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| X > SEC Filings for X > Form 10-Q on 28-Oct-2008 | All Recent SEC Filings |
28-Oct-2008
Quarterly Report
Certain sections of Management's Discussion and Analysis include forward-looking statements concerning trends or events potentially affecting the businesses of United States Steel Corporation (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 Item 1A. Risk Factors and "Supplementary Data - Disclosures About Forward-Looking Statements" in U. S. Steel's Annual Report on Form 10-K for the year ended December 31, 2007, and Item 1A. Risk Factors in this Form 10-Q. References in this Quarterly Report on Form 10-Q to "U. S. Steel", "the Company", "we", "us" and "our" refer to U. S. Steel and its consolidated subsidiaries unless otherwise indicated by the context.
On August 29, 2008, U. S. Steel Canada Inc. (USSC) paid C$38 million (approximately $36 million) to acquire three pickle lines in Nanticoke, Ontario, from Nelson Steel, a division of Samuel Manu-Tech Inc. The acquisition of the pickle lines strengthens USSC's position as a premier supplier of flat-rolled steel products to the North American market. The results of operations for these facilities are included in our Flat-rolled segment as of the date of the acquisition.
RESULTS OF OPERATIONS
Net sales by segment for the third quarter and first nine months of 2008 and
2007 are set forth in the following table:
Quarter Ended Nine Months Ended
September 30, September 30,
(Dollars in millions, excluding % %
intersegment sales) 2008 2007 Change 2008 2007 Change
Flat-rolled $ 4,303 $ 2,439 76 % $ 11,468 $ 7,137 61 %
USSE 1,598 1,167 37 % 4,714 3,566 32 %
Tubular 1,333 637 109 % 2,866 1,398 105 %
Total sales from reportable
segments 7,234 4,243 70 % 19,048 12,101 57 %
Other Businesses 78 111 -30 % 204 237 -14 %
Net sales $ 7,312 $ 4,354 68 % $ 19,252 $ 12,338 56 %
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Management's analysis of the percentage change in net sales for U. S. Steel's reportable business segments for the quarter ended September 30, 2008 versus the quarter ended September 30, 2007 is set forth in the following table:
Quarter Ended September 30, 2008 versus Quarter Ended September 30, 2007
Steel Products Sales (a) Coke &
Volume Price Mix FX (b) Other Sales Net Change
Flat-rolled 34 % 38 % -1 % 0 % 5 % 76 %
USSE -5 % 32 % 1 % 9 % 0 % 37 %
Tubular 11 % 83 % 6 % 0 % 9 % 109 %
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(a) Excludes intersegment sales
(b) Foreign currency effects
Net sales were $7,312 million in the third quarter of 2008, compared with $4,354 million in the same quarter last year. The increase in sales for the Flat-rolled segment primarily reflected higher average realized prices (up $264 per ton) and increased shipments, primarily due to the inclusion of USSC in 2008. The increase in sales for the European segment was primarily due to higher average realized euro-based prices and favorable currency effects. Including the currency effects, average realized prices increased $348 per ton from the same period last year. The increase in sales for the Tubular segment resulted primarily from higher average realized prices (up $1,098 per ton) and increased shipments.
Management's analysis of the percentage change in net salesfor U. S. Steel's reportable business segments for the nine months ended September 30, 2008 versus the nine months ended September 30, 2007 is set forth in the following table:
Nine Months Ended September 30, 2008 versus Nine Months Ended September 30, 2007
Steel Products Sales (a) Coke &
Volume Price Mix FX (b) Other Sales Net Change
Flat-rolled 38 % 20 % -1 % 0 % 4 % 61 %
USSE 0 % 19 % 1 % 12 % 0 % 32 %
Tubular 50 % 43 % 5 % 0 % 7 % 105 %
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(a) Excludes intersegment sales
(b) Foreign currency effects
Net sales were $19,252 million in the first nine months of 2008, compared with $12,338 million in the same period last year. Sales for the Flat-rolled segment were higher due mainly to higher shipments, primarily due to the inclusion of USSC in 2008, and higher average realized prices (up $127 per ton). Sales for USSE increased mainly as a result of higher average realized euro-based prices and favorable currency effects. Including the currency effects, average realized prices increased $238 per ton from the same period last year. Tubular sales were up due primarily to the inclusion of facilities acquired from Lone Star Technologies, Inc. (Lone Star) for the entire nine months of 2008 and higher average realized prices (up $468 per ton).
Operating expenses
Total operating expenses as a percent of sales were 82 percent in the third quarter of 2008, compared to 92 percent in the third quarter of 2007. Total operating expenses as a percent of sales were 87 percent in the first nine months of 2008, compared to 91 percent in the first nine months of 2007. The increases in average realized prices in both periods outpaced the increase in unit production costs resulting primarily from higher raw materials and energy costs.
Profit-based union payments
Third Quarter Ended Nine Months Ended
September 30, % September 30, %
(Dollars in millions) 2008 2007 Change 2008 2007 Change
Allocated to segment results $ 109 $ 36 203 % $ 206 $ 100 106 %
Retiree benefit expenses - 29 -100 % - 84 -100 %
Total $ 109 $ 65 68 % $ 206 $ 184 12 %
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Results for 2008 and 2007 include costs related to profit-based payments pursuant to the provisions of the 2003 labor agreement negotiated with the United Steelworkers (USW), and to payments pursuant to agreements with other unions. In September 2008, U. S. Steel and its U. S. Steel Tubular Products, Inc. subsidiary reached labor agreements with the USW (the 2008 BLA Agreements). Effective September 1, 2008, results include costs related to profit-based payments pursuant to the provisions of the 2008 BLA Agreements. All of these costs are included in cost of sales on the statement of operations.
Profit-based payment amounts per the agreements with the USW are calculated as a percentage of consolidated income from operations after special items (as defined in the agreement) and are paid as profit sharing to active union employees (excluding employees of USSC) based on 7.5 percent of profit between $10 and $50 per ton and 10 percent of profit above $50 per ton. Amounts in 2007 also include costs related to a trust to be used to assist retirees from National Steel with health care costs. This profit-based expense related to National Steel retirees was eliminated beginning with the fourth quarter of 2007 pursuant to an agreement with the USW, and was not included in the 2008 BLA Agreements. Under the terms of the 2008 BLA Agreements, effective January 1, 2009, profit sharing will be expanded to include Texas Operations. At the same time, the profit sharing formula will be modified such that at certain higher levels of income from operations, profit sharing payments will be capped and any excess amounts will be contributed to our trust for retiree health care and life insurance.
Pension and other benefits costs
Defined benefit and multiemployer pension plan costs totaled $21 million in the third quarter of 2008, compared to $32 million in the third quarter of 2007. Defined benefit and multiemployer pension plan costs totaled $50 million in the first nine months of 2008, compared to $88 million in the first nine months of 2007. The decreases primarily reflect the improved funded status of the main U. S. Steel pension plan before the September 1, 2008 remeasurement. The effects of the benefit enhancements encompassed by the 2008 BLA Agreements will not be fully reflected until the fourth quarter. Costs related to defined contribution plans totaled $9 million and $26 million in the third quarter and first nine months of 2008, respectively, compared to $6 million and $18 million in last year's third quarter and first nine months, respectively.
Other benefits costs, including multiemployer plans, totaled $39 million and $107 million in the third quarter and first nine months of 2008, respectively, compared to $32 million and $94 million in the corresponding periods of 2007. The increases in both periods were primarily due to the addition of expenses related to USSC employees in 2008.
The 2008 BLA Agreements enhanced the defined pension benefits and increased the obligation by $121 million after considering the impact of higher wages on final average pay formulas and higher flat rate multipliers. After the remeasurement, annual net periodic pension expense for the main pension plan as of the September 1, 2008, increased to $38 million as compared to $16 million at the January 1, 2008 valuation date. Since 2003, newly hired active USW employees have been covered by a multi-employer pension plan called the Steelworkers Pension Trust (the SPT) to which the Company contributes a flat dollar rate for each man-hour worked representing our entire obligation for these employees' pension benefits. As a result of the 2008 BLA Agreements, the flat dollar contribution rate per hour worked for USW represented employees covered by the SPT increased to $2.65 from $1.80.
The 2008 BLA Agreements increased OPEB liabilities principally as a result of reduced retiree medical premiums for (1) surviving spouses who are now subject to non-escalating target premiums, and for (2) retirees covered by a cap whose premiums will be reduced whenever certain annual profit levels are met. After the remeasurement, annual net periodic OPEB expense for these main plans as
of September 1, 2008, increased to $143 million as compared to $72 million at the January 1, 2008 measurement date.
Selling, general and administrative expenses
Selling, general and administrative expenses were $151 million in the third quarter of 2008, compared to $134 million in the third quarter of 2007. Selling, general and administrative expenses were $464 million in the first nine months of 2008, compared to $411 million in the first nine months of 2007. The increases in both periods mainly resulted from increased expenses related to our 2007 acquisition of USSC and higher compensation expense, partially offset by lower pension and retiree medical costs. The increase in the nine month period also reflected increased expense resulting from the acquisition of Lone Star.
Income from operations by segment for the third quarters of 2008 and 2007 is set forth in the following table:
Quarter Ended Nine Months Ended
September 30, % September 30, %
(Dollars in millions) 2008 2007 Change 2008 2007 Change
Flat-rolled $ 835 $ 170 391 % $ 1,433 $ 337 325 %
USSE 173 152 14 % 632 602 5 %
Tubular 420 74 468 % 648 273 137 %
Total income from reportable
segments 1,428 396 261 % 2,713 1,212 124 %
Other Businesses 33 37 -11 % 34 40 -15 %
Segment income from operations 1,461 433 237 % 2,747 1,252 119 %
Retiree benefit expenses (6 ) (46 ) -87 % (4 ) (128 ) -97 %
Other items not allocated to
segments:
Labor agreement signing
bonuses (105 ) - (105 ) -
Environmental remediation (23 ) - (23 ) -
Flat-rolled inventory
transition effects - - (23 ) -
Litigation reserve - - (45 ) -
Tubular inventory transition
effects - (27 ) - (27 )
Total income from operations $ 1,327 $ 360 269 % $ 2,547 $ 1,097 132 %
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Segment results for Flat-rolled
Quarter Ended Nine Months Ended
September 30, % September 30, %
2008 2007 Change 2008 2007 Change
Income from operations ($
millions) $ 835 $ 170 391 % $ 1,433 $ 337 325 %
Raw steel production (mnt) 5,282 4,328 22 % 16,454 12,157 35 %
Capability utilization 86.2 % 88.5 % -3 % 90.2 % 83.8 % 8 %
Steel shipments (mnt) 4,505 3,601 25 % 14,055 10,388 35 %
Average realized steel
price per ton $ 907 $ 643 41 % $ 775 $ 648 20 %
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The increase in Flat-rolled income in the third quarter and first nine months of 2008 as compared to the same periods in 2007 resulted mainly from higher commercial effects (approximately $1,050 million and $1,790 million, respectively) and increased income from semi-finished steel sales to Tubular (approximately $260 million and $500 million, respectively). These were partially offset by
higher costs for raw materials (approximately $450 million and $970 million, respectively) and energy (approximately $80 million and $170 million, respectively) and higher accruals for profit-based payments (approximately $80 million and $100 million, respectively). In addition, for the nine-month period, segment income benefited by approximately $80 million from improved operating efficiencies. The higher commercial effects in 2008 were partially due to the inclusion of USSC results.
Segment results for USSE
Quarter Ended Nine Months Ended
September 30, % September 30, %
2008 2007 Change 2008 2007 Change
Income from operations ($
millions) $ 173 $ 152 14 % $ 632 $ 602 5 %
Raw steel production (mnt) 1,623 1,661 -2 % 5,456 5,325 2 %
Capability utilization 87.0 % 88.7 % -2 % 98.2 % 95.9 % 2 %
Steel shipments (mnt) 1,409 1,486 -5 % 4,743 4,754 0 %
Average realized steel
price per ton $ 1,086 $ 738 47 % $ 948 $ 710 34 %
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The increases in USSE income in the third quarter and first nine months of 2008 as compared to the same periods in 2007 were primarily due to higher commercial effects (approximately $350 million and $680 million, respectively), offset by higher raw materials costs (approximately $230 million and $560 million, respectively), net unfavorable currency effects (approximately $40 million and $50 million, respectively) and outage-related costs (approximately $30 million and $40 million, respectively).
Segment results for Tubular
Quarter Ended Nine Months Ended
September 30, % September 30, %
2008 2007 Change 2008 2007 Change
Income from operations ($
millions) $ 420 $ 74 468 % $ 648 $ 273 137 %
Steel shipments (mnt) 519 466 10 % 1,452 1,001 44 %
Average realized steel price
per ton $ 2,390 $ 1,292 86 % $ 1,823 $ 1,355 35 %
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The increases in Tubular income in the third quarter and first nine months of 2008 as compared to the same periods last year mainly resulted from higher commercial effects (approximately $560 million and $730 million, respectively), partially offset by increased costs for semi-finished steel (approximately $270 million and $410 million, respectively). The higher commercial effects in the nine month period in 2008 were partially due to the inclusion of results for facilities acquired from Lone Star for the entire period.
Results for Other Businesses
Other Businesses generated income of $33 million in the third quarter of 2008, compared to income of $37 million in the third quarter of 2007. Other Businesses generated income of $34 million in the first nine months of 2008, compared to income of $40 million in the same period last year.
Items not allocated to segments
The reduction in retiree benefit expenses compared to the third quarter last year primarily resulted from the elimination of the profit-based expense related to certain former National Steel employees (See "Operating expenses - Profit-based union payments") and the improved funded status of the main pension plan before the September 1, 2008 remeasurement.
The 2008 BLA Agreements provided for signing bonuses of up to $6,000 per employee. These labor agreement signing bonuses resulted in a pretax charge of $105 million in the third quarter of 2008.
An environmental remediation charge of $23 million was taken in the third quarter of 2008 as the scope of work for an environmental project at a former operating location has become defined.
Flat-rolled inventory transition effects of unfavorable $23 million in the first nine months of 2008 reflected the impact of selling inventory acquired in the acquisition of USSC, which had been recorded at fair value.
A litigation reserve of $45 million was established in the first quarter of 2008 as a result of a ruling by the Indiana Court of Appeals involving a rate escalation provision in U. S. Steel's power supply contract with Northern Indiana Public Service Company. In September 2008, the Indiana Supreme Court agreed to review this matter.
Tubular inventory transition effects of unfavorable $27 million in the third quarter and first nine months of 2007 reflected the effects of conforming certain inventories acquired from Lone Star to our unified business model and the impact of selling acquired inventory, which had been recorded at fair value.
Net interest and other financial costs
Quarter Ended Nine Months Ended
September 30, % September 30, %
(Dollars in millions) 2008 2007 Change 2008 2007 Change
Interest and other financial
costs $ 43 $ 37 (a) 16 % $ 137 $ 87 (a) 57 %
Interest income (3 ) (11 )(a) -73 % (11 ) (46 )(a) -76 %
Foreign currency (gains)
losses 6 (4 ) (87 ) (6 )
Charge from early
extinguishment of debt - - - 26
Total $ 46 $ 22 109 % $ 39 $ 61 -36 %
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(a) The quarter and nine months ended September 30, 2007 include $6 million and $18 million, respectively, of interest expense and interest income related to the obligation to provide benefits for National Steel retirees that was settled in the fourth quarter of 2007. For further information, see U. S. Steel's Annual Report on Form 10-K for the year ended December 31, 2007.
The unfavorable change in net interest and other financial costs in the third quarter of 2008 compared to the same period last year was mainly due to unfavorable changes in foreign currency effects, lower interest income and increased interest expense resulting from debt incurred to fund the acquisition of USSC. The favorable change in the nine month period was mainly due to higher foreign currency gains and the nonrecurrence of a charge related to the early redemption of certain debt, partially offset by lower interest income and increased interest expense resulting from debt incurred to fund the acquisitions of Lone Star and USSC. The foreign currency gains include remeasurement effects on a U.S. dollar-denominated intercompany loan (the intercompany loan) to a European subsidiary that had an outstanding balance of $840 million at September 30, 2008. These effects were partially offset by euro-U.S. dollar derivatives activity, which we use to mitigate our foreign currency exposure. For additional information on U. S. Steel's foreign currency exchange activity, see Note 14 to Financial Statements and "Item 3 . Quantitative and Qualitative Disclosures about Market Risk - Foreign Currency Exchange Rate Risk."
The provision for income taxes in the third quarter and first nine months of 2008 was $339 million and $652 million, compared with $68 million and $187 million in the respective periods in 2007. The
effective tax rate has increased in 2008 compared to 2007 principally as a result of a change in the mix of domestic and foreign earnings, as well as the expected utilization of the remaining tax credits under the Slovak Income Tax Act as discussed below.
The Slovak Income Tax Act permits U. S. Steel Košice (USSK) to claim a tax credit of 100 percent of USSK's tax liability for the years 2000 through 2004 and 50 percent of the current statutory rate of 19 percent for the years 2005 through 2009, not to exceed $430 million in total pursuant to an agreement with the European Union. Approximately $25 million of credits remained at December 31, 2007, which management expects will be fully utilized in 2008.
At September 30, 2008, the net domestic deferred tax asset was $260 million compared to a net deferred tax liability of $21 million at December 31, 2007. The net deferred tax asset arose in the third quarter of 2008 as a result of the remeasurement of the pension and OPEB plans (see Note 7 to Financial Statements).
At September 30, 2008, the foreign deferred tax assets recorded were $15 million, net of an established valuation allowance of $378 million. Net foreign deferred tax assets will fluctuate as the value of the U.S. dollar changes with respect to the euro, the Slovak koruna, the Canadian dollar and the Serbian dinar. A full valuation allowance is provided for Serbian deferred tax assets because current projected investment tax credits, which must be used before net operating loss and credit carryforwards, are more than sufficient to offset future tax liabilities. A full valuation allowance is recorded for Canadian deferred tax assets due to a recent history of losses, particularly before U. S. Steel acquired USSC. As USSC and U. S. Steel Serbia, d.o.o. (USSS) generate sufficient income, the valuation allowances of $234 million for Canadian deferred tax assets, including $156 million pre-acquisition, and $137 million for Serbian deferred tax assets as of September 30, 2008, would be partially or fully reversed at such time that it is more likely than not that the deferred tax assets will be realized. (If any portion of the $156 million of the valuation allowance at USSC is reversed prior to January 1, 2009, it will result in a decrease to goodwill. In accordance with Financial Accounting Standard 141(R) "Business Combinations", any reversals of this amount made after January 1, 2009, will result in a decrease to tax expense.)
We expect the annual effective tax rate in 2008 to be approximately 27 percent.
For further information on income taxes see Note 11 to Financial Statements.
U. S. Steel's net income was $919 million in the third quarter of 2008, compared to $269 million in the third quarter of 2007. U. S. Steel's net income was $1,822 million in the first nine months of 2008, compared to $844 million in the same period last year. The increases primarily reflect the factors discussed above.
BALANCE SHEET
Receivables increased by $1,210 million from year-end 2007 as third quarter 2008 average realized prices and shipment volumes increased compared to the fourth quarter of 2007.
Intangibles - net decreased by $122 million from year-end 2007 as a result of the completion of the valuation of assets acquired from Stelco Inc.
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