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, 2014
Or
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to .
(Exact name of registrant as specified in its charter)
Delaware | 1-16811 | 25-1897152 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||
600 Grant Street, Pittsburgh, PA | 15219-2800 | |
(Address of principal executive offices) | (Zip Code) | |
(412) 433-1121
(Registrant’s telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes P No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ P ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer P | Accelerated filer | Non-accelerated filer | Smaller reporting company | |||
(Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes No P
Common stock outstanding at October 23, 2014 – 145,484,622 shares
INDEX
Page | |||
PART I – FINANCIAL INFORMATION | |||
Item 1. | Financial Statements: | ||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 1. | |||
Item 1A. | |||
Item 4. | |||
Item 6. | |||
UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in millions, except per share amounts) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Net sales: | ||||||||||||||||
Net sales | $ | 4,285 | $ | 3,856 | $ | 12,582 | $ | 12,292 | ||||||||
Net sales to related parties (Note 19) | 302 | 275 | 853 | 863 | ||||||||||||
Total | 4,587 | 4,131 | 13,435 | 13,155 | ||||||||||||
Operating expenses (income): | ||||||||||||||||
Cost of sales (excludes items shown below) | 3,848 | 3,749 | 11,983 | 12,105 | ||||||||||||
Selling, general and administrative expenses | 125 | 153 | 406 | 449 | ||||||||||||
Depreciation, depletion and amortization | 158 | 173 | 489 | 514 | ||||||||||||
Income from investees | (50 | ) | (26 | ) | (103 | ) | (31 | ) | ||||||||
Impairment of goodwill (Note 5) | — | 1,783 | — | 1,783 | ||||||||||||
Restructuring and other charges (Note 20) | 236 | — | 254 | — | ||||||||||||
Loss on deconsolidation of U. S. Steel Canada and other charges (Note 4) | 413 | — | 413 | — | ||||||||||||
Net gain on disposal of assets (Note 21) | (2 | ) | — | (23 | ) | — | ||||||||||
Other expense, net | — | 1 | — | 6 | ||||||||||||
Total | 4,728 | 5,833 | 13,419 | 14,826 | ||||||||||||
(Loss) income from operations | (141 | ) | (1,702 | ) | 16 | (1,671 | ) | |||||||||
Interest expense | 57 | 61 | 178 | 204 | ||||||||||||
Interest income | (2 | ) | — | (4 | ) | (2 | ) | |||||||||
Other financial costs | 5 | 24 | 19 | 55 | ||||||||||||
Net interest and other financial costs (Note 7) | 60 | 85 | 193 | 257 | ||||||||||||
Loss before income taxes and noncontrolling interests | (201 | ) | (1,787 | ) | (177 | ) | (1,928 | ) | ||||||||
Income tax provision (benefit) (Note 9) | 6 | 4 | (4 | ) | 14 | |||||||||||
Net loss | (207 | ) | (1,791 | ) | (173 | ) | (1,942 | ) | ||||||||
Less: Net loss attributable to noncontrolling interests | — | — | — | — | ||||||||||||
Net loss attributable to United States Steel Corporation | $ | (207 | ) | $ | (1,791 | ) | $ | (173 | ) | $ | (1,942 | ) | ||||
Earnings per common share (Note 11): | ||||||||||||||||
Earnings per share attributable to United States Steel Corporation shareholders: | ||||||||||||||||
-Basic | $ | (1.42 | ) | $ | (12.38 | ) | $ | (1.19 | ) | $ | (13.44 | ) | ||||
-Diluted | $ | (1.42 | ) | $ | (12.38 | ) | $ | (1.19 | ) | $ | (13.44 | ) | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Net loss | $ | (207 | ) | $ | (1,791 | ) | $ | (173 | ) | $ | (1,942 | ) | ||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||
Changes in foreign currency translation adjustments | 107 | 31 | 93 | 13 | ||||||||||||
Changes in pension and other employee benefit accounts | 53 | 59 | 175 | 197 | ||||||||||||
Deconsolidation of U. S. Steel Canada (a) | 468 | — | 468 | — | ||||||||||||
Total other comprehensive income, net of tax | 628 | 90 | 736 | 210 | ||||||||||||
Comprehensive income (loss) including noncontrolling interest | 421 | (1,701 | ) | 563 | (1,732 | ) | ||||||||||
Comprehensive income attributable to noncontrolling interest | — | — | — | — | ||||||||||||
Comprehensive income (loss) attributable to United States Steel Corporation | $ | 421 | $ | (1,701 | ) | $ | 563 | $ | (1,732 | ) | ||||||
(a) Consists of $493 million for Pension and other benefit adjustments and $(25) million for currency translation adjustment.
The accompanying notes are an integral part of these consolidated financial statements.
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UNITED STATES STEEL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions) | (Unaudited) September 30, 2014 | December 31, 2013 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,257 | $ | 604 | ||||
Receivables, less allowance of $49 and $53 | 1,876 | 1,818 | ||||||
Receivables from related parties, less allowance of $117 and $0 (Note 19) | 182 | 157 | ||||||
Inventories (Note 12) | 2,199 | 2,688 | ||||||
Income tax receivable (Note 9) | 14 | 185 | ||||||
Deferred income tax benefits (Note 9) | 535 | 576 | ||||||
Other current assets | 38 | 50 | ||||||
Total current assets | 6,101 | 6,078 | ||||||
Property, plant and equipment | 15,058 | 16,799 | ||||||
Less accumulated depreciation and depletion | 10,488 | 10,877 | ||||||
Total property, plant and equipment, net | 4,570 | 5,922 | ||||||
Investments and long-term receivables, less allowance of $9 and $10 | 586 | 621 | ||||||
Long-term receivables from related parties, less allowance of $1,317 and $0 | 400 | — | ||||||
Intangibles – net (Note 5) | 205 | 271 | ||||||
Deferred income tax benefits (Note 9) | 13 | 16 | ||||||
Other noncurrent assets | 133 | 235 | ||||||
Total assets | $ | 12,008 | $ | 13,143 | ||||
Liabilities | ||||||||
Current liabilities: | ||||||||
Accounts payable and other accrued liabilities | $ | 1,941 | $ | 1,681 | ||||
Accounts payable to related parties (Note 19) | 131 | 73 | ||||||
Bank checks outstanding | 26 | — | ||||||
Payroll and benefits payable | 925 | 974 | ||||||
Accrued taxes | 118 | 140 | ||||||
Accrued interest | 73 | 54 | ||||||
Short-term debt and current maturities of long-term debt (Note 13) | 336 | 323 | ||||||
Total current liabilities | 3,550 | 3,245 | ||||||
Long-term debt, less unamortized discount (Note 14) | 3,162 | 3,616 | ||||||
Employee benefits | 554 | 2,064 | ||||||
Deferred income tax liabilities (Note 9) | 411 | 418 | ||||||
Deferred credits and other noncurrent liabilities | 388 | 424 | ||||||
Total liabilities | 8,065 | 9,767 | ||||||
Contingencies and commitments (Note 21) | ||||||||
Stockholders’ Equity (Note 17): | ||||||||
Common stock (150,925,911 shares issued) (Note 11) | 151 | 151 | ||||||
Treasury stock, at cost (5,455,773 and 6,245,666 shares) | (410 | ) | (480 | ) | ||||
Additional paid-in capital | 3,623 | 3,667 | ||||||
Retained earnings | 1,594 | 1,789 | ||||||
Accumulated other comprehensive loss (Note 18) | (1,016 | ) | (1,752 | ) | ||||
Total United States Steel Corporation stockholders’ equity | 3,942 | 3,375 | ||||||
Noncontrolling interests | 1 | 1 | ||||||
Total liabilities and stockholders’ equity | $ | 12,008 | $ | 13,143 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, | ||||||||
(Dollars in millions) | 2014 | 2013 | ||||||
Increase (decrease) in cash and cash equivalents | ||||||||
Operating activities: | ||||||||
Net loss | $ | (173 | ) | $ | (1,942 | ) | ||
Adjustments to reconcile to net cash provided by operating activities: | ||||||||
Depreciation, depletion and amortization | 489 | 514 | ||||||
Impairment of goodwill (Note 5) | — | 1,783 | ||||||
Restructuring and other charges (Note 20) | 254 | — | ||||||
Loss on deconsolidation of U. S. Steel Canada and other charges (Note 4) | 413 | — | ||||||
Provision for doubtful accounts | 4 | (2 | ) | |||||
Pensions and other postretirement benefits | (266 | ) | (143 | ) | ||||
Deferred income taxes | 6 | 3 | ||||||
Net gain on disposal of assets (Note 21) | (23 | ) | — | |||||
Currency remeasurement loss | 32 | 8 | ||||||
Distributions received, net of equity investees income | (96 | ) | (20 | ) | ||||
Changes in: | ||||||||
Current receivables | (312 | ) | 137 | |||||
Inventories | 63 | 15 | ||||||
Current accounts payable and accrued expenses | 586 | (34 | ) | |||||
Income taxes receivable/payable | 167 | 1 | ||||||
Bank checks outstanding | 25 | 40 | ||||||
All other, net | 78 | 61 | ||||||
Net cash provided by operating activities | 1,247 | 421 | ||||||
Investing activities: | ||||||||
Capital expenditures | (282 | ) | (328 | ) | ||||
Acquisition of intangible assets (Note 5) | — | (12 | ) | |||||
Disposal of assets | 28 | — | ||||||
Change in restricted cash, net | 23 | 39 | ||||||
Investments, net | (3 | ) | (8 | ) | ||||
Net cash used in investing activities | (234 | ) | (309 | ) | ||||
Financing activities: | ||||||||
Issuance of long-term debt, net of financing costs of $0 and $15 | — | 575 | ||||||
Repayment of long-term debt | (323 | ) | (542 | ) | ||||
Receipts from exercise of stock options | 10 | — | ||||||
Dividends paid | (22 | ) | (22 | ) | ||||
Net cash (used in) provided by financing activities | (335 | ) | 11 | |||||
Effect of exchange rate changes on cash | (25 | ) | 4 | |||||
Net increase in cash and cash equivalents | 653 | 127 | ||||||
Cash and cash equivalents at beginning of year | 604 | 570 | ||||||
Cash and cash equivalents at end of period | $ | 1,257 | $ | 697 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
United States Steel Corporation (U. S. Steel or the Company) produces and sells steel products, including flat-rolled and tubular products, in North America and Central Europe. Operations in North America also include iron ore and coke production facilities, railroad services and real estate operations. Operations in Europe also include coke production facilities.
The year-end consolidated balance sheet data was derived from audited statements but does not include all disclosures required for complete financial statements by accounting principles generally accepted in the United States of America (U.S. GAAP). The other information in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair statement of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including 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 U.S. GAAP for complete financial statements. Additional information is contained in the United States Steel Corporation Annual Report on Form 10-K for the year ended December 31, 2013, which should be read in conjunction with these financial statements.
Revision of prior period financial statements - During the second quarter of 2014, the Company identified a prior period error related to the accounting for income taxes associated with the 2013 tax restructuring. The effect of the $27 million adjustment has been recorded in the second quarter of 2014 as a revision to retained earnings and long-term deferred tax liabilities on the Company’s consolidated balance sheet as of December 31, 2013. The effects of the revision to the Company’s 2013 financial statements in the 2014 Form 10-K will result in an additional tax benefit of $27 million to the previously reported income tax benefit in the consolidated statement of operations and a corresponding decrease to long-term deferred tax liabilities and an increase in retained earnings of $27 million to the previously reported amounts in the consolidated balance sheet. The Company concluded that the impact of this error was not material to the prior period.
2. New Accounting Standards
On August 27, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 explicitly requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. Currently, there is no guidance in U.S. GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern or to provide related footnote disclosures. ASU 2014-15 is effective for all entities for interim and annual periods beginning after December 15, 2016; early application is permitted. U. S. Steel does not expect any financial statement impact relating to the adoption of this ASU.
On May 28, 2014, the FASB and the International Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016; early application is not permitted. U. S. Steel is evaluating the financial statement implications of adopting ASU 2014-09.
On April 10, 2014, the FASB issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of components of an Entity (ASU 2014-08). ASU 2014-08 amends the definition of a discontinued operation in ASC 205-20 and requires entities to provide additional disclosures about disposal transactions that do not meet the discontinued operations criteria. The revised guidance will change how entities identify and disclose information about disposal transactions under U.S. GAAP. ASU 2014-08 is effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014 and interim periods within those years. U. S. Steel is evaluating the financial statement implications of adopting ASU 2014-08.
On July 18, 2013, the FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). ASU 2013-11 requires the netting of unrecognized tax benefits (UTBs) against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. UTBs are
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required to be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. ASU 2013-11 was effective for interim and annual periods beginning after December 15, 2013. U. S. Steel early adopted ASU 2013-11 in the second quarter of 2013 on a prospective basis. The adoption did not have a significant impact on U. S. Steel's consolidated financial statements.
On March 4, 2013, the FASB issued Accounting Standards Update No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries of Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (ASU 2013-05). ASU 2013-05 applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. In addition, the amendments in ASU 2013-05 resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. ASU 2013-05 was effective for interim and annual periods beginning after December 31, 2013. The adoption did not have a significant impact on U. S. Steel’s consolidated financial statements.
On February 28, 2013, the FASB issued Accounting Standards Update No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for which the Total Amount of the Obligation Is Fixed at the Reporting Date (ASU 2013-04). ASU 2013-04 requires companies to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, as the sum of the amount a company has agreed to pay on the basis of its arrangement among its co-obligors and any additional amount a company expects to pay on behalf of its co-obligors. ASU 2013-04 also requires a company to disclose the nature and amount of the obligation as well as other information about those obligations. ASU 2013-04 was effective for interim and annual periods beginning after December 31, 2013. The adoption did not have a significant impact on U. S. Steel’s consolidated financial statements.
3. Segment Information
U. S. Steel has three reportable segments: Flat-rolled Products (Flat-rolled), U. S. Steel Europe (USSE), and Tubular Products (Tubular). The results of several other operating segments that do not constitute reportable segments, which include railroad services and real estate operations, are combined and disclosed in the Other Businesses category.
On September 16, 2014, U. S. Steel Canada Inc. (USSC), a wholly owned subsidiary of USS, applied for relief from its creditors pursuant to Canada’s Companies’ Creditors Arrangement Act (CCAA). As a result of USSC filing for protection under the CCAA (CCAA filing), U. S. Steel determined that USSC and its subsidiaries would be deconsolidated from U. S. Steel’s financial statements. We recorded a total non-cash charge of $413 million in the third quarter of 2014 related to the deconsolidation of USSC. See Note 4.
The Flat-rolled segment information subsequent to September 16, 2014 does not include USSC. After the deconsolidation of USSC, transactions between U. S. Steel and USSC are considered related party transactions.
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 (income), income taxes, postretirement benefit expenses (other than service cost and amortization of prior service cost for active employees) and certain other items that management believes are not indicative of future results. 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. The transfer value for steel rounds from Flat-rolled to Tubular is based on cost. All other intersegment sales and transfers are accounted for at market-based prices and are eliminated at the corporate consolidation level. 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.
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The results of segment operations for the three months ended September 30, 2014 and 2013 are:
(In millions) Three Months Ended September 30, 2014 | Customer Sales | Intersegment Sales | Net Sales | Income (loss) from investees | Income (loss) from operations | |||||||||||||||
Flat-rolled | $ | 3,125 | $ | 319 | $ | 3,444 | $ | 47 | $ | 347 | ||||||||||
USSE | 687 | 1 | 688 | — | 29 | |||||||||||||||
Tubular | 700 | — | 700 | 3 | 69 | |||||||||||||||
Total reportable segments | 4,512 | 320 | 4,832 | 50 | 445 | |||||||||||||||
Other Businesses | 75 | 33 | 108 | — | 34 | |||||||||||||||
Reconciling Items and Eliminations | — | (353 | ) | (353 | ) | — | (620 | ) | ||||||||||||
Total | $ | 4,587 | $ | — | $ | 4,587 | $ | 50 | $ | (141 | ) | |||||||||
Three Months Ended September 30, 2013 | ||||||||||||||||||||
Flat-rolled | $ | 2,731 | $ | 324 | $ | 3,055 | $ | 28 | $ | 82 | ||||||||||
USSE | 643 | 1 | 644 | — | (32 | ) | ||||||||||||||
Tubular | 731 | 2 | 733 | (1 | ) | 49 | ||||||||||||||
Total reportable segments | 4,105 | 327 | 4,432 | 27 | 99 | |||||||||||||||
Other Businesses | 26 | 32 | 58 | (1 | ) | 14 | ||||||||||||||
Reconciling Items and Eliminations | — | (359 | ) | (359 | ) | — | (1,815 | ) | ||||||||||||
Total | $ | 4,131 | $ | — | $ | 4,131 | $ | 26 | $ | (1,702 | ) | |||||||||
The results of segment operations for the nine months ended September 30, 2014 and 2013 are:
(In millions) Nine Months Ended September 30, 2014 | Customer Sales | Intersegment Sales | Net Sales | Income (loss) from investees | Income (loss) from operations | |||||||||||||||
Flat-rolled | $ | 9,089 | $ | 947 | $ | 10,036 | $ | 98 | $ | 462 | ||||||||||
USSE | 2,203 | 45 | 2,248 | — | 99 | |||||||||||||||
Tubular | 2,030 | 2 | 2,032 | 8 | 140 | |||||||||||||||
Total reportable segments | 13,322 | 994 | 14,316 | 106 | 701 | |||||||||||||||
Other Businesses | 113 | 101 | 214 | (3 | ) | 64 | ||||||||||||||
Reconciling Items and Eliminations | — | (1,095 | ) | (1,095 | ) | — | (749 | ) | ||||||||||||
Total | $ | 13,435 | $ | — | $ | 13,435 | $ | 103 | $ | 16 | ||||||||||
Nine Months Ended September 30, 2013 | ||||||||||||||||||||
Flat-rolled | $ | 8,710 | $ | 985 | $ | 9,695 | $ | 41 | $ | 18 | ||||||||||
USSE | 2,204 | 3 | 2,207 | — | 16 | |||||||||||||||
Tubular | 2,126 | 4 | 2,130 | (7 | ) | 158 | ||||||||||||||
Total reportable segments | 13,040 | 992 | 14,032 | 34 | 192 | |||||||||||||||
Other Businesses | 115 | 101 | 216 | (3 | ) | 62 | ||||||||||||||
Reconciling Items and Eliminations | — | (1,093 | ) | (1,093 | ) | — | (1,925 | ) | ||||||||||||
Total | $ | 13,155 | $ | — | $ | 13,155 | $ | 31 | $ | (1,671 | ) | |||||||||
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The following is a schedule of reconciling items to income (loss) from operations:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(In millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Items not allocated to segments: | ||||||||||||||||
Postretirement benefit expense (a) | $ | (26 | ) | $ | (55 | ) | $ | (90 | ) | $ | (165 | ) | ||||
Other items not allocated to segments: | ||||||||||||||||
Loss on deconsolidation of U. S. Steel Canada and other charges (Note 4) | (413 | ) | — | (413 | ) | — | ||||||||||
Impairment of carbon alloy facilities (Note 20) | (199 | ) | — | (199 | ) | — | ||||||||||
Write-off of pre-engineering costs (Note 20) | (37 | ) | — | (37 | ) | — | ||||||||||
Gain on sale of real estate assets (b) | 55 | — | 55 | — | ||||||||||||
Litigation reserves (Note 21) | — | — | (70 | ) | — | |||||||||||
Loss on assets held for sale (Note 20) | — | — | (14 | ) | — | |||||||||||
Curtailment gain (Note 6) | — | — | 19 | — | ||||||||||||
Impairment of goodwill (Note 5) | — | (1,783 | ) | — | (1,783 | ) | ||||||||||
Supplier contract dispute settlement | — | 23 | — | 23 | ||||||||||||
Total other items not allocated to segments | (594 | ) | (1,760 | ) | (659 | ) | (1,760 | ) | ||||||||
Total reconciling items | $ | (620 | ) | $ | (1,815 | ) | $ | (749 | ) | $ | (1,925 | ) | ||||
(a) Consists of the net periodic benefit cost elements, other than service cost and amortization of prior service cost for active employees, associated with our pension, retiree health care and life insurance benefit plans.
(b) Gain on sale of surface rights and mineral royalty revenue streams in the state of Alabama.
4. Deconsolidation of U. S. Steel Canada and other charges
Restructuring and Creditor Protection
U. S. Steel Canada Inc. (USSC), an indirect wholly owned subsidiary of U. S. Steel, with unanimous approval from its Board of Directors applied for relief from its creditors pursuant to CCAA on September 16, 2014. The CCAA filing was approved by the Ontario Superior Court of Justice (the Court) on September 16, 2014 and grants USSC creditor protection while it formulates a plan of restructuring. To assist USSC with its plan of restructuring, the Court confirmed the engagement by USSC of a chief restructuring officer, the appointment of a monitor and certain other financial advisors. As of the date of the CCAA filing, any proceedings pending against USSC, or currently underway affecting USSC’s business operations or property, have been stayed pending further order by the Court.
As a result of the CCAA proceedings, U. S. Steel no longer has a controlling financial interest over USSC, as defined under ASC 810, Consolidation, and therefore has deconsolidated USSC’s financial position as of the end of the day on September 15, 2014. This has resulted in a pretax loss on deconsolidation and other charges of $413 million, which includes approximately $20 million of professional fees. The pretax loss on deconsolidation includes the derecognition of the carrying amounts of USSC's assets and liabilities and accumulated other comprehensive loss that were previously consolidated in U. S. Steel's consolidated balance sheet and the impact of recording the retained interest in USSC. Subsequent to the deconsolidation, U. S. Steel will account for USSC using the cost method of accounting, which has been reflected as zero in U. S. Steel’s consolidated balance sheet as of September 30, 2014, due to the negative equity associated with USSC’s underlying financial position.
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The following disclosure represents USSC’s assets, liabilities and accumulated other comprehensive loss which have been deconsolidated from U. S. Steel’s consolidated balance sheet as of the end of the day on September 15, 2014. The amounts presented are before the elimination of balances with U. S. Steel, presenting USSC as if on a stand-alone basis.
(Dollars in millions) | September 15, 2014 | ||
Assets | |||
Current assets: | |||
Cash and cash equivalents | $ | 80 | |
Receivables | 291 | ||
Inventories | 373 | ||
Other current assets | 6 | ||
Total current assets | 750 | ||
Property, plant and equipment, net | 840 | ||
Other noncurrent assets | 126 | ||
Total assets | $ | 1,716 | |
Liabilities | |||
Current liabilities: | |||
Accounts payable | $ | 435 | |
Other current liabilities | 149 | ||
Total current liabilities | 584 | ||
Long-term debt | 126 | ||
Long-term notes payable | 1,733 | ||
Employee benefits | 948 | ||
Other noncurrent liabilities | 29 | ||
Total liabilities | 3,420 | ||
Stockholders’ Equity | |||
Additional paid-in capital | 2,268 | ||
Retained earnings | (3,504 | ) | |
Accumulated other comprehensive loss | (468 | ) | |
Total stockholders’ equity | (1,704 | ) | |
Noncontrolling interests | — | ||
Total liabilities and stockholders’ equity | $ | 1,716 | |
USSC’s results of operations have been removed from U. S. Steel’s consolidated statement of operations beginning September 16, 2014. Because USSC remains a wholly owned subsidiary of U. S. Steel, as of September 30, 2014, and does not meet the requirements of a discontinued operation, USSC’s results of operations continue to be included in our consolidated statement of operations through September 15, 2014. Our consolidated statements of operations include the following amounts for USSC’s results of operations. The amounts presented are before the elimination of transactions with U. S. Steel, presenting USSC as if on a stand-alone basis.
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(Dollars in millions) | Period from July 1, 2014 - September 15, 2014 | Three months ended September 30, 2013 | Period from January 1, 2014 - September 15, 2014 | Nine months ended September 30, 2013 | |||||||||||
Total net sales | $ | 447 | $ | 282 | $ | 1,508 | $ | 960 | |||||||
Total operating expenses | 467 | 1,026 | 1,587 | 1,941 | |||||||||||
Loss from continuing operations | (20 | ) | (744 | ) | (79 | ) | (981 | ) | |||||||
Net interest and other financial costs | 37 | 39 | 121 | 142 | |||||||||||
Loss before income taxes | (57 | ) | (783 | ) | (200 | ) | (1,123 | ) | |||||||
Income tax benefit | — | — | — | — | |||||||||||
Net loss | $ | (57 | ) | $ | (783 | ) | $ | (200 | ) | $ | (1,123 | ) | |||
Related Party Transactions
Prior to the deconsolidation, U. S. Steel made loans to USSC for the purpose of funding its operations and had net trade accounts receivable in the ordinary course of business. The loans, the corresponding interest and the net trade accounts receivable were considered intercompany transactions and were eliminated in the consolidated U. S. Steel financial statements. As of the deconsolidation date, the loans, associated interest and net trade accounts receivable are now considered third party transactions and have been recognized in U. S. Steel's consolidated financial statements based upon the recoverability of their carrying amounts and whether or not the amounts are secured or unsecured. U. S. Steel has estimated a recovery rate based upon the fair value of the net assets of USSC available for distribution to its creditors in relation to the secured and unsecured creditor claims in the CCAA filing.
Fair values of the Hamilton Works finishing operations, Hamilton Works coke operations and Lake Erie Works (the USSC Businesses) were used to determine the recoverability of the loans receivable, accrued interest receivable and the net trade accounts receivable using various valuation approaches depending on the type of assets being valued and the highest and best use of those assets. The Hamilton Works finishing operations were valued under a liquidation basis using replacement costs, market comparables, and other recoverability measures as it had negative cash flows on a discounted cash flow basis, while the remainder of the USSC Businesses were valued on a going concern basis.
The going concern fair value for the Hamilton Works coke operations and Lake Erie Works was determined based upon an income approach using a discounted cash flow (DCF) analysis, discounted at an appropriate risk-adjusted rate.
The amount and timing of future cash flows within the DCF analysis and the liquidation basis were based on the following inputs within the fair value framework prescribed by ASC Topic 820, Fair Value Measurements, in the table below.
Level 2 Other Observable Inputs | Level 3 Other Unobservable Inputs |
Market Participant Weighted Average Cost of Capital (1) | Recent Operating Budgets |
Perpetual Growth Rate (2) | Long Range Strategic Plans |
Market Comparables | Estimated Shipments |
Replacement Cost | Projected Raw Material Costs |
Projected Margins | |
Recoverability Measures | |
(1) Ranged from 15.54% - 18.31%
(2) Set at approximately 2%
Actual results may differ from those assumed in U. S. Steel’s forecasts for the USSC Businesses.
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The total fair values associated with the underlying net assets of the USSC Businesses were then compared to the estimated outstanding creditor claims, both secured and unsecured, to determine the expected recoverability. This has resulted in a fair value of the retained interest in the intercompany loans, interest receivable and trade accounts receivable of $432 million, net of an allowance for doubtful accounts of $1,448 million, which has been reflected as a component of the loss on deconsolidation of USSC and other charges in the consolidated statement of operations.
For further information regarding USSC’s related party transactions with U. S. Steel subsequent to the date of deconsolidation, see Transactions with Related Parties at Note 19.
Debtor-in Possession Financing
In conjunction with the CCAA filing, U. S. Steel agreed to provide a debtor-in-possession (DIP) credit facility to USSC, that was approved by the Court on October 8, 2014, and provides for borrowings under the facility of a maximum commitment of C$185 million (approximately $165 million). The DIP facility will be primarily used for USSC’s working capital needs as well as to provide support for any guarantees, letters of credit and other forms of credit support related to USSC’s operations and contains certain covenants governing the terms and provisions of the DIP facility.
Borrowings under the DIP facility will bear interest at a rate of 5% annually on outstanding principal balances. Interest on the DIP will be due and payable on the first business day of the month. Upon an occurrence of default, the interest rate will be increased by 2%. USSC will pay U. S. Steel a lending fee of 2% of the maximum commitment which is payable from the initial DIP advance. If the DIP facility is repaid using funds advanced to USSC by a party other than U. S. Steel, prior to USSC emerging from CCAA protection, USSC will pay U. S. Steel an exit fee of approximately 3% of the maximum commitment.
All outstanding amounts owed to U. S. Steel pursuant to the DIP facility will be due and payable by USSC on the earliest of the occurrence of any of the following: (i) December 31, 2015; (ii) the implementation of a plan of reorganization under the CCAA proceeding; (iii) conversion of the CCAA proceeding into a proceeding under the Bankruptcy and Insolvency Act (Canada); (iv) the completion of the sale of all or substantially all of the assets of USSC; or (v) an event of default.
Amounts borrowed by USSC under the DIP facility will have a priority claim over certain other secured and unsecured claims subsequent to USSC emerging from CCAA protection. As of September 30, 2014, there were no amounts drawn under the DIP facility.
5. Goodwill and 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 goodwill impairment involves using either a qualitative or quantitative approach as outlined in ASC Topic 350, Intangibles - Goodwill and Other. U. S. Steel completed its annual goodwill impairment evaluation using the two-step quantitative analysis during the third quarter of 2013. We had two reporting units that included nearly all of our goodwill: our Flat-rolled reporting unit and our Texas Operations reporting unit, which is part of our Tubular operating segment. The results of the second step analysis showed the implied fair value of goodwill was zero for both of our reporting units and therefore, in 2013, U. S. Steel recorded a goodwill impairment charge of $969 million and $837 million for the Flat-rolled reporting unit and the Texas Operations reporting unit, respectively.
As a result of this goodwill impairment charge, there is no goodwill remaining within the Flat-rolled and Tubular segments. Goodwill remaining on our consolidated balance sheet at September 30, 2014 is $4 million within the USSE reporting unit and is included as a component of other noncurrent assets.
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Amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives and are detailed below:
As of September 30, 2014 | As of December 31, 2013 | |||||||||||||||||||||||||
(In millions) | Useful Lives | Gross Carrying Amount | Accumulated Amortization | Net Amount | Gross Carrying Amount | Accumulated Amortization | Net Amount | |||||||||||||||||||
Customer relationships (a) | 22 Years | $ | 132 | $ | 45 | $ | 87 | $ | 215 | $ | 63 | $ | 152 | |||||||||||||
Other | 2-20 Years | 23 | 13 | 10 | 23 | 12 | 11 | |||||||||||||||||||
Total amortizable intangible assets | $ | 155 | $ | 58 | $ | 97 | $ | 238 | $ | 75 | $ | 163 | ||||||||||||||
(a) Amounts associated with USSC totaling $56 million were removed as of the end of the day on September 15, 2014.
The carrying amount of acquired water rights with indefinite lives as of both September 30, 2014 and December 31, 2013 totaled $75 million. The water rights are tested for impairment annually in the third quarter. U. S. Steel performed a qualitative impairment evaluation of its water rights for 2014. The 2014 and prior year tests indicated the water rights were not impaired.
During 2013, U. S. Steel acquired indefinite-lived intangible assets for $12 million and entered into an agreement to make future payments contingent upon certain factors. The aggregate purchase price was $36 million, and U. S. Steel allocated $33 million to indefinite-lived intangible assets, based upon their estimated fair value. The liability for contingent consideration will be reassessed each quarter. The maximum potential liability for contingent consideration is $53 million. As of September 30, 2014, U. S. Steel has recorded a liability of $24 million to reflect the estimated fair value of the contingent consideration. Contingent consideration was valued using a probability weighted discounted cash flow using both Level 2 inputs based on 2013 Standard and Poor’s Bond Guide as well as Level 3, significant other unobservable inputs, based on internal forecasts and the weighted average cost of capital derived from market data.
Identifiable intangible assets with finite lives are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. During the third quarter of 2013, U. S. Steel completed a review of its identifiable intangible assets with finite lives and determined that the assets were not impaired. There were no such events or circumstances during the third quarter of 2014 that required a review for impairment.
Amortization expense was $2 million in the three months ended September 30, 2014 and $3 million in the three months ended September 30, 2013 and $8 million in both the nine months ended September 30, 2014 and 2013. The estimated future amortization expense of identifiable intangible assets during the next five years is $2 million for the remaining portion of 2014 and $7 million each year from 2015 to 2018.
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6. Pensions and Other Benefits
The following table reflects the components of net periodic benefit cost for the three months ended September 30, 2014 and 2013:
Pension Benefits | Other Benefits | |||||||||||||||
(In millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Service cost | $ | 27 | $ | 32 | $ | 5 | $ | 7 | ||||||||
Interest cost | 103 | 100 | 33 | 35 | ||||||||||||
Expected return on plan assets | (147 | ) | (152 | ) | (37 | ) | (33 | ) | ||||||||
Amortization of prior service cost | 6 | 6 | (4 | ) | (3 | ) | ||||||||||
Amortization of actuarial net loss | 67 | 92 | — | 8 | ||||||||||||
Net periodic benefit cost, excluding below | 56 | 78 | (3 | ) | 14 | |||||||||||
Multiemployer plans | 19 | 19 | — | — | ||||||||||||
Settlement, termination and curtailment losses | 13 | 3 | — | — | ||||||||||||
Net periodic benefit cost | $ | 88 | $ | 100 | $ | (3 | ) | $ | 14 | |||||||
The following table reflects the components of net periodic benefit cost for the nine months ended September 30, 2014 and 2013:
Pension Benefits | Other Benefits | |||||||||||||||
(In millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Service cost | $ | 81 | $ | 96 | $ | 17 | $ | 21 | ||||||||
Interest cost | 321 | 303 | 106 | 106 | ||||||||||||
Expected return on plan assets | (454 | ) | (459 | ) | (106 | ) | (98 | ) | ||||||||
Amortization of prior service cost | 17 | 18 | (11 | ) | (10 | ) | ||||||||||
Amortization of actuarial net loss (gain) | 208 | 275 | (2 | ) | 23 | |||||||||||
Net periodic benefit cost, excluding below | 173 | 233 | 4 | 42 | ||||||||||||
Multiemployer plans | 56 | 55 | — | — | ||||||||||||
Settlement, termination and curtailment losses/(gains) | 28 | 3 | (19 | ) | — | |||||||||||
Net periodic benefit cost | $ | 257 | $ | 291 | $ | (15 | ) | $ | 42 | |||||||
Settlements and Curtailments
Pension settlements have taken place in the non-qualified pension plan related to the retirement of several U. S. Steel executives that occurred throughout 2013. In accordance with Internal Revenue Code requirements, these executives were required to wait six months before receiving their non-qualified pension payments.
A curtailment gain of $19 million was recognized in the nine months ended September 30, 2014 due to a change to the post retirement medical benefits for non-union, pre-Medicare retirees that will take effect after 2017.
Employer Contributions
During the first nine months of 2014, U. S. Steel made $47 million in required cash contributions to the USSC pension plans prior to the deconsolidation of USSC (see Note 4), cash payments of $56 million to the Steelworkers’ Pension Trust and $83 million of pension payments not funded by trusts.
During the first nine months of 2014, cash payments of $180 million were made for other postretirement benefit payments not funded by trusts.
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Company contributions to defined contribution plans totaled $11 million in both the three months ended September 30, 2014 and 2013. Company contributions to defined contribution plans totaled $35 million and $33 million for the nine months ended September 30, 2014 and 2013, respectively.
Pension Funding
In November 2013, U. S. Steel's Board of Directors authorized voluntary contributions to U. S. Steel's trusts for pensions and other benefits of up to $300 million through the end of 2015. U. S. Steel made voluntary contributions to our main U.S. defined benefit plan of $140 million during the first nine months of 2014 and 2013.
7. Net Interest and Other Financial Costs
Net interest and other financial costs includes interest expense (net of capitalized interest), interest income, financing costs, derivatives gains and losses and foreign currency remeasurement gains and losses. Foreign currency gains and losses are a result of foreign currency denominated assets and liabilities that require remeasurement. During the three months ended September 30, 2014 and 2013, net foreign currency remeasurement gains of less than $1 million and $3 million, respectively, were recorded in other financial costs. During the nine months ended September 30, 2014 and 2013, net foreign currency remeasurement losses of $1 million and $9 million, respectively, were recorded in other financial costs.
For the three and nine months ended September 30, 2013, net interest and other financial costs also included a charge of $22 million related to a guarantee of an unconsolidated equity investment for which payment by U. S. Steel is probable (See Note 21). Also included in the nine months ended September 30, 2013 is a charge of $34 million related to repurchases of approximately $542 million aggregate principal amount of our 4.00% Senior Convertible Notes due May 15, 2014.
See Note 13 for additional information on U. S. Steel’s use of derivatives to mitigate its foreign currency exchange rate exposure.
8. Stock-Based Compensation Plans
U. S. Steel has outstanding stock-based compensation awards that were granted by the Compensation & Organization Committee of the Board of Directors (the Committee) under the 2005 Stock Incentive Plan (the Plan), which is more fully described in Note 12 of the United States Steel Corporation 2013 Annual Report on Form 10-K. An aggregate of 21,250,000 shares of U. S. Steel common stock may be issued under the Plan. As of September 30, 2014, 4,930,655 shares were available for future grants.
During the first quarter of 2014, the Committee added return on capital employed (ROCE) as a second performance measure for the 2014 Performance Awards as permitted under the terms of the Plan. Prior to 2014, performance awards were based solely on a total shareholder return (TSR) metric. ROCE awards granted will be measured on a weighted average basis of the Company’s consolidated worldwide income from operations, as adjusted, divided by consolidated worldwide capital employed, as adjusted, over a three year period.
Weighted average ROCE is calculated based on the ROCE achieved in the first, second and third years of the performance period, weighted at 20 percent, 30 percent and 50 percent, respectively. The ROCE awards will payout at approximately 50 percent at the threshold level, 100 percent at the target level and 200 percent at the maximum level. Amounts in between the threshold percentages will be interpolated.
Compensation expense associated with the ROCE awards will be contingent based upon the achievement of the specified ROCE metric as outlined in the Plan and will be adjusted on a quarterly basis to reflect the probability of achieving the ROCE metric.
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Recent grants of stock-based compensation consist of stock options, restricted stock units, and TSR and ROCE performance awards. Stock options are generally issued at the market price of the underlying stock on the date of the grant. The 2013 executive grants, however, were issued at the greater of (1) the premium exercise price of $25 or (2) the market price on the grant date. Upon exercise of stock options, shares of U. S. Steel stock are issued from treasury stock. The following table is a general summary of the awards made under the Plan.
2014 Grants | 2013 Grants | ||||||||||
Grant Details | Shares(a) | Fair Value(b) | Shares(a) | Fair Value(b) | |||||||
Executive Stock Options | 441,960 | $ | 9.93 | 826,340 | $ | 8.37 | |||||
Non-executive Stock Options | 1,054,480 | $ | 9.93 | 970,640 | $ | 9.70 | |||||
Restricted Stock Units | 724,510 | $ | 24.29 | 1,033,210 | $ | 18.58 | |||||
Performance Awards(c) | |||||||||||
TSR | 282,770 | $ | 22.09 | 271,960 | $ | 21.26 | |||||
ROCE | 262,800 | $ | 23.76 | — | $ | — | |||||
(a) The share amounts shown in this table do not reflect an adjustment for estimated forfeitures.
(b) Represents the per share weighted-average for all grants during the year.
(c) The number of performance awards shown represents the target value of the award.
U. S. Steel recognized pretax stock-based compensation cost in the amount of $9 million in both the three month periods ended September 30, 2014 and 2013, and $26 million and $28 million in the first nine months of 2014 and 2013, respectively.
As of September 30, 2014, total future compensation cost related to nonvested stock-based compensation arrangements was $46 million, and the weighted average period over which this cost is expected to be recognized is approximately 1.3 years.
Compensation expense for stock options is recorded over the vesting period based on the fair value on the date of grant, as calculated by U. S. Steel using the Black-Scholes model and the assumptions listed below. The stock options vest ratably over a three-year service period and have a term of ten years.
Black-Scholes Assumptions(a) | 2014 Grants | 2013 Executive Grants | 2013 Non-Executive Grants | |||||||
Grant date price per share of option award | $ | 24.29 | $ | 18.48 | $ | 18.64 | ||||
Exercise price per share of option award | $ | 24.29 | $ | 25.00 | $ | 18.64 | ||||
Expected annual dividends per share, at grant date | $ | 0.20 | $ | 0.20 | $ | 0.20 | ||||
Expected life in years | 5.0 | 5.0 | 5.0 | |||||||
Expected volatility | 49 | % | 66 | % | 67 | % | ||||
Risk-free interest rate | 1.621 | % | 1.315 | % | 1.049 | % | ||||
Grant date fair value per share of unvested option awards as calculated from above | $ | 9.93 | $ | 8.37 | $ | 9.70 | ||||
(a) The assumptions represent a weighted average of all grants during the year.
The expected annual dividends per share are based on the latest annualized dividend rate at the date of grant; the expected life in years is determined primarily from historical stock option exercise data; the expected volatility is based on the historical volatility of U. S. Steel stock; and the risk-free interest rate is based on the U.S. Treasury strip rate for the expected life of the option.
Restricted stock units generally vest ratably over three years. The fair value of the restricted stock units is the market price of the underlying common stock on the date of the grant.
TSR performance awards vest at the end of a three-year performance period as a function of U. S. Steel's total shareholder return compared to the total shareholder return of a group of peer companies over the three-year performance period. TSR performance awards can vest at between zero and 200 percent of the target award. The fair value of the TSR performance awards is calculated using a Monte-Carlo simulation.
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ROCE performance awards vest at the end of a three-year performance period contingent upon meeting the specified ROCE metric. ROCE performance awards can vest at between zero and 200 percent of the target award. The fair value of the ROCE performance awards is the average market price of the underlying common stock on the date of grant.
9. Income Taxes
Tax provision
For the nine months ended September 30, 2014 and 2013, we recorded a tax benefit of $4 million on our pretax loss of $177 million and a tax provision of $14 million on our pretax loss of $1.9 billion, respectively. Included in the tax benefit in the first nine months of 2014 is a discrete benefit of $30 million related to the loss on deconsolidation of USSC and other charges as discussed in Note 4, as well as a discrete benefit related to the antitrust settlement discussed in Note 21. The tax provision reflects a benefit for percentage depletion in excess of cost depletion for iron ore that we produce and consume or sell. The tax provision does not reflect any tax benefit for pretax losses in Canada, prior to the deconsolidation on September 16, 2014, which is a jurisdiction where we had recorded a full valuation allowance on deferred tax assets.
The tax benefit for the first nine months of 2014 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, plant operating performance and cost estimates. To the extent that actual 2014 pretax results for U.S. and foreign income or loss vary from estimates applied herein, the actual tax provision or benefit recognized in 2014 could be materially different from the forecasted amount used to estimate the tax provision for the nine months ended September 30, 2014.
Income tax refunds
During 2014, U. S. Steel has received $176 million representing the majority of its expected federal income tax refund related to the carryback of our 2013 net operating loss to prior years.
Unrecognized tax benefits
Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken, in a tax return and the benefit recognized for accounting purposes pursuant to the guidance in ASC Topic 740 on income taxes. The total amount of gross unrecognized tax benefits was $114 million at September 30, 2014 and $127 million at December 31, 2013. The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $60 million as of September 30, 2014 and $69 million as of December 31, 2013.
U. S. Steel records interest related to uncertain tax positions as a part of net interest and other financial costs in the consolidated statement of operations. Any penalties are recognized as part of selling, general and administrative expenses. As of both September 30, 2014 and December 31, 2013, U. S. Steel had accrued liabilities of $7 million for interest related to uncertain tax positions. U. S. Steel currently does not have a liability for tax penalties.
Deferred taxes
As of September 30, 2014, the net domestic deferred tax asset was $95 million compared to $115 million at December 31, 2013. A substantial amount of U. S. Steel’s domestic deferred tax assets relates to employee benefits that will become deductible for tax purposes over an extended period of time as cash contributions are made to employee benefit plans and retiree benefits are paid in the future. We continue to believe it is more likely than not that the net domestic deferred tax asset will be realized.
As of September 30, 2014, the net foreign deferred tax asset was $42 million, net of established valuation allowances of $5 million. At December 31, 2013, the net foreign deferred tax asset was $59 million, net of established valuation allowances of $1,028 million. The net foreign deferred tax asset will fluctuate as the value of the U.S. dollar changes with respect to the euro. At December 31, 2013, a full valuation allowance was recorded for the net Canadian deferred tax asset primarily due to cumulative losses in Canada. The Canadian deferred tax asset and the related valuation allowance were deconsolidated from U. S. Steel's balance sheet as of the end of the day on September 15, 2014.
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10. Significant Equity Investments
Summarized unaudited income statement information for our significant equity investments for the nine months ended September 30, 2014 and 2013 is reported below (amounts represent 100% of investee financial information):
(In millions) | 2014 | 2013 | ||||||
Net sales | $ | 1,977 | $ | 1,841 | ||||
Cost of sales | 1,505 | 1,395 | ||||||
Operating income | 427 | 399 | ||||||
Net income | 412 | 382 | ||||||
Net income attributable to significant equity investments | 412 | 382 | ||||||
U. S. Steel’s portion of the equity in net income of the significant equity investments above was $89 million and $50 million for the nine months ended September 30, 2014 and 2013, respectively, which is included in the income from investees line on the consolidated statement of operations.
11. Earnings and Dividends Per Common Share
Earnings Per Share Attributable to United States Steel Corporation Shareholders
Basic earnings per common share is based on the weighted average number of common shares outstanding during the period.
Diluted earnings per common share assumes the exercise of stock options, the vesting of restricted stock units and performance awards and the conversion of convertible notes, provided in each case the effect is dilutive. The "if-converted" method was used to calculate the dilutive effect of the 2014 Senior Convertible Notes due May 2014 (2014 Senior Convertible Notes) and the dilutive effect of such securities was included in the calculation for the period prior to repurchase on May 15, 2014. The “treasury stock” method is used to calculate the dilutive effect of the Senior Convertible Notes due in 2019 (due to our current intent and policy, among other factors, to settle the principal amount of the 2019 Senior Convertible Notes in cash upon conversion).
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The computations for basic and diluted earnings per common share from continuing operations are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in millions, except per share amounts) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Net loss attributable to United States Steel Corporation shareholders | $ | (207 | ) | $ | (1,791 | ) | $ | (173 | ) | $ | (1,942 | ) | ||||
Plus income effect of assumed conversion-interest on convertible notes | — | — | — | — | ||||||||||||
Net loss after assumed conversion | $ | (207 | ) | $ | (1,791 | ) | $ | (173 | ) | $ | (1,942 | ) | ||||
Weighted-average shares outstanding (in thousands): | ||||||||||||||||
Basic | 145,348 | 144,727 | 144,999 | 144,523 | ||||||||||||
Effect of convertible notes | — | — | — | — | ||||||||||||
Effect of stock options, restricted stock units and performance awards | — | — | — | — | ||||||||||||
Adjusted weighted-average shares outstanding, diluted | 145,348 | 144,727 | 144,999 | 144,523 | ||||||||||||
Basic earnings per common share | $ | (1.42 | ) | $ | (12.38 | ) | $ | (1.19 | ) | $ | (13.44 | ) | ||||
Diluted earnings per common share | $ | (1.42 | ) | $ | (12.38 | ) | $ | (1.19 | ) | $ | (13.44 | ) | ||||
The following table summarizes the securities that were antidilutive, and therefore, were not included in the computations of diluted earnings per common share:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
(In thousands) | 2014 | 2013 | 2014 | 2013 | |||||||
Securities granted under the 2005 Stock Incentive Plan | 8,865 | 7,621 | 8,865 | 7,621 | |||||||
Securities convertible under the Senior Convertible Notes (a) | 3,477 | 10,058 | 6,523 | 15,351 | |||||||
Total | 12,342 | 17,679 | 15,388 | 22,972 | |||||||
(a) On March 27, 2013, we repurchased approximately $542 million aggregate principal amount of our 2014 Senior Convertible Notes. If the repurchases had occurred on January 1, 2013, the antidilutive securities would be 10,058 for the nine months ended September 30, 2013. Additionally, on May 15, 2014, we redeemed the remaining amount due under the 2014 Senior Convertible Notes. If the redemption had occurred on January 1, 2014, the antidilutive securities would be zero for the nine months ended September 30, 2014.
Dividends Paid Per Share
The dividend for each of the first three quarters of 2014 and 2013 was five cents per common share.
12. Inventories
Inventories are carried at the lower of cost or market. The first-in, first-out method is the predominant method of inventory costing in Europe. The last-in, first-out (LIFO) method is the predominant method of inventory costing in the United States. At September 30, 2014 and December 31, 2013, the LIFO method accounted for 74 percent and 59 percent of total inventory values, respectively.
(In millions) | September 30, 2014 | December 31, 2013 | ||||||
Raw materials | $ | 608 | $ | 1,011 | ||||
Semi-finished products | 994 | 1,023 | ||||||
Finished products | 518 | 558 | ||||||
Supplies and sundry items | 79 | 96 | ||||||
Total | $ | 2,199 | $ | 2,688 | ||||
Current acquisition costs were estimated to exceed the above inventory values by $1.0 billion at both September 30, 2014 and December 31, 2013. As a result of the liquidation of LIFO inventories, cost of sales
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decreased and income from operations increased by $8 million in the three months ended September 30, 2014 and by $1 million in the nine months ended September 30, 2014. Cost of sales increased and income from operations decreased by $3 million in both the three and nine months ended September 30, 2013 as a result of the liquidation of LIFO inventories.
Inventory includes $69 million and $81 million of property held for residential or commercial development as of September 30, 2014 and December 31, 2013, respectively.
13. Derivative Instruments
U. S. Steel is exposed to foreign currency exchange rate risks as a result of our European operations and our Canadian operations (prior to the deconsolidation of USSC). USSE’s revenues are primarily in euros and costs are primarily in U.S. dollars and euros. USSC’s revenues and costs were denominated in both Canadian and U.S. dollars. In addition, foreign cash requirements have been, and in the future may be, funded by intercompany loans, creating intercompany monetary assets and liabilities in currencies other than the functional currency of the entities involved, which can affect income when remeasured at the end of each period.
U. S. Steel uses euro forward sales contracts with maturities no longer than 12 months to exchange euros for U.S. dollars to manage our currency requirements and exposure to foreign currency exchange rate fluctuations. Derivative instruments are required to be recognized at fair value in the consolidated balance sheet. U. S. Steel has not elected to designate these euro forward sales contracts as hedges. Therefore, changes in their fair value are recognized immediately in the results of operations. The gains and losses recognized on the euro forward sales contracts may also partially offset the accounting remeasurement gains and losses recognized on intercompany loans.
As of September 30, 2014, U. S. Steel held euro forward sales contracts with a total notional value of approximately $409 million. We mitigate the risk of concentration of counterparty credit risk by purchasing our forward sales contracts from several counterparties.
Additionally, U. S. Steel uses fixed-price forward physical purchase contracts to partially manage our exposure to price risk related to the purchases of natural gas and certain nonferrous metals used in the production process. During 2014 and 2013, the forward physical purchase contracts for natural gas and nonferrous metals qualified for the normal purchases and normal sales exemption described in ASC Topic 815 and were not subject to mark-to-market accounting.
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The following summarizes the location and amounts of the fair values and gains or losses related to derivatives included in U. S. Steel’s consolidated financial statements as of September 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013:
Fair Value | Fair Value | |||||||||
(In millions) | Balance Sheet Location | September 30, 2014 | December 31, 2013 | |||||||
Foreign exchange forward contracts | Accounts receivable | $ | 28 | $ | — | |||||
Foreign exchange forward contracts | Accounts payable | $ | — | $ | 11 | |||||
Statement of Operations Location | Amount of Gain (Loss) | Amount of Gain (Loss) | ||||||||
(In millions) | Three Months Ended September 30, 2014 | Nine months ended September 30, 2014 | ||||||||
Foreign exchange forward contracts | Other financial costs | $ | 33 | $ | 36 | |||||
Statement of Operations Location | Amount of Gain (Loss) | Amount of Gain (Loss) | ||||||||
(In millions) | Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2013 | ||||||||
Foreign exchange forward contracts | Other financial costs | $ | (11 | ) | $ | (7 | ) | |||
In accordance with the guidance found in ASC Topic 820 on fair value measurements and disclosures, the fair value of our euro forward sales contracts was determined using Level 2 inputs, which are defined as “significant other observable” inputs. The inputs used are from market sources that aggregate data based upon market transactions.
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14. Debt
(In millions) | Interest Rates % | Maturity | September 30, 2014 | December 31, 2013 | ||||||||
2037 Senior Notes | 6.65 | 2037 | $ | 350 | $ | 350 | ||||||
2022 Senior Notes | 7.50 | 2022 | 400 | 400 | ||||||||
2021 Senior Notes | 6.875 | 2021 | 275 | 275 | ||||||||
2020 Senior Notes | 7.375 | 2020 | 600 | 600 | ||||||||
2018 Senior Notes | 7.00 | 2018 | 500 | 500 | ||||||||
2017 Senior Notes | 6.05 | 2017 | 450 | 450 | ||||||||
2019 Senior Convertible Notes | 2.75 | 2019 | 316 | 316 | ||||||||
2014 Senior Convertible Notes | 4.00 | 2014 | — | 322 | ||||||||
USSC Province Note (C$150 million) (a) | 1.00 | 2015 | — | 141 | ||||||||
Environmental Revenue Bonds | 5.38 - 6.88 | 2015 - 2042 | 549 | 549 | ||||||||
Recovery Zone Facility Bonds | 6.75 | 2040 | 70 | 70 | ||||||||
Fairfield Caster Lease | 2022 | 34 | 35 | |||||||||
Other capital leases and all other obligations | 2020 | — | — | |||||||||
Amended Credit Agreement | Variable | 2016 | — | — | ||||||||
USSK Revolver | Variable | 2016 | — | — | ||||||||
USSK credit facilities | Variable | 2015 - 2016 | — | — | ||||||||
Total Debt | 3,544 | 4,008 | ||||||||||
Less Province Note fair value adjustment (a) | — | 15 | ||||||||||
Less unamortized discount | 46 | 54 | ||||||||||
Less short-term debt and long-term debt due within one year | 336 | 323 | ||||||||||
Long-term debt | $ | 3,162 | $ | 3,616 | ||||||||
(a) As a result of USSC's CCAA filing, the USSC Province Note has been deconsolidated from U. S. Steel's consolidated balance sheet as of September 15, 2014. See Note 4 for additional details.
To the extent not otherwise discussed below, information concerning the Senior Notes, the Senior Convertible Notes and other listed obligations can be found in Note 14 of the audited financial statements in the 2013 Annual Report on Form 10-K.
In May 2014, U. S. Steel redeemed the remaining $322 million principal amount of our 2014 Senior Convertible Notes with cash. The aggregate price, including accrued and unpaid interest, for the 2014 Senior Convertible Notes was approximately $327 million.
2019 Senior Convertible Notes Reclassification
The CCAA filing on September 16, 2014 is an event of default under the terms of the Province Note loan agreement between USSC and the Province of Ontario. The failure of USSC to pay the Province Note would constitute an event of default under the indenture for the 2019 Senior Convertible Notes (2019 Notes) that enables the holders of the 2019 Notes to declare them immediately due and payable. It is U. S. Steel’s intent to settle the 2019 Notes in cash if the holders exercise their options to call the notes. In addition to the CCAA filing, the 2019 Notes have met certain conversion options based on the Company's stock price, which made the 2019 Notes eligible for immediate conversion by the holders at September 30, 2014. As a result of these events, the 2019 Notes have been reclassified from long-term to short-term in our consolidated balance sheet as of September 30, 2014.
Amended Credit Agreement
As of September 30, 2014, there were no amounts drawn on the Amended Credit Agreement and inventory values calculated in accordance with the Amended Credit Agreement supported the full $875 million of the facility. Under the Amended Credit Agreement, U. S. Steel must maintain a fixed charge coverage ratio (as further defined in the Amended Credit Agreement) of at least 1.00 to 1.00 for the most recent four consecutive quarters when availability under the Amended Credit Agreement is less than the greater of 10% of the total
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aggregate commitments and $87.5 million. Since availability was greater than $87.5 million, compliance with the fixed charge coverage ratio covenant was not applicable.
On July 23, 2014, the Company amended its Amended Credit Agreement to designate USSC and each subsidiary of USSC formed under the laws of Canada or any province thereof as an excluded subsidiary and to waive any event of default that may occur as a result of the 2019 Notes being accelerated or caused to be accelerated as a result of specified actions of USSC.
Receivables Purchase Agreement
As of September 30, 2014, U. S. Steel has a Receivables Purchase Agreement (RPA) under which trade accounts receivable are sold, on a daily basis without recourse, to U. S. Steel Receivables, LLC (USSR), a wholly owned, bankruptcy-remote, special purpose entity used only for the securitization program. As U. S. Steel accesses this facility, USSR sells senior undivided interests in the receivables to a third-party and a third-party commercial paper conduit, while maintaining a subordinated undivided interest in a portion of the receivables. U. S. Steel has agreed to continue servicing the sold receivables at market rates.
At both September 30, 2014 and December 31, 2013, eligible accounts receivable supported $625 million of availability under the RPA and there were no receivables sold to third-party conduits under this facility. The subordinated retained interest was $625 million at both September 30, 2014 and December 31, 2013. Availability under the RPA was $575 million at September 30, 2014, and $572 million at December 31, 2013, due to letters of credit outstanding of $50 million and $53 million, respectively.
USSR pays the third parties a discount based on the third-parties’ borrowing costs plus incremental fees. We paid approximately $1 million for each of the three months ended September 30, 2014 and 2013, and approximately $3 million for each of the nine months ended September 30, 2014 and 2013, relating to fees on the RPA. These costs are included in other financial costs in the consolidated statement of operations.
Generally, the facility provides that as payments are collected from the sold accounts receivables, USSR may elect to have the third-parties reinvest the proceeds in new eligible accounts receivable. As there was no activity under this facility during the nine months ended September 30, 2014 and 2013, there were no collections reinvested.
The eligible accounts receivable and receivables sold to third party conduits are summarized below:
(In millions) | September 30, 2014 | December 31, 2013 | ||||||
Balance of accounts receivable-net, eligible for sale to third-parties | $ | 1,166 | $ | 988 | ||||
Accounts receivable sold to third-parties | — | — | ||||||
Balance included in Receivables on the balance sheet of U. S. Steel | $ | 1,166 | $ | 988 | ||||
The net book value of U. S. Steel’s retained interest in the receivables represents the best estimate of the fair market value due to the short-term nature of the receivables. The retained interest in the receivables is recorded net of the allowance for bad debts, which historically have not been significant.
The facility may be terminated on the occurrence and failure to cure certain events, including, among others, failure of USSR to maintain certain ratios related to the collectability of the receivables and failure to make payment under its material debt obligations, and may also be terminated upon a change of control. The facility expires in July 2016.
On July 23, 2014, the RPA was amended to (a) modify a termination event so that if USSC and any of its subsidiaries organized in Canada failed to pay any principal of or premium or interest on any of its debt that is outstanding in a principal amount of at least $100 million, and (b) waive any termination event occurring as a result of the acceleration by the holders of the Company's 2019 Notes due to the acceleration of any debt of USSC or any of its subsidiaries but only if the notes are promptly paid in full.
U. S. Steel Košice (USSK) credit facilities
At September 30, 2014, USSK had no borrowings under its €200 million (approximately $252 million) unsecured revolving credit facility (the Credit Agreement). The Credit Agreement contains certain USSK financial covenants (as further defined in the Credit Agreement), including maximum Leverage, maximum Net Debt to Tangible Net
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Worth, and minimum Interest Cover ratios. The covenants are measured semi-annually for the period covering the last twelve calendar months. USSK may not draw on the Credit Agreement if it does not comply with any of the financial covenants until the next measurement date. The Credit Agreement expires in July 2016.
At September 30, 2014, USSK had no borrowings under its €20 million and €10 million unsecured credit facilities (collectively approximately $38 million) and the availability was approximately $37 million due to approximately $1 million of customs and other guarantees outstanding.
Change in control event
If there is a change in control of U. S. Steel, the following may occur: (a) debt obligations totaling $2,891 million as of September 30, 2014 (including the Senior Notes and Senior Convertible Notes) may be declared immediately due and payable; (b) the Amended Credit Agreement, the RPA and USSK’s €200 million revolving credit agreement may be terminated and any amounts outstanding declared immediately due and payable; and (c) U. S. Steel may be required to either repurchase the leased Fairfield Works slab caster for $37 million or provide a letter of credit to secure the remaining obligation.
15. Asset Retirement Obligations
U. S. Steel’s asset retirement obligations (AROs) primarily relate to mine and landfill closure and post-closure costs. The following table reflects changes in the carrying values of AROs:
(In millions) | September 30, 2014 | December 31, 2013 | ||||||
Balance at beginning of year | $ | 59 | $ | 33 | ||||
Additional obligations incurred | — | 28 | ||||||
Obligations settled(a) | (18 | ) | (7 | ) | ||||
Foreign currency translation effects | (1 | ) | — | |||||
Accretion expense | 3 | 5 | ||||||
Balance at end of period | $ | 43 | $ | 59 | ||||
(a) Includes $16 million as a result of the deconsolidation of USSC as of the end of the day on September 15, 2014. See Note 4 for additional details.
Certain AROs related to disposal costs of the majority of fixed assets at our integrated steel facilities have not been recorded because they have an indeterminate settlement date. These AROs will be initially recognized in the period in which sufficient information exists to estimate their fair value.
16. Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, current accounts and notes receivable, accounts payable, bank checks outstanding, accrued interest and certain equity method investee guarantees included in the consolidated balance sheet approximate fair value due to their short-term nature. See Note 13 for disclosure of U. S. Steel’s derivative instruments, which are accounted for at fair value on a recurring basis. Additionally, see Note 4 for disclosure of short-term and long-term receivables from related parties which are accounted for at fair value.
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The following table summarizes U. S. Steel’s financial assets and liabilities that were not carried at fair value at September 30, 2014 and December 31, 2013.
September 30, 2014 | December 31, 2013 | |||||||||||||||
(In millions) | Fair Value | Carrying Amount | Fair Value | Carrying Amount | ||||||||||||
Financial assets: | ||||||||||||||||
Investments and long-term receivables (a) | $ | 45 | $ | 45 | $ | 63 | $ | 63 | ||||||||
Financial liabilities: | ||||||||||||||||
Debt (b) | $ | 3,957 | $ | 3,464 | $ | 4,198 | $ | 3,904 | ||||||||
(a) Excludes equity method investments.
(b) Excludes capital lease obligations.
The following methods and assumptions were used to estimate the fair value of financial instruments included in the table above:
Investments and long-term receivables: Fair value was based on Level 2 inputs which were discounted cash flows. U. S. Steel is subject to market risk and liquidity risk related to its investments.
Long-term debt instruments: Fair value was determined using Level 2 inputs which were derived from quoted market prices and is based on the yield on public debt where available or current borrowing rates available for financings with similar terms and maturities.
Fair value of the financial assets and liabilities disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.
Financial guarantees are U. S. Steel’s only unrecognized financial instrument. For details relating to financial guarantees see Note 21.
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17. Statement of Changes in Stockholders’ Equity
The following table reflects the first nine months of 2014 and 2013 reconciliation of the carrying amount of total equity, equity attributable to U. S. Steel and equity attributable to noncontrolling interests:
Nine Months Ended September 30, 2014 (In millions) | Total | Comprehensive Income (Loss) | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Common Stock | Treasury Stock | Paid-in Capital | Non- Controlling Interest | ||||||||||||||||||||||||
Balance at beginning of year | $ | 3,376 | $ | 1,789 | $ | (1,752 | ) | $ | 151 | $ | (480 | ) | $ | 3,667 | $ | 1 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||
Net loss | (173 | ) | (173 | ) | (173 | ) | ||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||||||||
Pension and other benefit adjustments | 175 | 175 | 175 | |||||||||||||||||||||||||||||
Currency translation adjustment | 93 | 93 | 93 | |||||||||||||||||||||||||||||
Deconsolidation of U. S. Steel Canada (a) | 468 | 468 | 468 | |||||||||||||||||||||||||||||
Employee stock plans | 26 | 70 | (44 | ) | ||||||||||||||||||||||||||||
Dividends paid on common stock | (22 | ) | (22 | ) | ||||||||||||||||||||||||||||
Balance at September 30, 2014 | $ | 3,943 | $ | 563 | $ | 1,594 | $ | (1,016 | ) | $ | 151 | $ | (410 | ) | $ | 3,623 | $ | |||||||||||||||