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, 2018
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 ü 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 [ ü ] 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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ü | Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging growth company(a) __ | ||||
(a) If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___ | ||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes No ü
Common stock outstanding at October 26, 2018 – 177,268,638 shares
INDEX
Page | |||
PART I – FINANCIAL INFORMATION | |||
Item 1. | Financial Statements: | ||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 1. | |||
Item 1A. | |||
Item 4. | |||
Item 5. | |||
Item 6. | |||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains information that may constitute ”forward-looking statements” within the meaning of Section 27 of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in those sections. Generally, we have identified such forward-looking statements by using the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “target,” “forecast,” “aim,” "should," “will” and similar expressions or by using future dates in connection with any discussion of, among other things, operating performance, trends, events or developments that we expect or anticipate will occur in the future, statements relating to volume growth, share of sales and earnings per share growth, and statements expressing general views about future operating results. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. Forward-looking statements are not historical facts, but instead represent only the Company’s beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of the Company’s control. It is possible that the Company’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Management believes that these forward-looking statements are reasonable as of the time made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. Our Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to the risks and uncertainties described in this report and in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, and those described from time to time in our future reports filed with the Securities and Exchange Commission.
References in this Quarterly Report on Form 10-Q to "U. S. Steel," "the Company," "we," "us," and "our" refer to United States Steel Corporation and its consolidated subsidiaries unless otherwise indicated by the context.
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) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net sales: | ||||||||||||||||
Net sales | 3,351 | $ | 2,976 | $ | 9,415 | $ | 8,176 | |||||||||
Net sales to related parties (Note 20) | 378 | 272 | 1,072 | 941 | ||||||||||||
Total (Note 5) | 3,729 | 3,248 | 10,487 | 9,117 | ||||||||||||
Operating expenses (income): | ||||||||||||||||
Cost of sales (excludes items shown below) | 3,172 | 2,828 | 9,101 | 8,110 | ||||||||||||
Selling, general and administrative expenses | 81 | 75 | 251 | 223 | ||||||||||||
Depreciation, depletion and amortization | 126 | 118 | 384 | 376 | ||||||||||||
Earnings from investees | (17 | ) | (9 | ) | (39 | ) | (29 | ) | ||||||||
Gain on equity investee transactions (Note 24) | — | (21 | ) | (18 | ) | (21 | ) | |||||||||
Gain associated with retained interest in U. S. Steel Canada Inc. (Note 23) | — | — | — | (72 | ) | |||||||||||
Restructuring and other charges (Note 21) | — | (2 | ) | — | 30 | |||||||||||
Net gain on disposal of assets | (5 | ) | (1 | ) | (3 | ) | (2 | ) | ||||||||
Other income, net | (1 | ) | — | — | (5 | ) | ||||||||||
Total | 3,356 | 2,988 | 9,676 | 8,610 | ||||||||||||
Earnings before interest and income taxes | 373 | 260 | 811 | 507 | ||||||||||||
Interest expense | 41 | 60 | 134 | 173 | ||||||||||||
Interest income | (6 | ) | (5 | ) | (16 | ) | (13 | ) | ||||||||
Loss on debt extinguishment (Note 9) | 3 | 31 | 77 | 32 | ||||||||||||
Other financial costs | 2 | 12 | 4 | 37 | ||||||||||||
Net periodic benefit cost (other than service cost) (Note 3) (a) | 19 | 15 | 53 | 47 | ||||||||||||
Net interest and other financial costs (Note 9) | 59 | 113 | 252 | 276 | ||||||||||||
Earnings before income taxes | 314 | 147 | 559 | 231 | ||||||||||||
Income tax provision (Note 11) | 23 | — | 36 | 3 | ||||||||||||
Net earnings | 291 | 147 | 523 | 228 | ||||||||||||
Less: Net earnings attributable to noncontrolling interests | — | — | — | — | ||||||||||||
Net earnings attributable to United States Steel Corporation | $ | 291 | $ | 147 | $ | 523 | $ | 228 | ||||||||
Earnings per common share (Note 12): | ||||||||||||||||
Earnings per share attributable to United States Steel Corporation stockholders: | ||||||||||||||||
-Basic | $ | 1.64 | $ | 0.84 | $ | 2.96 | $ | 1.30 | ||||||||
-Diluted | $ | 1.62 | $ | 0.83 | $ | 2.92 | $ | 1.29 | ||||||||
(a) Represents postretirement benefit expense as a result of the adoption of Accounting Standards Update 2017-07, Compensation - Retirement Benefits on January 1, 2018.
The accompanying notes are an integral part of these consolidated financial statements.
-1-
UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net earnings | $ | 291 | $ | 147 | $ | 523 | $ | 228 | ||||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||
Changes in foreign currency translation adjustments | (10 | ) | 44 | (58 | ) | 149 | ||||||||||
Changes in pension and other employee benefit accounts | 50 | 55 | 143 | 146 | ||||||||||||
Changes in derivative financial instruments | 7 | 8 | (11 | ) | 6 | |||||||||||
Total other comprehensive income, net of tax | 47 | 107 | 74 | 301 | ||||||||||||
Comprehensive income including noncontrolling interest | 338 | 254 | 597 | 529 | ||||||||||||
Comprehensive income attributable to noncontrolling interest | — | — | — | — | ||||||||||||
Comprehensive income attributable to United States Steel Corporation | $ | 338 | $ | 254 | $ | 597 | $ | 529 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
-2-
UNITED STATES STEEL CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions) | September 30, 2018 | December 31, 2017 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents (Note 6) | $ | 1,344 | $ | 1,553 | ||||
Receivables, less allowance of $29 and $28 | 1,463 | 1,173 | ||||||
Receivables from related parties (Note 20) | 210 | 206 | ||||||
Inventories (Note 13) | 1,950 | 1,738 | ||||||
Other current assets | 101 | 85 | ||||||
Total current assets | 5,068 | 4,755 | ||||||
Property, plant and equipment | 15,698 | 15,086 | ||||||
Less accumulated depreciation and depletion | 11,055 | 10,806 | ||||||
Total property, plant and equipment, net | 4,643 | 4,280 | ||||||
Investments and long-term receivables, less allowance of $9 and $11 | 508 | 480 | ||||||
Intangibles – net (Note 7) | 160 | 167 | ||||||
Deferred income tax benefits (Note 11) | 56 | 56 | ||||||
Other noncurrent assets | 134 | 124 | ||||||
Total assets | $ | 10,569 | $ | 9,862 | ||||
Liabilities | ||||||||
Current liabilities: | ||||||||
Accounts payable and other accrued liabilities | $ | 2,419 | $ | 2,096 | ||||
Accounts payable to related parties (Note 20) | 106 | 74 | ||||||
Payroll and benefits payable | 425 | 347 | ||||||
Accrued taxes | 144 | 132 | ||||||
Accrued interest | 38 | 69 | ||||||
Current portion of long-term debt (Note 15) | 4 | 3 | ||||||
Total current liabilities | 3,136 | 2,721 | ||||||
Long-term debt, less unamortized discount and debt issuance costs (Note 15) | 2,498 | 2,700 | ||||||
Employee benefits | 666 | 759 | ||||||
Deferred income tax liabilities (Note 11) | 7 | 6 | ||||||
Deferred credits and other noncurrent liabilities | 320 | 355 | ||||||
Total liabilities | 6,627 | 6,541 | ||||||
Contingencies and commitments (Note 22) | ||||||||
Stockholders’ Equity (Note 18): | ||||||||
Common stock (177,354,654 and 176,424,554 shares issued) (Note 12) | 177 | 176 | ||||||
Treasury stock, at cost (96,399 shares and 1,203,344 shares) | (3 | ) | (76 | ) | ||||
Additional paid-in capital | 3,909 | 3,932 | ||||||
Retained earnings | 629 | 133 | ||||||
Accumulated other comprehensive loss (Note 19) | (771 | ) | (845 | ) | ||||
Total United States Steel Corporation stockholders’ equity | 3,941 | 3,320 | ||||||
Noncontrolling interests | 1 | 1 | ||||||
Total liabilities and stockholders’ equity | $ | 10,569 | $ | 9,862 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
-3-
UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, | ||||||||
(Dollars in millions) | 2018 | 2017 | ||||||
Increase (decrease) in cash, cash equivalents and restricted cash | ||||||||
Operating activities: | ||||||||
Net earnings | $ | 523 | $ | 228 | ||||
Adjustments to reconcile to net cash provided by operating activities: | ||||||||
Depreciation, depletion and amortization | 384 | 376 | ||||||
Gain associated with retained interest in U. S. Steel Canada Inc. (Note 23) | — | (72 | ) | |||||
Gain on equity investee transactions (Note 24) | (18 | ) | (21 | ) | ||||
Restructuring and other charges (Note 21) | — | 30 | ||||||
Loss on debt extinguishment (Note 9) | 77 | 32 | ||||||
Provision for doubtful accounts | 4 | 1 | ||||||
Pensions and other postretirement benefits | 57 | 42 | ||||||
Deferred income taxes (Note 11) | 1 | 7 | ||||||
Net gain on disposal of assets | (3 | ) | (2 | ) | ||||
Equity investee earnings, net of distributions received | (35 | ) | (18 | ) | ||||
Changes in: | ||||||||
Current receivables | (357 | ) | (214 | ) | ||||
Inventories | (228 | ) | (123 | ) | ||||
Current accounts payable and accrued expenses | 302 | 121 | ||||||
Income taxes receivable/payable | 53 | 15 | ||||||
Bank checks outstanding | 1 | 12 | ||||||
All other, net | (39 | ) | 132 | |||||
Net cash provided by operating activities | 722 | 546 | ||||||
Investing activities: | ||||||||
Capital expenditures | (646 | ) | (291 | ) | ||||
Disposal of assets | 10 | — | ||||||
Proceeds from sale of ownership interest in equity investee (Note 24) | — | 105 | ||||||
Investments, net | (1 | ) | (3 | ) | ||||
Net cash used in investing activities | (637 | ) | (189 | ) | ||||
Financing activities: | ||||||||
Issuance of long-term debt, net of financing costs (Note 15) | 640 | 737 | ||||||
Repayment of long-term debt (Note 15) | (922 | ) | (906 | ) | ||||
Dividends paid | (27 | ) | (26 | ) | ||||
Receipt from exercise of stock options | 34 | 14 | ||||||
Taxes paid for equity compensation plans (Note 10) | (9 | ) | (10 | ) | ||||
Net cash used in financing activities | (284 | ) | (191 | ) | ||||
Effect of exchange rate changes on cash | (13 | ) | 15 | |||||
Net (decrease) increase in cash, cash equivalents and restricted cash | (212 | ) | 181 | |||||
Cash, cash equivalents and restricted cash at beginning of year (Note 6) | 1,597 | 1,555 | ||||||
Cash, cash equivalents and restricted cash at end of period (Note 6) | $ | 1,385 | $ | 1,736 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
-4-
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation and Significant Accounting Policies
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 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 fiscal year ended December 31, 2017, which should be read in conjunction with these financial statements.
2. New Accounting Standards
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14). ASU 2018-14 removes certain disclosures that the FASB no longer considers cost beneficial, adds certain disclosure requirements and clarifies others. ASU 2018-14 is effective for public companies for fiscal years beginning after December 15, 2020, with early adoption permitted. U. S. Steel is currently assessing the impact of the ASU on its defined benefit plan disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which adds an impairment model that is based on expected losses rather than incurred losses. Under ASU 2016-13, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 is effective for public companies for fiscal years beginning after December 15, 2019 including interim reporting periods, with early adoption permitted. U. S. Steel is currently assessing the impact of the ASU, but does not believe this ASU will have a material impact on its overall Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02). ASU 2016-02 supersedes prior lease accounting guidance. Under ASU 2016-02, for operating leases, a lessee should recognize in its statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term; recognize a single lease cost, which is allocated over the lease term, generally on a straight line basis, and classify all cash payments within operating activities in the statement of cash flows. For financing leases, a lessee is required to recognize a right-of-use asset and a lease liability; recognize interest on the lease liability separately from amortization of the right-of-use asset, and classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. In addition, at the inception of a contract, an entity should determine whether the contract is or contains a lease. ASU 2016-02 is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) - Targeted Improvements (ASU 2018-11), which provides an option to use a modified retrospective transition method at the adoption date. U. S. Steel expects to adopt the new lease accounting standard at the adoption date using the optional modified retrospective transition method outlined in ASU 2018-11. U. S. Steel has completed its inventory of leases. Based on our lease portfolio and estimated secured borrowing rates at September 30, 2018, we anticipate that the impact of adoption will result in an insignificant cumulative effect of adoption and a right of use asset and total lease liability in the range of $200 million to $275 million. We estimate that the short-term portion of the total lease liability will be between $45 million and $75 million. We anticipate changes in our lease portfolio and estimated borrowing rates which will cause the actual impact of adoption to vary.
-5-
3. Recently Adopted Accounting Standards
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). ASU 2018-02 allows a reclassification from Accumulated Other Comprehensive Income to Retained Earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (2017 Act). The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and for interim periods therein; early adoption is permitted. U. S. Steel adopted ASU 2018-02 on July 1, 2018, and elected not to reclassify the stranded tax effects related to the 2017 Act. As a result, the adoption did not have an impact on the Company's Consolidated Financial Statements. U. S. Steel's accounting policy is to release stranded income tax effects from AOCI when the circumstances upon which the stranded tax effects are premised cease to exist.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12), which amends and simplifies hedge accounting guidance so that companies could more accurately present the economic effects of risk management activities in the financial statements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. U. S. Steel adopted the provisions of ASU 2017-12 on January 1, 2018. The adoption did not result in a material impact to our financial results; however, we expanded our use of hedge accounting effective January 1, 2018 as well as our disclosures of derivative activity. See Note 14 for further details.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting (ASU 2017-09). The amendments included in ASU 2017-09 provide guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. On January 1, 2018, U. S. Steel adopted the provisions of ASU 2017-09 and the adoption did not have an impact on its Consolidated Financial Statements.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (ASU 2017-07). ASU 2017-07 requires an employer who offers defined benefit and postretirement benefit plans to report the service cost component of the net periodic benefit cost in the same line item or items as other compensation cost arising from services rendered by employees during the period. The other components of net periodic benefit costs are required to be presented on a retrospective basis in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The ASU also allows for the service cost component of net periodic benefit cost to be eligible for capitalization into inventory when applicable. ASU 2017-07 was effective for periods beginning after December 15, 2017, including interim periods within those annual periods; early adoption was permitted. U. S. Steel adopted ASU 2017-07 on January 1, 2018. U. S. Steel has historically capitalized the service cost component of net periodic benefit cost into inventory, when applicable, and will continue to do so prospectively.
The effect of the retrospective presentation change related to the net periodic benefit cost of our defined benefit pension and other post-employment benefits (OPEB) plans on our consolidated statement of operations was as follows:
Three Months Ended September 30, 2017 | ||||||||||||
Statement of Operations (In millions) | As Revised | Previously Reported | Effect of Change Higher/(Lower) | |||||||||
Cost of Sales | $ | 2,828 | $ | 2,829 | $ | (1 | ) | |||||
Selling, general and administrative expenses | 75 | 89 | (14 | ) | ||||||||
Net periodic benefit cost (other than service cost) | 15 | — | 15 | |||||||||
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Nine Months Ended September 30, 2017 | ||||||||||||
Statement of Operations (In millions) | As Revised | Previously Reported | Effect of Change Higher/(Lower) | |||||||||
Cost of Sales | $ | 8,110 | $ | 8,115 | $ | (5 | ) | |||||
Selling, general and administrative expenses | 223 | 265 | (42 | ) | ||||||||
Net periodic benefit cost (other than service cost) | 47 | — | 47 | |||||||||
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18). The ASU reduced diversity in practice in the classification and presentation of changes in restricted cash on the statement of cash flows by including restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. On January 1, 2018, U. S. Steel adopted the provisions of ASU 2016-18 using a retrospective transition method. As a result, the Change in Restricted Cash, Net line that was included in the investing activities section of the Consolidated Statement of Cash Flows has been eliminated as changes in restricted cash are now included in the beginning-of-period and end-of-period total cash, cash equivalents and restricted cash amounts. Expanded disclosures have been included, which describe the components of cash shown on the Company's Consolidated Statements of Cash Flows. See Note 6 for further details.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 reduced diversity in practice in how certain transactions are classified in the statement of cash flows by addressing eight specific cash receipt and cash payment issues. On January 1, 2018, U. S. Steel adopted the provisions of ASU 2016-15 using a retrospective transition method. As a result, all payments to extinguish debt will now be presented as cash outflows from financing activities on our Consolidated Statement of Cash Flows in accordance with ASU 2016-15. U. S. Steel has historically presented make-whole premiums as cash outflows from operating activities. There was a $4 million cash outflow for make-whole premiums that was reclassified from cash provided by operating activities to the repayment of long-term debt line within the cash used in financing activities section on the Consolidated Statement of Cash Flows for the nine months ended September 30, 2017. The other cash receipt and cash payment items addressed in ASU 2016-15 did not have an impact on the Company’s Consolidated Statement of Cash Flows. Additionally, the Company has elected to use the cumulative earnings approach as defined in ASU 2016-15 to classify distributions received from equity method investees.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 and its related amendments (Revenue Recognition Standard) outline a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded most previous revenue recognition guidance. On January 1, 2018, U. S. Steel adopted the Revenue Recognition Standard using the full retrospective method. Generally, U. S. Steel’s performance obligations are satisfied, control of our products is transferred, and revenue is recognized at a single point in time. The adoption did not have a financial statement impact to U. S. Steel but did result in expanded disclosures. See Note 5 for further details.
4. Segment Information
U. S. Steel has three reportable segments: (1) Flat-Rolled Products (Flat-Rolled), which consists of the following three commercial entities that directly interact with our customers and service their needs: (i) automotive solutions, (ii) consumer solutions, and (iii) industrial, service center and mining solutions; (2) U. S. Steel Europe (USSE); and (3) Tubular Products (Tubular). The results of our railroad and real estate businesses that do not constitute reportable segments are combined and disclosed in the Other Businesses category.
The chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being earnings (loss) before interest and income taxes. Earnings (loss) before interest and income taxes for reportable segments and Other Businesses does not include net interest and other financial costs (income), income taxes, and certain other items that management believes are not indicative of future results.
The accounting principles applied at the operating segment level in determining earnings (loss) before interest and income taxes are generally the same as those applied at the consolidated financial statement level.
-7-
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.
The results of segment operations for the three months ended September 30, 2018 and 2017 are:
(In millions) Three Months Ended September 30, 2018 | Customer Sales | Intersegment Sales | Net Sales | Earnings from investees | Earnings (loss) before interest and income taxes | |||||||||||||||
Flat-Rolled | $ | 2,632 | $ | 32 | $ | 2,664 | $ | 15 | $ | 305 | ||||||||||
USSE | 767 | 4 | 771 | — | 72 | |||||||||||||||
Tubular | 313 | 2 | 315 | 2 | 7 | |||||||||||||||
Total reportable segments | 3,712 | 38 | 3,750 | 17 | 384 | |||||||||||||||
Other Businesses | 17 | 31 | 48 | — | 16 | |||||||||||||||
Reconciling Items and Eliminations | — | (69 | ) | (69 | ) | — | (27 | ) | ||||||||||||
Total | $ | 3,729 | $ | — | $ | 3,729 | $ | 17 | $ | 373 | ||||||||||
Three Months Ended September 30, 2017 | ||||||||||||||||||||
Flat-Rolled | $ | 2,249 | $ | 42 | $ | 2,291 | $ | 7 | $ | 161 | ||||||||||
USSE | 710 | 1 | 711 | — | 73 | |||||||||||||||
Tubular | 276 | — | 276 | 2 | (7 | ) | ||||||||||||||
Total reportable segments | 3,235 | 43 | 3,278 | 9 | 227 | |||||||||||||||
Other Businesses | 13 | 29 | 42 | — | 12 | |||||||||||||||
Reconciling Items and Eliminations | — | (72 | ) | (72 | ) | — | 21 | |||||||||||||
Total | $ | 3,248 | $ | — | $ | 3,248 | $ | 9 | $ | 260 | ||||||||||
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The results of segment operations for the nine months ended September 30, 2018 and 2017 are:
(In millions) Nine Months Ended September 30, 2018 | Customer Sales | Intersegment Sales | Net Sales | Earnings (Loss) from investees | Earnings (loss) before interest and income taxes | |||||||||||||||
Flat-Rolled | $ | 7,114 | $ | 148 | $ | 7,262 | $ | 34 | $ | 562 | ||||||||||
USSE | 2,438 | 20 | 2,458 | — | 297 | |||||||||||||||
Tubular | 888 | 4 | 892 | 5 | (55 | ) | ||||||||||||||
Total reportable segments | 10,440 | 172 | 10,612 | 39 | 804 | |||||||||||||||
Other Businesses | 47 | 94 | 141 | — | 44 | |||||||||||||||
Reconciling Items and Eliminations | — | (266 | ) | (266 | ) | — | (37 | ) | ||||||||||||
Total | $ | 10,487 | $ | — | $ | 10,487 | $ | 39 | $ | 811 | ||||||||||
Nine Months Ended September 30, 2017 | ||||||||||||||||||||
Flat-Rolled | $ | 6,265 | $ | 154 | $ | 6,419 | $ | 24 | $ | 293 | ||||||||||
USSE | 2,123 | 25 | 2,148 | — | 215 | |||||||||||||||
Tubular | 682 | — | 682 | 6 | (93 | ) | ||||||||||||||
Total reportable segments | 9,070 | 179 | 9,249 | 30 | 415 | |||||||||||||||
Other Businesses | 47 | 89 | 136 | (1 | ) | 34 | ||||||||||||||
Reconciling Items and Eliminations | — | (268 | ) | (268 | ) | — | 58 | |||||||||||||
Total | $ | 9,117 | $ | — | $ | 9,117 | $ | 29 | $ | 507 | ||||||||||
The following is a schedule of reconciling items to consolidated earnings (loss) before interest and income taxes:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(In millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Items not allocated to segments: | ||||||||||||||||
Gain on equity investee transactions (Note 24) | $ | — | $ | 21 | $ | 18 | $ | 21 | ||||||||
Granite City Works restart costs | (27 | ) | — | (63 | ) | — | ||||||||||
Granite City Works adjustment to temporary idling charges | — | — | 8 | — | ||||||||||||
Loss on shutdown of certain tubular assets (a) | — | — | — | (35 | ) | |||||||||||
Gain associated with retained interest in U. S. Steel Canada Inc. (Note 23) | — | — | — | 72 | ||||||||||||
Total reconciling items | $ | (27 | ) | $ | 21 | $ | (37 | ) | $ | 58 | ||||||
(a) Included in Restructuring and other charges in the Consolidated Statement of Operations. See Note 21 to the Consolidated Financial Statements.
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5. Revenue
Revenue is generated primarily from contracts to produce, ship and deliver steel products, and to a lesser extent, to deliver raw materials such as iron ore pellets, to deliver coke by-products and for railroad services and real estate sales. Generally, U. S. Steel’s performance obligations are satisfied, control of our products is transferred, and revenue is recognized at a single point in time, when title transfers to our customer for product shipped or when services are provided. Revenues are recorded net of any sales incentives. Shipping and other transportation costs charged to customers are treated as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. Costs related to obtaining sales contracts are incidental and are expensed when incurred. Because customers are invoiced at the time title transfers and U. S. Steel’s right to consideration is unconditional at that time, U. S. Steel does not maintain contract asset balances. Additionally, U. S. Steel does not maintain contract liability balances, as performance obligations are satisfied prior to customer payment for product. U. S. Steel offers industry standard payment terms.
U. S. Steel has three reportable segments: Flat-Rolled, USSE and Tubular. Flat-Rolled primarily generates revenue from sheet and coated product sales to North American customers. Flat-Rolled also sells iron ore pellets and coke making by-products. USSE sells slabs, sheet, strip mill plate, coated products and spiral welded pipe to customers primarily in the Eastern European market. Tubular sells seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as oil country tubular goods or OCTG), standard and line pipe and mechanical tubing and primarily serves customers in the oil, gas and petrochemical markets. Revenue from our railroad and real estate businesses is reported in the Other Businesses category in our segment reporting structure. The following tables disaggregate our revenue by product for each of our reportable business segments for the three and nine months ended September 30, 2018 and 2017, respectively:
Customer Sales by Product
(In millions) Three Months Ended September 30, 2018 | Flat-Rolled | USSE | Tubular | Other Businesses | Total | |||||||||||
Semi-finished | $ | 40 | $ | 83 | $ | — | $ | — | $ | 123 | ||||||
Hot-rolled sheets | 764 | 267 | — | — | 1,031 | |||||||||||
Cold-rolled sheets | 718 | 91 | — | — | 809 | |||||||||||
Coated sheets | 829 | 282 | — | — | 1,111 | |||||||||||
Tubular products | — | 12 | 304 | — | 316 | |||||||||||
All Other (a) | 281 | 32 | 9 | 17 | 339 | |||||||||||
Total | $ | 2,632 | $ | 767 | $ | 313 | $ | 17 | $ | 3,729 | ||||||
(a) Consists primarily of sales of raw materials and coke making by-products.
(In millions) Three Months Ended September 30, 2017 | Flat-Rolled | USSE | Tubular | Other Businesses | Total | |||||||||||
Semi-finished | $ | 15 | $ | 51 | $ | — | $ | — | $ | 66 | ||||||
Hot-rolled sheets | 525 | 273 | — | — | 798 | |||||||||||
Cold-rolled sheets | 576 | 79 | — | — | 655 | |||||||||||
Coated sheets | 787 | 267 | — | — | 1,054 | |||||||||||
Tubular products | — | 11 | 268 | — | 279 | |||||||||||
All Other (a) | 346 | 29 | 8 | 13 | 396 | |||||||||||
Total | $ | 2,249 | $ | 710 | $ | 276 | $ | 13 | $ | 3,248 | ||||||
(a) Consists primarily of sales of raw materials and coke making by-products.
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(In millions) Nine Months Ended September 30, 2018 | Flat-Rolled | USSE | Tubular | Other Businesses | Total | |||||||||||
Semi-finished | $ | 50 | $ | 172 | $ | — | $ | — | $ | 222 | ||||||
Hot-rolled sheets | 1,976 | 959 | — | — | 2,935 | |||||||||||
Cold-rolled sheets | 2,092 | 293 | — | — | 2,385 | |||||||||||
Coated sheets | 2,332 | 889 | — | — | 3,221 | |||||||||||
Tubular products | — | 37 | 862 | — | 899 | |||||||||||
All Other (a) | 664 | 88 | 26 | 47 | 825 | |||||||||||
Total | $ | 7,114 | $ | 2,438 | $ | 888 | $ | 47 | $ | 10,487 | ||||||
(a) Consists primarily of sales of raw materials and coke making by-products.
(In millions) Nine Months Ended September 30, 2017 | Flat-Rolled | USSE | Tubular | Other Businesses | Total | |||||||||||
Semi-finished | $ | 16 | $ | 155 | $ | — | $ | — | $ | 171 | ||||||
Hot-rolled sheets | 1,507 | 862 | — | — | 2,369 | |||||||||||
Cold-rolled sheets | 1,761 | 235 | — | — | 1,996 | |||||||||||
Coated sheets | 2,291 | 774 | — | — | 3,065 | |||||||||||
Tubular products | — | 30 | 656 | — | 686 | |||||||||||
All Other (a) | 690 | 67 | 26 | 47 | 830 | |||||||||||
Total | $ | 6,265 | $ | 2,123 | $ | 682 | $ | 47 | $ | 9,117 | ||||||
(a) Consists primarily of sales of raw materials and coke making by-products.
6. Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within U. S. Steel's Consolidated Balance Sheets that sum to the total of the same amounts shown in the Consolidated Statement of Cash Flows:
(In millions) | September 30, 2018 | September 30, 2017 | ||||||
Cash and cash equivalents | $ | 1,344 | $ | 1,694 | ||||
Restricted cash in other current assets | 4 | — | ||||||
Restricted cash in other noncurrent assets | 37 | 42 | ||||||
Total cash, cash equivalents and restricted cash | $ | 1,385 | $ | 1,736 | ||||
Amounts included in restricted cash represent cash balances which are legally or contractually restricted, primarily for environmental capital expenditure projects and insurance purposes.
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7. Intangible Assets
Intangible assets that are being amortized on a straight-line basis over their estimated useful lives are detailed below:
As of September 30, 2018 | As of December 31, 2017 | |||||||||||||||||||||||||
(In millions) | Useful Lives | Gross Carrying Amount | Accumulated Amortization | Net Amount | Gross Carrying Amount | Accumulated Amortization | Net Amount | |||||||||||||||||||
Customer relationships | 22 Years | $ | 132 | $ | 69 | $ | 63 | $ | 132 | $ | 64 | $ | 68 | |||||||||||||
Patents | 10-15 Years | 22 | 6 | 16 | 22 | 5 | 17 | |||||||||||||||||||
Other | 4-20 Years | 14 | 8 | 6 | 15 | 8 | 7 | |||||||||||||||||||
Total amortizable intangible assets | $ | 168 | $ | 83 | $ | 85 | $ | 169 | $ | 77 | $ | 92 | ||||||||||||||
Identifiable intangible assets with finite lives are reviewed for impairment whenever events or circumstances indicate that the carrying values may not be recoverable.
Amortization expense was $2 million in both the three months ended September 30, 2018 and 2017. Amortization expense was $6 million in both the nine months ended September 30, 2018 and 2017. The estimated amortization expense for the remainder of 2018 is $2 million. We expect a consistent level of annual amortization expense through 2022.
In addition, the carrying amount of acquired water rights with indefinite lives as of September 30, 2018 and December 31, 2017 totaled $75 million. The acquired water rights are tested for impairment annually in the third quarter, or whenever events or circumstances indicate the carrying value may not be recoverable. U. S. Steel performed a qualitative impairment evaluation of its acquired water rights during the third quarter of 2018. Based on the results of the evaluation, the water rights were not impaired.
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8. Pensions and Other Benefits
The following table reflects the components of net periodic benefit cost for the three months ended September 30, 2018 and 2017:
Pension Benefits | Other Benefits | |||||||||||||||
(In millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Service cost | $ | 12 | $ | 13 | $ | 4 | $ | 4 | ||||||||
Interest cost | 58 | 59 | 23 | 23 | ||||||||||||
Expected return on plan assets | (90 | ) | (98 | ) | (20 | ) | (16 | ) | ||||||||
Amortization of prior service cost | — | — | 7 | 8 | ||||||||||||
Amortization of actuarial net loss | 38 | 37 | 1 | 1 | ||||||||||||
Net periodic benefit cost, excluding below | 18 | 11 | 15 | 20 | ||||||||||||
Multiemployer plans | 16 | 15 | — | — | ||||||||||||
Settlement, termination and curtailment losses (a) | $ | 10 | $ | 1 | $ | — | $ | — | ||||||||
Net periodic benefit cost | $ | 44 | $ | 27 | $ | 15 | $ | 20 | ||||||||
The following table reflects the components of net periodic benefit cost for the nine months ended September 30, 2018 and 2017:
Pension Benefits | Other Benefits | |||||||||||||||
(In millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Service cost | $ | 37 | $ | 37 | $ | 12 | $ | 13 | ||||||||
Interest cost | 174 | 177 | 69 | 70 | ||||||||||||
Expected return on plan assets | (270 | ) | (292 | ) | (61 | ) | (49 | ) | ||||||||
Amortization of prior service cost | — | — | 22 | 22 | ||||||||||||
Amortization of actuarial net loss | 114 | 111 | 3 | 3 | ||||||||||||
Net periodic benefit cost, excluding below | 55 | 33 | 45 | 59 | ||||||||||||
Multiemployer plans | 45 | 44 | — | — | ||||||||||||
Settlement, termination and curtailment losses (a) | 10 | 5 | — | — | ||||||||||||
Net periodic benefit cost | $ | 110 | $ | 82 | $ | 45 | $ | 59 | ||||||||
(a) During the first nine months of 2018 and 2017, the non-qualified pension plan incurred settlement charges of approximately $10 million and $5 million, respectively, due to lump sum payments for certain individuals.
Employer Contributions
During the first nine months of 2018, U. S. Steel made cash payments of $45 million to the Steelworkers’ Pension Trust and $19 million of pension payments not funded by trusts.
During the first nine months of 2018, cash payments of $36 million were made for other postretirement benefit payments not funded by trusts.
Company contributions to defined contribution plans totaled $13 million and $11 million for the three months ended September 30, 2018 and 2017, respectively. Company contributions to defined contribution plans totaled $35 million and $30 million for the nine months ended September 30, 2018 and 2017, respectively.
9. Net Interest and Other Financial Costs
Net interest and other financial costs includes interest expense (net of capitalized interest), interest income, financing costs, net periodic benefit costs (other than service costs) related to pension and other post-
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employment benefits (OPEB) plans, and foreign currency derivative and remeasurement gains and losses. During the three months ended September 30, 2018 and 2017, net foreign currency gains of $3 million and losses of $6 million, respectively were recorded in other financial costs. During the nine months ended September 30, 2018 and 2017, net foreign currency gains of $11 million and losses of $21 million, respectively, were recorded in other financial costs. Additionally, during the nine months ended September 30, 2018 and 2017, there were losses on debt extinguishments recognized of $77 million and $32 million, respectively.
See Note 14 for additional information on U. S. Steel’s use of derivatives to mitigate its foreign currency exchange rate exposure.
10. 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 2005 Plan) and the 2016 Omnibus Incentive Compensation Plan (the Omnibus Plan), which are more fully described in Note 14 of the United States Steel Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2017. On April 26, 2016, the Company's stockholders approved the Omnibus Plan and authorized the Company to issue up to 7,200,000 shares of U. S. Steel common stock under the Omnibus Plan. The Company's stockholders authorized the issuance of an additional 6,300,000 shares under the Omnibus Plan on April 25, 2017. While awards that were previously granted under the 2005 Plan remain outstanding, all future awards will be granted under the Omnibus Plan. As of September 30, 2018, there were 10,993,930 shares available for future grants under the Omnibus Plan.
Recent grants of stock-based compensation consist of stock options, restricted stock units, total shareholder return (TSR) performance awards and return on capital employed (ROCE) performance awards. Stock options are generally issued at the market price of the underlying stock on the date of the grant. Upon exercise of stock options, shares of U. S. Steel common stock were issued from treasury stock. Beginning in 2018, shares of common stock are issued from authorized, but unissued stock. The following table is a general summary of the awards made under the Omnibus Plan during the first nine months of 2018 and 2017. There were no stock options granted during the first nine months of 2018.
2018 | 2017 | |||||||||||
Grant Details | Shares(a) | Fair Value(b) | Shares(a) | Fair Value(b) | ||||||||
Stock Options | — | $ | — | 647,780 | $ | 17.28 | ||||||
Restricted Stock Units | 742,495 | $ | 41.44 | 344,500 | $ | 36.27 | ||||||
Performance Awards (c) | ||||||||||||
TSR | 79,190 | $ | 61.57 | 169,850 | $ | 40.72 | ||||||
ROCE (d) | 247,510 | $ | 43.50 | — | $ | — | ||||||
(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 period.
(c) The number of performance awards shown represents the target value of the award.
(d) The ROCE awards granted in 2017 are not shown in the table above because they were granted in cash.
U. S. Steel recognized pretax stock-based compensation expense in the amount of $9 million and $6 million in the three-month periods ended September 30, 2018 and 2017, respectively, and $26 million and $21 million in the first nine months of 2018 and 2017, respectively.
As of September 30, 2018, total future compensation expense related to nonvested stock-based compensation arrangements was $29 million, and the weighted average period over which this expense is expected to be recognized is approximately 1 year.
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. The stock options generally vest ratably over a three-year service period and have a term of ten years.
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
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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 awarded as part of annual grants generally vest ratably over three years. Their fair value is the market price of the underlying common stock on the date of grant. Restricted stock units granted in connection with new-hire or retention grants generally cliff vest three years from the date of the grant.
TSR performance awards may vest at the end of a three-year performance period if U. S. Steel's total shareholder return compared to the total shareholder return of a peer group of companies over the three-year performance period meets performance criteria established by the Committee at the beginning of the performance period. 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.
ROCE performance awards vest at the end of a three-year performance period contingent upon meeting the specified ROCE metric established by the Committee at the beginning of the performance period. 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.
11. Income Taxes
Tax provision
For the nine months ended September 30, 2018 and 2017, we recorded a tax provision of $36 million on our pretax earnings of $559 million and a tax provision of $3 million on our pretax earnings of $231 million, respectively. Included in the tax provision in the first nine months of 2018 is a benefit for the release of a portion of the domestic valuation allowance due to pretax income. Included in the tax provision in the first nine months of 2017 is a benefit of $13 million related to the carryback of certain losses to prior years, as well as a benefit of $25 million related to the Company's intent to claim a refund of Alternative Minimum Tax credits pursuant to a provision in the Protecting Americans from Tax Hikes Act. As a result, the provision recorded in the third quarter of 2017 was immaterial.
The tax provision for the first nine months of 2018 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 2018 pretax results for U.S. and foreign income or loss vary from estimates applied herein, the actual tax provision or benefit recognized in 2018 could be materially different from the forecasted amount used to estimate the tax provision for the nine months ended September 30, 2018.
Deferred taxes
Each quarter U. S. Steel analyzes the likelihood that our deferred tax assets will be realized. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not that some portion, or all, of the deferred tax asset may not be realized.
At September 30, 2018, U. S. Steel reviewed all available positive and negative evidence and determined that it is more likely than not that all of its net domestic deferred tax assets may not be realized.
U. S. Steel will continue to monitor the realizability of its deferred tax assets on a quarterly basis taking into consideration, among other items, the uncertainty regarding the Company's continued ability to generate domestic income in the near term. In the future, if we determine that realization is more likely than not for deferred tax assets with a valuation allowance, the related valuation allowance will be reduced, and we will record a non-cash benefit to earnings.
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. As of September 30, 2018, and December 31, 2017, the total amount of gross unrecognized tax benefits was $40 million and $42 million, respectively. The total amount of net unrecognized tax benefits that, if
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recognized, would affect the effective tax rate was $6 million as of both September 30, 2018 and December 31, 2017.
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, 2018 and December 31, 2017, U. S. Steel had accrued liabilities of $6 million for interest and penalties related to uncertain tax positions.
12. Earnings and Dividends Per Common Share
Earnings Per Share Attributable to United States Steel Corporation Stockholders
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, provided in each case the effect is dilutive.
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) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Earnings attributable to United States Steel Corporation stockholders | $ | 291 | $ | 147 | $ | 523 | $ | 228 | ||||||||
Weighted-average shares outstanding (in thousands): | ||||||||||||||||
Basic | 177,250 | 175,003 | 176,815 | 174,684 | ||||||||||||
Effect of stock options, restricted stock units and performance awards | 1,876 | 1,481 | 1,919 | 1,652 | ||||||||||||
Adjusted weighted-average shares outstanding, diluted | 179,126 | 176,484 | 178,734 | 176,336 | ||||||||||||
Basic earnings per common share | $ | 1.64 | $ | 0.84 | $ | 2.96 | $ | 1.30 | ||||||||
Diluted earnings per common share | $ | 1.62 | $ | 0.83 | $ | 2.92 | $ | 1.29 | ||||||||
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) | 2018 | 2017 | 2018 | 2017 | ||||||||
Securities granted under the 2016 Omnibus Incentive Compensation Plan, as amended | 1,671 | 2,679 | 1,689 | 1,677 | ||||||||
Dividends Paid Per Share
The dividend for each of the first three quarters of 2018 and 2017 was five cents per common share.
13. Inventories
Inventories are carried at the lower of cost or market for last-in, first-out (LIFO) inventories and lower of cost and net realizable value for first-in, first-out (FIFO) method inventories. The LIFO method is the predominant method of inventory costing in the United States. The FIFO method is the predominant inventory costing method in Europe. At September 30, 2018 and December 31, 2017, the LIFO method accounted for 71 percent and 75 percent of total inventory values, respectively.
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(In millions) | September 30, 2018 | December 31, 2017 | ||||||
Raw materials | $ | 622 | $ | 527 | ||||
Semi-finished products | 829 | 796 | ||||||
Finished products | 441 | 356 | ||||||
Supplies and sundry items | 58 | 59 | ||||||
Total | $ | 1,950 | $ | 1,738 | ||||
Current acquisition costs were estimated to exceed the above inventory values by $1,024 million and $802 million at September 30, 2018 and December 31, 2017, respectively. As a result of the liquidation of LIFO inventories, cost of sales decreased and earnings before interest and income taxes increased by $4 million for the three and nine months ended September 30, 2018, respectively. The impact from the liquidation of LIFO inventories was immaterial for the three and nine months ended September 30, 2017.
Inventory includes $39 million and $42 million of land held for residential/commercial development as of September 30, 2018 and December 31, 2017, respectively.
14. Derivative Instruments
U. S. Steel is exposed to foreign currency exchange rate risks in our European operations. USSE’s revenues are primarily in euros and costs are primarily in euros and U.S. dollars (USD). U. S. Steel uses foreign exchange forward sales contracts (foreign exchange forwards) with maturities no longer than 12 months to exchange euros for USD 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 contracts as hedges. Therefore, changes in their fair value are recognized immediately in the Consolidated Statements of Operations. We mitigate the risk of concentration of counterparty credit risk by purchasing our forwards from several counterparties.
During the three months ended September 30, 2018, U. S. Steel entered into long-term freight contracts in its domestic operations that require payment in Canadian dollars (CAD). We entered into foreign exchange forward sales contracts with maturities up to three years to exchange USD for CAD to mitigate a portion of the related risk of exchange rate fluctuations and to manage our currency requirements. We elected to designate these contracts as cash flow hedges. Accordingly, we record gains and losses on these contracts within accumulated other comprehensive income until the related contract impacts earnings. The impact related to these contracts was not material to our financial results for the three months ended September 30, 2018.
From time to time U. S. Steel may use fixed-price forward physical purchase contracts to partially manage our exposure to price risk related to the purchases of natural gas, zinc and tin used in the production process. Generally, forward physical purchase contracts qualify for the normal purchase and normal sales exceptions described in ASC Topic 815 and are not subject to mark-to-market accounting. U. S. Steel also uses financial swaps to protect from the commodity price risk associated with purchases of natural gas, zinc and tin (commodity purchase swaps). Commodity purchase swaps did not have a significant impact on the Company's financial results and were classified as cash flow hedges in prior periods (their impacts are included in our expanded tabular disclosure below). Effective January 1, 2018, U. S. Steel adopted the provisions of ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The cumulative effect of the adoption of ASU 2017-12 was not material to U. S. Steel's financial results. See Note 3 for additional information on the recently adopted accounting standard.
Financial swaps are also used to partially manage the sales price of certain hot-rolled coil and iron ore pellet contract sales (sales swaps). In prior periods, we did not elect hedge accounting for these financial swaps and changes in their fair value were immediately recognized in earnings. Effective January 1, 2018, U. S. Steel elected to designate its hot-rolled coil sales swaps as cash flow hedges. See the tabular disclosure below for further details.
In accordance with the guidance in ASC Topic 820 on fair value measurements and disclosures, the fair value of our foreign exchange forwards, commodity purchase swaps and sales swaps 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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The table below shows the outstanding swap quantities used to hedge forecasted purchases and sales as of September 30, 2018 and September 30, 2017:
Hedge Contracts | Classification | September 30, 2018 | September 30, 2017 | ||||||
Natural gas (in mmbtus) | Commodity purchase swaps | 12,345,000 | 24,142,500 | ||||||
Tin (in metric tons) | Commodity purchase swaps | 470 | 320 | ||||||
Zinc (in metric tons) | Commodity purchase swaps | 13,886 | 16,716 | ||||||
Hot-rolled coils (in tons) | Sales swaps | 38,000 | 122,000 | ||||||
Iron ore pellets (in metric tons) | Sales swaps | — | 225,000 | ||||||
Foreign currency (in millions of euros) | Foreign exchange forwards | € | 275 | € | 222 | ||||
Foreign currency (in millions of CAD) | Foreign exchange forwards | C$ | 58 | C$ | — | ||||
The following summarizes the fair value amounts included in our Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017:
(In millions) Designated as Hedging Instruments | Balance Sheet Location | September 30, 2018 | December 31, 2017 | ||||||
Sales swaps | Accounts payable | $ | 6 | $ | — | ||||
Commodity purchase swaps | Accounts receivable | 1 | 4 | ||||||
Commodity purchase swaps | Accounts payable | 9 | 2 | ||||||
Commodity purchase swaps | Investments and long-term receivables | — | 1 | ||||||
Commodity purchase swaps | Other long-term liabilities | — | 1 | ||||||
Not Designated as Hedging Instruments | |||||||||
Sales swaps | Accounts payable | — | 2 | ||||||
Commodity purchase swaps | Accounts payable | — | 1 | ||||||
Foreign exchange forwards | Accounts receivable | 12 | — | ||||||
Foreign exchange forwards | Accounts payable | — | 11 | ||||||
The table below summarizes the effect of hedge accounting on Accumulated Other Comprehensive Income (AOCI) and amounts reclassified from AOCI into earnings for the three and nine months ended September 30, 2018 and 2017:
Gain (Loss) on Derivatives in AOCI | Amount of Gain (Loss) Recognized in Income | |||||||||||||||||
(In millions) | Three Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | Location of Reclassification from AOCI (a) | Three Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | |||||||||||||
Sales swaps (b) | $ | 6 | $ | — | Net sales | $ | (6 | ) | $ | — | ||||||||
Commodity purchase swaps | — | 8 | Cost of sales (c) | (4 | ) | (2 | ) | |||||||||||
(a) The earnings impact of our hedging instruments substantially offsets the earnings impact of the related hedged items since ineffectiveness is less than $1 million.
(b) U. S. Steel has elected hedge accounting for hot-rolled coil sales swaps prospectively on January 1, 2018. Iron ore pellet sales swaps were not classified as hedges.
(c) Costs for commodity purchase swaps are recognized in cost of sales as products are sold.
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Gain (Loss) on Derivatives in AOCI | Amount of Gain (Loss) Recognized in Income | |||||||||||||||||
(In millions) | Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 | Location of Reclassification from AOCI (a) | Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 | |||||||||||||
Sales swaps (b) | $ | (6 | ) | $ | — | Net sales | $ | (9 | ) | $ | — | |||||||
Commodity purchase swaps | (7 | ) | 5 | Cost of sales (c) | (3 | ) | (5 | ) | ||||||||||
(a) The earnings impact of our hedging instruments substantially offsets the earnings impact of the related hedged items since ineffectiveness is less than $1 million.
(b) U. S. Steel has elected hedge accounting for hot-rolled coil sales swaps prospectively on January 1, 2018. Iron ore pellet sales swaps were not classified as hedges.
(c) Costs for commodity purchase swaps are recognized in cost of sales as products are sold.
The table below summarizes the impact of derivative activity where hedge accounting has not been elected on our Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017:
Amount of Gain (Loss) Recognized in Income | |||||||||
(In millions) | Consolidated Statement of Operations Location | Three Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | ||||||
Sales swaps (a) | Net sales | $ | — | $ | 5 | ||||
Foreign exchange forwards (b) | Other financial costs | 5 | (7 | ) | |||||
(a) U. S. Steel has elected hedge accounting for hot-rolled coil sales swaps prospectively on January 1, 2018. Iron ore pellet sales swaps were not classified as hedges.
(b) U. S. Steel has elected hedge accounting for foreign exchange forwards to exchange USD for CAD. Foreign exchange forwards to exchange euro for USD were not classified as hedges.
Amount of Gain (Loss) Recognized in Income | |||||||||
(In millions) | Consolidated Statement of Operations Location | Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 | ||||||
Sales swaps (a) | Net sales | $ | — | $ | 7 | ||||
Commodity purchase swaps | Cost of sales | — | 3 | ||||||
Foreign exchange forwards (b) | Other financial costs | 18 | (20 | ) | |||||
(a) U. S. Steel has elected hedge accounting for hot-rolled coil sales swaps prospectively on January 1, 2018. Iron ore pellet sales swaps were not classified as hedges.
(b) U. S. Steel has elected hedge accounting for foreign exchange forwards to exchange USD for CAD. Foreign exchange forwards to exchange euro for USD were not classified as hedges.
At current contract values, $8 million and $6 million currently in AOCI as of September 30, 2018 will be recognized as an increase in cost of sales and a decrease in net sales, respectively, over the next year as related hedged items are recognized in earnings. The maximum derivative contract duration for commodity purchase swaps is 14 months and the maximum duration for sales swaps is 3 months.
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15. Debt
(In millions) | Interest Rates % | Maturity | September 30, 2018 | December 31, 2017 | ||||||||
2037 Senior Notes | 6.650 | 2037 | $ | 350 | $ | 350 | ||||||
2026 Senior Notes | 6.250 | 2026 | 650 | — | ||||||||
2025 Senior Notes | 6.875 | 2025 | 750 | 750 | ||||||||
2021 Senior Secured Notes | 8.375 | 2021 | — | 780 | ||||||||
2020 Senior Notes | 7.375 | 2020 | 356 | 432 | ||||||||
Environmental Revenue Bonds | 5.750 - 6.875 | 2019 - 2042 | 400 | 400 | ||||||||
Fairfield Caster Lease | 2022 | 23 | 24 | |||||||||
Other capital leases and all other obligations | 2019 | 1 | 1 | |||||||||
Fourth Amended and Restated Credit Agreement | Variable | 2023 | — | — | ||||||||
USSK Credit Agreement | Variable | 2023 | — | — | ||||||||
USSK credit facilities | Variable | 2018 | — | — | ||||||||
Total Debt | 2,530 | 2,737 | ||||||||||
Less unamortized discount and debt issuance costs | 28 | 34 | ||||||||||
Less short-term debt and long-term debt due within one year | 4 | 3 | ||||||||||
Long-term debt | $ | 2,498 | $ | 2,700 | ||||||||
To the extent not otherwise discussed below, information concerning the senior notes and other listed obligations can be found in Note 16 of the audited financial statements in the United States Steel Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Senior Note Repurchases
Through a series of open market purchases, U. S. Steel repurchased approximately $75 million of its 7.375% Senior Notes due 2020 at a weighted average price of 107.119 percent of par during the nine months ended September 30, 2018.
Senior Secured Note Tender and Redemption
In March 2018, pursuant to a cash tender offer, U. S. Steel repurchased approximately $499 million aggregate principal amount of its outstanding 8.375% Senior Secured Notes due 2021 (2021 Senior Secured Notes). The aggregate cash outflow from the tender was approximately $538 million, which included $39 million in premiums. The remaining approximately $281 million aggregate principal amount of 2021 Senior Secured Notes was redeemed on April 12, 2018. The aggregate cash flow from the redemption was $302 million, which included $21 million in premiums.
Issuance of Senior Notes due 2026
In March 2018, U. S. Steel issued $650 million aggregate principal amount of 6.250% Senior Notes due March 15, 2026 (2026 Senior Notes). U. S. Steel received net proceeds from the offering of approximately $640 million after fees of approximately $10 million related to the underwriting and third-party expenses. The net proceeds from the issuance of the 2026 Senior Notes, together with cash on hand, were used to tender or otherwise redeem all of our 2021 Senior Secured Notes as discussed above.
The 2026 Senior Notes are senior and unsecured obligations that rank equally in right of payment with all of our other existing and future senior and unsecured indebtedness. U. S. Steel will pay interest on the notes semi-annually in arrears on March 15th and September 15th of each year, commencing on September 15, 2018.
Similar to our other senior notes, the indenture governing the 2026 Senior Notes restricts our ability to create certain liens, to enter into sale leaseback transactions and to consolidate, merge, transfer or sell all, or
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substantially all of our assets. It also contains provisions requiring the purchase of the 2026 Senior Notes upon a change of control under certain specified circumstances, as well as other customary provisions.
U. S. Steel may redeem the 2026 Senior Notes, in whole or in part, at our option at any time, or from time to time, on or after March 15, 2021 at the redemption price for such notes set forth below as a percentage of the principal amount, plus accrued and unpaid interest, if any, to, but excluding the redemption date, if redeemed during the twelve-month period beginning March 15 of the years indicated below:
Year | Redemption Price | |
2021 | 103.125 | % |
2022 | 101.563 | % |
2023 and thereafter | 100.000 | % |
At any time prior to March 15, 2021, U. S. Steel may also redeem up to 35% of the original aggregate principal amount of the 2026 Senior Notes at 106.25%, plus accrued and unpaid interest, if any, but excluding the applicable date of redemption, with proceeds from equity offerings.
Fourth Amended and Restated Credit Agreement
On February 26, 2018, U. S. Steel entered into the Fourth Amended and Restated Credit Agreement (Credit Facility Agreement), replacing the Company's Third Amended and Restated Credit Agreement. The Credit Facility Agreement maintains the facility size of $1.5 billion and extends the maturity date to 2023.
As of September 30, 2018, there were no amounts drawn under the $1.5 billion Credit Facility Agreement. U. S. Steel must maintain a fixed charge coverage ratio of at least 1.00 to 1.00 for the most recent four consecutive quarters when availability under the Credit Facility Agreement is less than the greater of 10 percent of the total aggregate commitments and $150 million. Based on the most recent four quarters as of September 30, 2018, we would have met this covenant. If we are unable to meet this covenant in future periods, the amount available to the Company under this facility would be reduced by $150 million.
The Credit Facility Agreement provides for borrowings at interest rates based on defined, short-term market rates plus a spread based on availability and includes other customary terms and conditions including restrictions on our ability to create certain liens and to consolidate, merge or transfer all, or substantially all, of our assets. The Credit Facility Agreement expires in February 2023. Maturity may be accelerated 91 days prior to the stated maturity of any outstanding senior debt if excess cash and credit facility availability do not meet the liquidity conditions set forth in the Credit Facility Agreement. Borrowings are secured by liens on certain North American inventory and trade accounts receivable.
U. S. Steel Košice (USSK) credit facilities
On September 26, 2018, USSK, and one of its wholly owned subsidiaries, as guarantor, entered into a €460 million unsecured revolving credit facility (USSK Credit Agreement), replacing USSK's €200 million revolving credit facility (Prior Facility). The USSK Credit Agreement has a maturity date of September 26, 2023 and contains terms and conditions substantially similar to the Prior Facility. Concurrent with the execution of the USSK Credit Agreement, USSK reduced the size of a separate €40 million unsecured credit facility to €20 million.
At September 30, 2018, USSK had no borrowings under its €460 million (approximately $533 million) USSK Credit Agreement. The USSK Credit Agreement contains certain USSK financial covenants, including a maximum net debt to EBITDA ratio and a minimum stockholders' equity to assets ratio. The covenants are measured semi-annually for the period covering the last twelve calendar months and calculated as set forth in the USSK Credit Agreement. If USSK does not comply with the USSK Credit Agreement financial covenants, it may not draw on the facility until the next measurement date, outstanding borrowings may be accelerated, or the margin on outstanding borrowings may be increased. At September 30, 2018, USSK had full availability under the USSK Credit Agreement. On October 15, 2018, USSK drew down €200 million (approximately $232 million) from its USSK Credit Agreement (See Note 25).
At September 30, 2018, USSK had no borrowings under its €20 million and €10 million unsecured credit facilities (collectively, approximately $35 million) and the availability was approximately $33 million due to approximately $2 million of customs and other guarantees outstanding. The €20 million credit facility expires in December
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2018. Currently, the €10 million credit facility also expires in December 2018, but can be extended one additional year to the final maturity date at the mutual consent of USSK and its lender.
Each of these facilities bear interest at the applicable inter-bank offer rate plus a margin and contain customary terms and conditions.
Change in control event
If there is a change in control of U. S. Steel, the following may occur: (a) debt obligations totaling $2,106 million as of September 30, 2018 may be declared due and payable; (b) the Credit Facility Agreement and the USSK credit facilities may be terminated and any amounts outstanding declared due and payable; and (c) U. S. Steel may be required to either purchase the leased Fairfield Works slab caster for approximately $24 million or provide a letter of credit to secure the remaining obligation.
16. Asset Retirement Obligations
U. S. Steel’s asset retirement obligations (AROs) primarily relate to mine, landfill closure and post-closure costs. The following table reflects changes in the carrying values of AROs:
(In millions) | September 30, 2018 | December 31, 2017 | |||||||
Balance at beginning of year | $ | 69 | $ | 79 | |||||
Obligations settled | (7 | ) | (8 | ) | |||||
Change in estimate of obligations | — | (6 | ) | ||||||
Foreign currency translation effects | — | 2 | |||||||
Accretion expense | 2 | 2 | |||||||
Balance at end of period | $ | 64 | $ | 69 | |||||
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.
17. Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, current accounts and notes receivable, accounts payable, bank checks outstanding, and accrued interest included in the Consolidated Balance Sheet approximate fair value. See Note 14 for disclosure of U. S. Steel’s derivative instruments, which are accounted for at fair value on a recurring basis.
The following table summarizes U. S. Steel’s financial liabilities that were not carried at fair value at September 30, 2018 and December 31, 2017.
September 30, 2018 | December 31, 2017 | |||||||||||||||
(In millions) | Fair Value | Carrying Amount | Fair Value | Carrying Amount | ||||||||||||
Financial liabilities: | ||||||||||||||||
Long-term debt (a) | $ | 2,501 | $ | 2,478 | $ | 2,851 | $ | 2,678 | ||||||||
(a) Excludes capital lease obligations.
The following methods and assumptions were used to estimate the fair value of financial instruments included in the table above:
Long-term debt: 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 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 22.
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18. Statement of Changes in Stockholders’ Equity
The following table reflects the reconciliation of the carrying amount of total equity, equity attributable to U. S. Steel and equity attributable to noncontrolling interests for the nine months ended September 30, 2018 and 2017:
Nine Months Ended September 30, 2018 (In millions) | Total | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Common Stock | Treasury Stock | Paid-in Capital | Non- Controlling Interest | |||||||||||||||||||||
Balance at beginning of year | $ | 3,321 | $ | 133 | $ | (845 | ) | $ | 176 | $ | (76 | ) | $ | 3,932 | $ | 1 | ||||||||||||
Comprehensive income (loss): | < | |||||||||||||||||||||||||||