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X > SEC Filings for X > Form 10-Q on 31-Jul-2012All Recent SEC Filings

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Form 10-Q for UNITED STATES STEEL CORP


31-Jul-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2011 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.

RESULTS OF OPERATIONS

On January 31, 2012, U. S. Steel sold U. S. Steel Serbia (USSS) to the Republic of Serbia for a purchase price of one dollar. In addition, United States Steel Košice (USSK) received a $40 million payment for certain intercompany balances owed by USSS for raw materials and support services. We recorded a total non-cash charge of $399 million in the first quarter of 2012 related to this transaction.

Since January 31, 2012 our U. S. Steel Europe (USSE) reportable segment consists of USSK. Prior to that date, USSS was also included.

In order to provide a better understanding of the USSE segment results, we include the following non-GAAP financial measures to show USSK results included in the USSE segment:

                                                                         Six Months             Six Months
(Dollars in millions               Second             Second               Ended                  Ended
except average                    Quarter            Quarter              June 30,               June 30,
realized price amounts)             2012               2011                 2012                   2011
USSK results
Income from operations            $     34           $     26           $         17           $         57
Shipments (a)                          955                826                  1,927                  1,859
Raw steel production (a)             1,173              1,036                  2,325                  2,220
Raw steel capability
utilization                             94 %               83 %                   93 %                   90 %
Average realized price
($/net ton)                       $    767           $    951           $        761           $        891

(a) Thousands of net tons

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Table of Contents

Net sales by segment for the second quarter and first six months of 2012 and 2011 are set forth in the following table:

                                    Quarter Ended                             Six Months Ended
                                       June 30,                                   June 30,
(Dollars in millions,
excluding                                                      %                                           %
intersegment sales)               2012          2011         Change          2012           2011         Change
Flat-rolled Products
(Flat-rolled)                   $  3,356      $  3,304             2 %     $   6,656      $  6,273             6 %
U. S. Steel Europe (USSE)            763         1,096           -30 %         1,578         2,319           -32 %
Tubular Products (Tubular)           871           695            25 %         1,817         1,337            36 %

Total sales from reportable
segments                           4,990         5,095            -2 %        10,051         9,929             1 %
Other Businesses                      27            25             8 %           138            55           151 %

Net sales                       $  5,017      $  5,120            -2 %     $  10,189      $  9,984             2 %

Management's analysis of the percentage change in net sales for U. S. Steel's reportable business segments for the quarter ended June 30, 2012 versus the quarter ended June 30, 2011 is set forth in the following table:

Quarter Ended June 30, 2012 versus Quarter Ended June 30, 2011

                                  Steel Products (a)
                                                                        Coke &             Net
                     Volume        Price       Mix        FX  (b)        Other            Change
      Flat-rolled          3 %         -5 %       0 %            0 %          4 %               2 %
      USSE               -14 %         -4 %      -2 %          -10 %          0 %             -30 %
      Tubular             15 %          8 %       2 %            0 %          0 %              25 %

(a) Excludes intersegment sales

(b) Currency translation effects

Net sales were $5,017 million in the second quarter of 2012, compared with $5,120 million in the same quarter last year. The slight increase in sales for the Flat-rolled segment reflected higher shipments (increase of 50 thousand tons) offset by lower average realized prices (decrease of $31 per ton). The decrease in sales for the European segment was primarily due to decreased shipments (decrease of 183 thousand tons) primarily due to the sale of USSS, decreased average realized prices (decrease of $163 per ton) and changes in foreign currency translation effects. The increase in sales for the Tubular segment primarily reflected higher average realized prices (increase of $141 per ton) and shipments (increase of 69 thousand tons) as a result of increased drilling activity, mainly due to the continued strength of oil directed drilling.

Management's analysis of the percentage change in net sales for U. S. Steel's reportable business segments for the six months ended June 30, 2012 versus the six months ended June 30, 2011 is set forth in the following table:

Six Months Ended June 30, 2012 versus Six Months Ended June 30, 2011

                                  Steel Products (a)
                                                                        Coke &             Net
                     Volume        Price       Mix        FX  (b)        Other            Change
      Flat-rolled          3 %          1 %       0 %            0 %          2 %               6 %
      USSE               -21 %         -4 %      -1 %           -6 %          0 %             -32 %
      Tubular             20 %         15 %       1 %            0 %          0 %              36 %

(a) Excludes intersegment sales

(b) Currency translation effects

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Table of Contents

Net sales were $10,189 million in the first six months of 2012, compared with $9,984 million in the same period last year. The increase in sales for the Flat-rolled segment primarily reflected higher shipments (increase of 188 thousand tons) and average realized prices (increase of $7 per ton) as a result of improved end user demand and higher average contract prices. The decrease in sales for the European segment was primarily due to decreased shipments (decrease of 583 thousand tons) primarily due to the sale of USSS, and decreased average realized prices (decrease of $113 per ton) and changes in foreign currency translation effects. The increase in sales for the Tubular segment primarily reflected higher average realized prices (increase of $211 per ton) and shipments (increase of 173 thousand tons) as a result of increased drilling activity, mainly due to the continued strength of oil directed drilling.

Pension and other benefits costs

Defined benefit and multiemployer pension plan costs totaled $103 million in the second quarter of 2012, compared to $109 million in the second quarter of 2011. Defined benefit and multiemployer pension plan costs totaled $203 million in the first six months of 2012, compared to $217 million in the first six months of 2011. The $6 million and $14 million decrease for the quarter and six month period, respectively, are primarily due to the natural maturation of our pension plans and a higher market related value of assets, partially offset by a decrease in the discount rate and the expected rate of return period over period.

The recently enacted pension stabilization legislation includes a revised interest rate formula used to measure defined benefit pension obligations for calculating minimum annual contributions. The new interest rate formula is expected to result in higher interest rates compared to prior law over the next few years which will improve the funded status of our main defined benefit pension plan and reduce minimum required contributions. U. S. Steel made voluntary contributions to our main U.S. defined benefit plan of $140 million in the first quarter of 2012 and for several prior years. U. S. Steel will likely make voluntary contributions of similar amounts in future periods in order to continue to mitigate potentially larger mandatory contributions in later years. Assuming future asset performance consistent with our expected long-term earnings rate assumption of 7.75%, we anticipate that the pension stabilization legislation interest rate changes will allow us to continue to make voluntary contributions of approximately $140 million per year through 2015 before we could be required to contribute more than that amount should the current low interest rate environment persist.

The foregoing statements regarding future minimum required cash contributions to our main defined benefit pension plan are forward-looking statements. Factors that may affect our future minimum required contributions to our main defined benefit pension plan include: any voluntary contributions that we may make, future pension plan asset performance, actual interest rates under the law, and the impacts of business acquisitions or divestitures, union negotiated benefit changes and future government regulations.

Net periodic pension cost, including multiemployer plans, is expected to total approximately $410 million in 2012. Total other benefits costs in 2012 are expected to total approximately $120 million. The discount rate and plan asset performance are significant assumption inputs used in the calculation of pension and other benefits net periodic benefit costs.

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A sensitivity analysis of the projected incremental effect of a hypothetical 1/2 percentage point change in the significant inputs used in the calculation of pension and other benefits net periodic benefit costs is provided in the following table:

                                                         Hypothetical Rate
                                                        Increase (Decrease)
   (In millions of dollars)                          1/2%               (1/2%)
   Expected return on plan assets
   Incremental increase (decrease) in:
   Net periodic pension cost                       $     (50 )       $         50
   Discount rate
   Incremental increase (decrease) in:
   Net periodic pension & other benefits costs     $     (30 )       $         35
   Health care cost escalation trend rates
   Incremental increase (decrease) in:
   Service and interest cost components for 2012   $       8         $         (6 )

Costs related to defined contribution plans totaled $11 million and $21 million in the second quarter and first six months of 2012, respectively, compared to $9 million and $19 million in the comparable periods in 2011.

Other benefits costs, including multiemployer plans, totaled $30 million and $60 million in the second quarter and first six months of 2012, respectively, compared to $40 million and $80 million in the corresponding periods of 2011. The decrease in other benefit costs is primarily a result of Medicare program changes, especially those related to the adoption of the new Employer Group Waiver Plan structure. As additional actual cost experience becomes available under the Employer Group Waiver Plan structure, the Company will re-evaluate its initial assessment of savings under this program.

Selling, general and administrative expenses

Selling, general and administrative expenses were $173 million and $346 million in the second quarter and first six months of 2012, compared to $189 million and $369 million in the second quarter and first six months of 2011. The decrease in both periods is primarily related to the sale of USSS offset with a slight increase in employee costs as a result of an increase in the number of employees.

Income (loss) from operations by segment for the second quarter and first six months of 2012 and 2011 is set forth in the following table:

                                    Quarter Ended                                Six Months Ended
                                       June 30,                 %                    June 30,                   %
(Dollars in millions)             2012          2011          Change           2012            2011           Change
Flat-rolled                      $   177        $ 374             -53 %      $    360         $   338               7 %
USSE                                  34          (18 )            NM              -              (23 )           100 %
Tubular                              103           31              NM             232              63              NM

Total income from reportable
segments                             314          387             -19 %           592             378              57 %
Other Businesses                      16            9              78 %            33              22              50 %

Segment income from
operations                           330          396             -17 %           625             400              56 %
Postretirement benefit
expense                              (77 )        (96 )           -20 %          (154 )          (191 )           -19 %

Other items not allocated to
segments:
Net loss on sale of assets            -            -                             (310 )            -
Property tax settlements              -            -                               19              -

Total income from operations     $   253        $ 300             -16 %      $    180         $   209             -14 %

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Segment results for Flat-rolled

                                    Quarter Ended                                Six Months Ended
                                       June 30,                                      June 30,
                                                                 %                                              %
                                 2012           2011           Change           2012           2011          Change
Income from operations ($
millions)                       $   177        $   374             -53 %      $    360        $   338              7 %
Gross margin                        9.5 %         15.6 %           -39 %          10.2 %         10.3 %           -1 %
Raw steel production (mnt)        4,688          4,894              -4 %         9,731          9,492              3 %
Capability utilization               77 %           81 %            -5 %            80 %           79 %            1 %
Steel shipments (mnt)             3,986          3,936               1 %         8,078          7,890              2 %
Average realized steel
price per ton                   $   772        $   803              -4 %      $    768        $   761              1 %

The decrease in Flat-rolled results in the second quarter of 2012 compared to the same period in 2011 resulted from a decrease of $31 per ton in average realized prices (approximately $120 million), increased other operating costs (approximately $65 million, which includes facility maintenance and outage costs), higher raw materials costs (approximately $45 million) and unfavorable changes from steel substrate sales to our Tubular segment (approximately $40 million). These decreases were partially offset by reduced energy costs primarily due to lower natural gas prices (approximately $65 million) and an increase of 50 thousand tons in shipments (approximately $10 million).

The improvement in Flat-rolled results in the first half of 2012 compared to the same period in 2011 resulted mainly from decreased energy costs primarily due to a reduction in natural gas prices (approximately $110 million) and an increase of $7 per ton in average realized prices (approximately $60 million) and an increase of 188 thousand tons in shipments (approximately $30 million). These improvements were partially offset by increased other operating costs (approximately $75 million, which includes facility maintenance and outage costs), unfavorable changes from steel substrate sales to our Tubular segment (approximately $35 million) higher accruals for profit-based payments (approximately $30 million), decreased shipment volumes (approximately $25 million) and higher raw material costs (approximately $15 million).

Segment results for USSE

                                    Quarter Ended                                Six Months Ended
                                      June 30,                                       June 30,
                                                                 %                                              %
                                2012            2011           Change          2012            2011           Change
Income (loss) from
operations ($ millions)        $    34        ($    18 )            NM        $    -         ($    23 )           100 %
Gross margin                      12.0 %           6.3 %            90 %          7.7 %           5.9 %            31 %
Raw steel production (mnt)       1,173           1,431             -18 %        2,413           3,112             -22 %
Capability utilization              94 %            78 %            21 %           89 %            85 %             5 %
Steel shipments (mnt)              955           1,138             -16 %        2,000           2,583             -23 %
Average realized steel
price per ton                  $   767        $    930             -18 %      $   757        $    870             -13 %

The improvement in USSE results in the second quarter of 2012 compared to the same period in 2011 was primarily due to lower raw materials costs (approximately $75 million), the elimination of operating losses subsequent to January 31, 2012 associated with our former Serbian operations (which were approximately $45 million in the 2011 period), decreased other operating costs (approximately $40 million, which includes operating efficiencies due to increased production volume at USSK) and an increase of 129 thousand tons in shipments at USSK (approximately $15 million). These improvements were partially offset by a decrease in average realized prices for USSK (approximately $90 million), unfavorable foreign currency translation effects (approximately $25 million) and increased energy costs primarily due to an increase in electricity costs (approximately $5 million).

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The improvement in USSE results in the first half of 2012 compared to the same period in 2011 was primarily due to lower raw materials costs (approximately $120 million), the elimination of operating losses subsequent to January 31, 2012 associated with our former Serbian operations (approximately $65 million), decreased other operating costs (approximately $30 million, which includes operating efficiencies due to increased production volume at USSK) and an increase of 68 thousand tons in shipments at USSK (approximately $10 million). These improvements were partially offset by a decrease in average realized prices for USSK (approximately $140 million), unfavorable foreign currency translation effects (approximately $35 million) and increased energy costs primarily due to an increase in electricity costs (approximately $25 million).

Segment results for Tubular

                                     Quarter Ended                               Six Months Ended
                                        June 30,                                     June 30,
                                                                  %                                             %
                                  2012           2011          Change           2012           2011          Change
Income from operations ($
millions)                        $   103        $    31             NM        $    232        $    63             NM
Gross margin                        14.5 %          8.4 %           73 %          15.8 %          8.9 %           78 %
Steel shipments (mnt)                493            424             16 %         1,022            849             20 %
Average realized steel price
per ton                          $ 1,706        $ 1,565              9 %      $  1,717        $ 1,506             14 %

The improvement in Tubular results in the second quarter of 2012 as compared to the same period in 2011 resulted mainly from an increase of $141 per ton in average realized prices (approximately $60 million), lower raw materials costs (approximately $30 million) and an increase of 69 thousand tons in shipments (approximately $15 million) partially offset by increased other operating costs (approximately $30 million, which includes spending for operating supplies).

The improvement in Tubular results in the first half of 2012 as compared to the same period in 2011 resulted mainly from an increase of $211 per ton in average realized prices (approximately $165 million), an increase of 173 thousand tons in shipments (approximately $50 million), and lower raw materials costs (approximately $35 million) partially offset by increased other operating costs (approximately $80 million, which includes facility maintenance and spending for operating supplies).

Results for Other Businesses

Other Businesses had income of $16 million and $33 million in the second quarter and first half of 2012, compared to income of $9 million and $22 million in the second quarter and first half of 2011.

Items not allocated to segments

We recorded a $310 million pretax net loss on the sale of assets in the first half of 2012 which consisted of a pretax loss of $399 million related to the sale of USSS and a pretax gain of $89 million related to the sale of a majority of the operating assets of the Birmingham Southern Railroad.

The decrease in postretirement benefit expense in the second quarter and first half of 2012 as compared to the same period in 2011 resulted from lower pension expense primarily due to the natural maturation of the pension plans and lower retiree medical expense caused by a number of Medicare program changes, particularly the adoption of a new Employer Group Waiver Plan structure for most medicare drug participants.

We recorded a pretax gain of $19 million related to property tax settlements that occurred in the first half of 2012. This was reflected as a reduction to our cost of sales.

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Table of Contents

Net interest and other financial costs

                                          Quarter Ended                              Six Months Ended
                                             June 30,                                    June 30,
                                                                      %                                            %
(Dollars in millions)                   2012          2011         Change          2012            2011         Change
Interest and other financial costs     $   73         $  55             33 %      $   129         $  113             14 %
Interest income                            (1 )          (1 )            0 %           (5 )           (3 )           67 %
Foreign currency (gains) losses            10           (41 )           NM              8           (118 )           NM

Total                                  $   82         $  13             NM        $   132         $   (8 )           NM

The unfavorable change in net interest and other financial costs in the second quarter and first six months of 2012 as compared to the same periods last year were primarily due to an $18 million redemption premium associated with the April 2012 redemption of all of our $300 million 5.65% Senior Notes due June 1, 2013. The foreign currency gains during the three and six months ended June 30, 2011 primarily resulted from the accounting remeasurement effects on a U.S. dollar-denominated intercompany loan from a U.S. subsidiary to a European entity partially offset by euro-U.S. dollar derivatives activity, which we use to mitigate our foreign currency exchange rate exposure. Effective January 1, 2012, the functional currency of the European entity changed from the euro to the U.S. dollar because of significant changes in economic facts and circumstances, including the sale of USSS. This change in functional currency has been applied on a prospective basis since January 1, 2012. For additional information on U. S. Steel's foreign currency exchange activity, see note 13 to the Financial Statements and "Item 3. Quantitative and Qualitative Disclosures about Market Risk - Foreign Currency Exchange Rate Risk."

The income tax provision was $70 million and $166 million in the second quarter and first six months of 2012 compared to $65 million and $81 million in the respective periods of 2011. The tax provision does not reflect any tax benefit for pretax losses in Canada and Serbia (USSS was sold on January 31, 2012), which are jurisdictions where we have recorded a full valuation allowance on deferred tax assets, and also does not reflect any tax provision or benefit for certain foreign currency remeasurement gains and losses that are not recognized in any tax jurisdiction. In addition, no material tax benefit was recorded on the loss on the sale of USSS.

The tax provision for the first six months of 2012 is based on an estimated annual effective rate, which requires management to make its best estimate of annual pretax income or loss. During the year, management regularly updates forecasted annual pretax results for the various countries in which we operate based on changes in factors such as prices, shipments, product mix, operating . . .

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