Flat-rolled segment includes the operating results
of Granite City, Great Lakes, the Midwest finishing facility, ProCoil and
U. S. Steel's equity interest in Double G Coatings, which were acquired from
National.
The Tubular segment includes the operating results of U. S. Steel's
domestic tubular production facilities and, prior to May 2003, include