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X > SEC Filings for X > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for UNITED STATES STEEL CORP

Form 10-Q for UNITED STATES STEEL CORP


30-Oct-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.

CRITICAL ACCOUNTING ESTIMATES

The following critical accounting estimates should be read in conjunction with those included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Goodwill and identifiable intangible assets - Goodwill represents the excess of the cost over the fair value of acquired identifiable tangible and intangible assets and liabilities assumed from businesses acquired. Goodwill is tested for impairment at the reporting unit level annually in the third quarter and whenever events or circumstances indicate the carrying value may not be recoverable. The evaluation of impairment involves comparing the estimated fair value of the associated reporting unit to its carrying value, including goodwill. We have two reporting units that have a significant amount of goodwill: our Flat-rolled reporting unit and our Texas Operations reporting unit.

On January 1, 2012, U. S. Steel adopted ASU 2011-08 which provides the option of performing a qualitative assessment before performing the first step of the two-step impairment test (see note 2 to the Consolidated Financial Statements). U. S. Steel completed its annual goodwill impairment evaluation during the third quarter of 2012 and determined, on the basis of a number of economic, cost, market and other qualitative factors, there was no indication of goodwill impairment for any of the reporting units. If business conditions deteriorate or other factors have an adverse effect on our qualitative and quantitative estimates, inclusive of discounted future cash flows or assumed growth rates, or if we experience a sustained decline in our market capitalization, future assessments of goodwill for impairment may result in impairment charges.

U. S. Steel has determined that certain acquired intangible assets have indefinite useful lives. These assets are reviewed for impairment annually in the third quarter and whenever events or circumstances indicate the carrying value may not be recoverable.

On January 1, 2012, U. S. Steel adopted ASU 2012-02, which provides the option of allowing companies to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment assessment noted above. U. S. Steel completed its evaluation of its indefinite lived water rights during the third quarter of 2012 and determined on the basis of qualitative factors, there was no indication of impairment.

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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 USSE segment results, we include the following non-GAAP financial measures to show USSK results included in the USSE segment:

                                                                      Nine Months              Nine Months
(Dollars in millions             Third             Third                 Ended                    Ended
except average                  Quarter           Quarter            September 30,            September 30,
realized price amounts)           2012              2011                 2012                     2011
USSK results
Income from operations          $     27          $      9          $            44          $            66
Shipments (a)                        911               923                    2,838                    2,783
Raw steel production (a)           1,140             1,036                    3,465                    3,256
Raw steel capability
utilization                           90 %              82 %                     92 %                     87 %
Average realized price
($/net ton)                     $    731          $    880          $           752          $           887

(a) Thousands of net tons

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

                                    Quarter Ended                             Nine Months Ended
                                    September 30,                               September 30,
(Dollars in millions,
excluding                                                      %                                           %
intersegment sales)               2012          2011         Change          2012           2011         Change
Flat-rolled Products
(Flat-rolled)                   $  3,142      $  3,136             0 %     $   9,798      $  9,409             4 %
U. S. Steel Europe (USSE)            696         1,072           -35 %         2,274         3,391           -33 %
Tubular Products (Tubular)           787           846            -7 %         2,604         2,183            19 %

Total sales from reportable
segments                           4,625         5,054            -8 %        14,676        14,983            -2 %
Other Businesses                      27            27             0 %           165            82           101 %

Net sales                       $  4,652      $  5,081            -8 %     $  14,841      $ 15,065            -1 %

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

Quarter Ended September 30, 2012 versus Quarter Ended September 30, 2011

                                  Steel Products (a)
                                                                        Coke &             Net
                     Volume        Price       Mix        FX  (b)        Other            Change
      Flat-rolled          5 %         -3 %       0 %            3 %         -5 %               0 %
      USSE               -21 %         -4 %       0 %           -9 %         -1 %             -35 %
      Tubular             -4 %         -3 %       0 %            0 %          0 %              -7 %

(a) Excludes intersegment sales

(b) Currency translation effects

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Net sales were $4,652 million in the third quarter of 2012, compared with $5,081 million in the same quarter last year. The slight increase in sales for the Flat-rolled segment reflected higher shipments (increase of 137 thousand tons) partially offset by lower average realized prices (decrease of $32 per ton). The decrease in sales for the European segment was primarily due to decreased shipments (decrease of 285 thousand tons) primarily due to the sale of USSS, decreased average realized euro-based prices (decrease of €26 per ton) and the strengthening of the U.S. dollar versus the euro in the third quarter of 2012 compared to the third quarter of 2011. The slight decrease in sales for the Tubular segment was primarily due to a slight decrease in shipments (decrease of 24 thousand tons) and lower average realized prices (decrease of $23 per ton).

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

Nine Months Ended September 30, 2012 versus Nine Months Ended September 30, 2011

                                  Steel Products (a)
                                                                        Coke &             Net
                     Volume        Price       Mix        FX  (b)        Other            Change
      Flat-rolled          4 %         -2 %       1 %            0 %          1 %               4 %
      USSE               -21 %         -4 %       0 %           -7 %         -1 %             -33 %
      Tubular             11 %          7 %       1 %            0 %          0 %              19 %

(a) Excludes intersegment sales

(b) Currency translation effects

Net sales were $14,841 million in the first nine months of 2012, compared with $15,065 million in the same period last year. The increase in sales for the Flat-rolled segment primarily reflected higher shipments (increase of 325 thousand tons) partially offset by lower average realized prices (decrease of $6 per ton). The decrease in sales for the European segment was primarily due to decreased shipments (decrease of 868 thousand tons) primarily due to the sale of USSS, decreased average euro-based realized prices (decrease of €33 per ton) and the strengthening of the U.S. dollar versus the euro in the first nine months of 2012 compared to the first nine months of 2011. The increase in sales for the Tubular segment primarily reflected higher average realized prices (increase of $128 per ton) and shipments (increase of 149 thousand tons) as a result of increased drilling activity.

Pension and other benefits costs

Defined benefit and multiemployer pension plan costs totaled $104 million in the third quarter of 2012, compared to $110 million in the third quarter of 2011. Defined benefit and multiemployer pension plan costs totaled $307 million in the first nine months of 2012, compared to $327 million in the first nine months of 2011. The $6 million and $20 million decrease for the quarter and nine month periods, 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 for minimum funding calculations 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

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several prior years. U. S. Steel will likely make voluntary contributions of similar amounts in future periods 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 $100 million as a result of the remeasurement described below. The discount rate and plan asset performance are significant assumption inputs used in the calculation of pension and other benefits net periodic benefit costs.

A sensitivity analysis of the projected incremental effect of a hypothetical 1/2percentage 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 $10 million and $31 million in the third quarter and first nine months of 2012, respectively, compared to $10 million and $29 million in the comparable periods in 2011.

U. S. Steel and its U. S. Steel Tubular Products, Inc. (USST) subsidiary reached new labor agreements with the United Steelworkers (USW) in September 2012 (the 2012 Labor Agreements), which required remeasurement of the other post-employment benefit (OPEB) plans effective September 1, 2012, to reflect the changes in the benefits provided. The discount rate used for the September 1, 2012 remeasurement was 3.75 percent, as compared to 4.50 percent at December 31, 2011.

As remeasured, the OPEB accumulated postretirement benefit obligation is $270 million lower than at December 31, 2011, primarily due to a decrease of approximately $520 million from benefit and plan design changes in the 2012 Labor Agreements partially offset by an increase of $250 million

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primarily as a result of the reduced discount rate. With the obligation reduction and an increase in the market value of the assets for these OPEB plans at September 1, 2012, the funded status of the OPEB plans improved by approximately $410 million. After the remeasurement, net periodic OPEB expense for 2012 is now projected to total $100 million as compared to $120 million at the January 1, 2012 measurement date.

Other benefits costs, including multiemployer plans, totaled $24 million and $84 million in the third quarter and first nine months of 2012, respectively, compared to $39 million and $119 million in the corresponding periods of 2011. The decrease in other benefit costs is primarily a result of Medicare program changes.

The 2008 Labor Agreements required U. S. Steel to make annual $75 million contributions during the prior contract period to a restricted account within our trust for retiree health care and life insurance. As previously disclosed, U. S. Steel reached agreement with the USW to defer the $75 million contributions. U. S. Steel is required to make the previously deferred contributions of $75 million in each annual period from 2012 through 2015. The 2012 Labor Agreements did not change the previously required contributions and do not include any additional contributions.

Selling, general and administrative expenses

Selling, general and administrative expenses were $166 million and $512 million in the third quarter and first nine months of 2012, compared to $181 million and $550 million in the third quarter and first nine months of 2011. The decrease in both periods is primarily related to the sale of USSS.

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

                                   Quarter Ended                                Nine Months Ended
                                   September 30,               %                  September 30,                 %
(Dollars in millions)            2012          2011          Change           2012             2011           Change
Flat-rolled                     $    29        $ 203             -86 %      $     389         $   541             -28 %
USSE                                 27          (50 )           154 %             27             (73 )           137 %
Tubular                             102          134             -24 %            334             197              70 %

Total income from
reportable segments                 158          287             -45 %            750             665              13 %
Other Businesses                     13            8              63 %             46              30              53 %

Segment income from
operations                          171          295             -42 %            796             695              15 %
Postretirement benefit
expense                             (74 )        (96 )            23 %           (228 )          (287 )            21 %
Other items not allocated
to segments:
Labor agreement lump sum
payments                            (35 )         -                               (35 )            -
Net loss on sale of assets           -            -                              (310 )            -
Property Tax settlements             -            -                                19              -

Total income from
operations                      $    62        $ 199             -69 %      $     242         $   408             -41 %

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Segment results for Flat-rolled

                                    Quarter Ended                                Nine Months Ended
                                    September 30,                                  September 30,
                                                                 %                                               %
                                 2012           2011           Change           2012            2011           Change
Income from operations ($
millions)                       $    29        $   203             -86 %      $    389        $    541             -28 %
Gross margin                          4 %           11 %            -7 %             8 %            11 %            -3 %
Raw steel production (mnt)        4,699          4,516               4 %        14,430          14,008               3 %
Capability utilization               77 %           74 %             3 %            79 %            77 %             2 %
Steel shipments (mnt)             3,972          3,835               4 %        12,050          11,725               3 %
Average realized steel
price per ton                   $   741        $   773              -4 %      $    759        $    765              -1 %

The decrease in Flat-rolled results in the third quarter of 2012 compared to the same period in 2011 resulted from a decrease in average realized prices (approximately $190 million), increased spending and other operating costs (approximately $50 million, which includes outage costs) and lower steel substrate sales to our Tubular segment (approximately $25 million). These decreases were partially offset by reduced energy costs, primarily due to lower natural gas costs (approximately $50 million), lower raw material costs (approximately $20 million) and an increase in shipment volumes (approximately $20 million).

The decrease in Flat-rolled results in the first nine months of 2012 compared to the same period in 2011 resulted mainly from a decrease in average realized prices (approximately $125 million), increased spending and other operating costs (approximately $110 million, which includes outage costs), unfavorable changes from steel substrate sales to our Tubular segment (approximately $75 million) and higher costs for employee profit sharing (approximately $20 million). These decreases were partially offset by reduced energy costs, primarily due to lower natural gas costs (approximately $140 million) and an increase in shipment volumes (approximately $40 million).

Segment results for USSE

                                                Quarter Ended                          Nine Months Ended
                                                September 30,                            September 30,
                                                                          %                                         %
                                              2012         2011         Change         2012          2011         Change
Income (loss) from operations ($ millions)   $    27      $   (50 )         154 %    $      27      $   (73 )         137 %
Gross margin                                      12 %          4 %           8 %            9 %          5 %           4 %
Raw steel production (mnt)                     1,140        1,317           -13 %        3,553        4,429           -20 %
Capability utilization                            90 %         71 %          19 %           90 %         80 %          10 %
Steel shipments (mnt)                            911        1,196           -24 %        2,911        3,779           -23 %
Average realized steel price per ton         $   731      $   862           -15 %    $     749      $   868           -14 %

The improvement in USSE results in the third quarter of 2012 compared to the same period in 2011 was primarily due to lower raw material costs (approximately $100 million), the elimination of operating losses subsequent to January 31, 2012 associated with our former Serbian operations (which were approximately $60 million) and decreased other operating costs (approximately $10 million). These improvements were partially offset by a decrease in average realized prices for USSK (approximately $60 million) and the strengthening of the U.S. dollar versus the euro in the third quarter of 2012 compared to the third quarter of 2011 (approximately $30 million).

The improvement in USSE results in the first nine months of 2012 compared to the same period in 2011 was primarily due to lower raw material costs (approximately $225 million), the elimination of

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operating losses subsequent to January 31, 2012 associated with our former Serbian operations (which were approximately $125 million), decreased other operating costs (approximately $30 million) and increased shipment volumes (approximately $20 million). These improvements were partially offset by a decrease in average realized prices for USSK (approximately $205 million), the strengthening of the U.S. dollar versus the euro in the first nine months of 2012 compared to the first nine months of 2011 (approximately $70 million) and increased energy costs primarily due to increased electricity costs (approximately $25 million).

Segment results for Tubular

                                     Quarter Ended                                Nine Months Ended
                                     September 30,                                  September 30,
                                                                  %                                               %
                                  2012           2011           Change           2012            2011          Change
Income from operations ($
millions)                        $   102        $   134             -24 %      $     334        $   197             70 %
Gross margin                          16 %           18 %            -2 %             16 %           13 %            3 %
Steel shipments (mnt)                457            481              -5 %          1,479          1,330             11 %
Average realized steel price
per ton                          $ 1,676        $ 1,699              -1 %      $   1,704        $ 1,576              8 %

The decrease in Tubular results in the third quarter of 2012 as compared to the same period in 2011 resulted mainly from a decrease in average realized prices (approximately $20 million) and increased spending and other costs (approximately $30 million, which includes spending for facility maintenance). These decreases were partially offset by decreased substrate costs (approximately $20 million).

The improvement in Tubular results in the first nine months of 2012 as compared to the same period in 2011 resulted mainly from an increase in average realized prices (approximately $150 million), lower substrate costs (approximately $45 million), and an increase of 149 thousand tons in shipments (approximately $40 million). These improvements were partially offset by increased spending and other operating costs (approximately $95 million, which includes facility maintenance costs) and higher accruals for profit-based payments (approximately $5 million).

Results for Other Businesses

Other Businesses had income of $13 million and $46 million in the third quarter and first nine months of 2012, compared to income of $8 million and $30 million in the third quarter and first nine months of 2011.

Items not allocated to segments

The decrease in postretirement benefit expense in the third quarter and first nine months of 2012 as compared to the same period in 2011 resulted from lower pension expense 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.

The 2012 Labor Agreements provided for lump sum payments of $2,000 to each covered active USW member. These labor agreement lump sum payments resulted in a pre-tax charge of $35 million in the third quarter of 2012.

We recorded a $310 million pretax net loss on the sale of assets in the first nine months of 2012 which consisted of a pretax loss of $399 million related to . . .

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