Edgar Filing: UNITED STATES STEEL CORP

Document

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 March 31, 2019



	[ ]	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 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 __
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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
United States Steel Corporation Common Stock	X	New York Stock Exchange and Chicago Stock Exchange

Common stock outstanding at April 25, 2019 – 172,391,637 shares

INDEX



			Page
PART I – FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Consolidated Statement of Operations (Unaudited)	1
		Consolidated Statement of Comprehensive Income (Loss) (Unaudited)	2
		Consolidated Balance Sheet (Unaudited)	3
		Consolidated Statement of Cash Flows (Unaudited)	4
		Notes to Consolidated Financial Statements (Unaudited)	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
	Item 4.	Controls and Procedures	41
		Supplemental Statistics (Unaudited)	42
PART II – OTHER INFORMATION
	Item 1.	Legal Proceedings	43
	Item 4.	Mine Safety Disclosure	51
	Item 5.	Issuer Purchases of Equity Securities	51
	Item 6.	Exhibits	52
SIGNATURE			53
WEB SITE POSTING			53

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains information that may constitute ”forward-looking statements” within the meaning of Section 27A 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, 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 March 31,
(Dollars in millions, except per share amounts)	2019			2018
Net sales:
Net sales	$	3,124		$	2,821
Net sales to related parties (Note 21)	375			328
Total (Note 5)	3,499			3,149
Operating expenses (income):
Cost of sales (excludes items shown below)	3,172			2,808
Selling, general and administrative expenses	78			78
Depreciation, depletion and amortization	143			128
Earnings from investees	(9		)	(3		)
Net loss on disposal of assets	4			1
Total	3,388			3,012
Earnings before interest and income taxes	111			137
Interest expense	34			50
Interest income	(5		)	(5		)
Loss on debt extinguishment (Note 11)	—			46
Other financial (income) costs	(3		)	10
Net periodic benefit cost (other than service cost)	23			17
Net interest and other financial costs (Note 11)	49			118
Earnings before income taxes	62			19
Income tax provision (Note 13)	8			1
Net earnings	54			18
Less: Net earnings attributable to noncontrolling interests	—			—
Net earnings attributable to United States Steel Corporation	$	54		$	18
Earnings per common share (Note 14):
Earnings per share attributable to United States Steel Corporation stockholders:
-Basic	$	0.31		$	0.10
-Diluted	$	0.31		$	0.10

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 March 31,
(Dollars in millions)	2019			2018
Net earnings	$	54		$	18
Other comprehensive income (loss), net of tax:
Changes in foreign currency translation adjustments	(17		)	40
Changes in pension and other employee benefit accounts	32			46
Derivative financial instruments	15			(16		)
Total other comprehensive income, net of tax	30			70
Comprehensive income including noncontrolling interest	84			88
Comprehensive income attributable to noncontrolling interest	—			—
Comprehensive income attributable to United States Steel Corporation	$	84		$	88

The accompanying notes are an integral part of these consolidated financial statements.

-2-

UNITED STATES STEEL CORPORATION

CONSOLIDATED BALANCE SHEET

(Unaudited)



(Dollars in millions)	March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents (Note 6)	$	676		$	1,000
Receivables, less allowance of $28 and $29	1,489			1,435
Receivables from related parties (Note 21)	240			224
Inventories (Note 7)	2,133			2,092
Other current assets	92			79
Total current assets	4,630			4,830
Operating lease assets (Note 8)	234			—
Property, plant and equipment	16,210			16,008
Less accumulated depreciation and depletion	11,221			11,143
Total property, plant and equipment, net	4,989			4,865
Investments and long-term receivables, less allowance of $5 in both periods	535			513
Intangibles – net (Note 9)	156			158
Deferred income tax benefits (Note 13)	427			445
Other noncurrent assets	181			171
Total assets	$	11,152		$	10,982
Liabilities
Current liabilities:
Accounts payable and other accrued liabilities	$	2,428		$	2,454
Accounts payable to related parties (Note 21)	119			81
Payroll and benefits payable	333			440
Accrued taxes	115			118
Accrued interest	26			39
Current operating lease liabilities (Note 8)	53			—
Current portion of long-term debt (Note 16)	66			65
Total current liabilities	3,140			3,197
Noncurrent operating lease liabilities (Note 8)	185			—
Long-term debt, less unamortized discount and debt issuance costs (Note 16)	2,326			2,316
Employee benefits	954			980
Deferred income tax liabilities (Note 13)	12			14
Deferred credits and other noncurrent liabilities	299			272
Total liabilities	6,916			6,779
Contingencies and commitments (Note 22)
Stockholders’ Equity (Note 19):
Common stock (178,042,935 and 177,386,430 shares issued) (Note 14)	178			177
Treasury stock, at cost (5,185,931 shares and 2,857,578 shares)	(126		)	(78		)
Additional paid-in capital	3,924			3,917
Retained earnings	1,255			1,212
Accumulated other comprehensive loss (Note 20)	(996		)	(1,026		)
Total United States Steel Corporation stockholders’ equity	4,235			4,202
Noncontrolling interests	1			1
Total liabilities and stockholders’ equity	$	11,152		$	10,982

The accompanying notes are an integral part of these consolidated financial statements.

-3-

UNITED STATES STEEL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)



	Three Months Ended March 31,
(Dollars in millions)	2019			2018
Increase (decrease) in cash, cash equivalents and restricted cash
Operating activities:
Net earnings	$	54		$	18
Adjustments to reconcile to net cash provided by operating activities:
Depreciation, depletion and amortization	143			128
Loss on debt extinguishment (Note 11)	—			46
Pensions and other postretirement benefits	30			22
Deferred income taxes (Note 13)	6			—
Net loss on disposal of assets	4			1
Distributions received, net of equity investees earnings	(9		)	(3		)
Changes in:
Current receivables	(124		)	(169		)
Inventories	(50		)	(76		)
Current accounts payable and accrued expenses	(73		)	(65		)
Income taxes receivable/payable	41			(8		)
Bank checks outstanding	9			4
All other, net	(2		)	3
Net cash provided by (used in) operating activities	29			(99		)
Investing activities:
Capital expenditures	(302		)	(208		)
Net cash used in investing activities	(302		)	(208		)
Financing activities:
Issuance of long-term debt, net of financing costs (Note 16)	—			640
Repayment of long-term debt (Note 16)	—			(538		)
Common stock repurchased (Note 24)	(42		)	—
Dividends paid	(9		)	(9		)
Receipt from exercise of stock options	—			30
Taxes paid for equity compensation plans (Note 12)	(5		)	(6		)
Net cash (used in) provided by financing activities	(56		)	117
Effect of exchange rate changes on cash	(2		)	10
Net decrease in cash, cash equivalents and restricted cash	(331		)	(180		)
Cash, cash equivalents and restricted cash at beginning of year (Note 6)	1,040			1,597
Cash, cash equivalents and restricted cash at end of period (Note 6)	$	709		$	1,417

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, 2018, which should be read in conjunction with these financial statements.

2. New Accounting Standards

In August 2018, the FASB issued 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.

3. Recently Adopted Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02). 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 finance 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 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 adopted the new lease accounting standard effective January 1, 2019 using the optional modified retrospective transition method outlined in ASU 2018-11. As a result of the adoption, an operating lease asset and current and noncurrent liabilities for operating leases were recorded, and there was an insignificant reduction in prior year retained earnings for the cumulative effect of adoption for operating leases where payment started after lease commencement. See Note 8 for further details.

-5-

U. S. Steel's adoption of the following ASU's effective January 1, 2019 did not have a material impact on U. S. Steel's financial position, results of operations or cash flows:



Accounting Standard Update
2018-07	Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
2018-15	Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs in a Cloud Computing Arrangement That is a Service Contract

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. 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 March 31, 2019 and 2018 are:



(In millions) Three Months Ended March 31, 2019	Customer Sales		Intersegment Sales			Net Sales			Earnings from investees		Earnings (loss) before interest and income taxes
Flat-Rolled	$	2,405	$	69		$	2,474		$	7	$	95
USSE	737		3			740			—		29
Tubular	343		2			345			2		10
Total reportable segments	3,485		74			3,559			9		134
Other Businesses	14		30			44			—		8
Reconciling Items and Eliminations	—		(104		)	(104		)	—		(31		)
Total	$	3,499	$	—		$	3,499		$	9	$	111

Three Months Ended March 31, 2018
Flat-Rolled	$	2,046	$	57		$	2,103		$	2	$	33
USSE	823		1			824			—		110
Tubular	266		—			266			1		(27		)
Total reportable segments	3,135		58			3,193			3		116
Other Businesses	14		31			45			—		11
Reconciling Items and Eliminations	—		(89		)	(89		)	—		10
Total	$	3,149	$	—		$	3,149		$	3	$	137

-6-

The following is a schedule of reconciling items to consolidated earnings before interest and income taxes:



	Three Months Ended March 31,
(In millions)	2019			2018
Items not allocated to segments:
Clairton coke making facility fire	$	(31	)	$	—
Granite City Works adjustment to temporary idling charges	—			10
Total reconciling items	$	(31	)	$	10

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 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 slabs, 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 months ended March 31, 2019 and 2018, respectively:

Net Sales by Product



(In millions) Three Months Ended March 31, 2019	Flat-Rolled		USSE		Tubular		Other Businesses		Total
Semi-finished	$	88	$	4	$	—	$	—	$	92
Hot-rolled sheets	763		332		—		—		1,095
Cold-rolled sheets	661		88		—		—		749
Coated sheets	728		279		—		—		1,007
Tubular products	—		9		335		—		344
All Other^(a)	165		25		8		14		212
Total	$	2,405	$	737	$	343	$	14	$	3,499

^(a)Consists primarily of sales of raw materials and coke making by-products.

-7-



(In millions) Three Months Ended March 31, 2018	Flat-Rolled		USSE		Tubular		Other Businesses		Total
Semi-finished	$	9	$	37	$	—	$	—	$	46
Hot-rolled sheets	572		353		—		—		925
Cold-rolled sheets	639		98		—		—		737
Coated sheets	706		297		—		—		1,003
Tubular products	—		12		259		—		271
All Other ^(a)	120		26		7		14		167
Total	$	2,046	$	823	$	266	$	14	$	3,149

^(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)	March 31, 2019		March 31, 2018
Cash and cash equivalents	$	676	$	1,372
Restricted cash in other current assets	2		6
Restricted cash in other noncurrent assets	31		39
Total cash, cash equivalents and restricted cash	$	709	$	1,417

Amounts included in restricted cash represent cash balances which are legally or contractually restricted, primarily for environmental capital expenditure projects and insurance purposes.

7. 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 March 31, 2019 and December 31, 2018, the LIFO method accounted for 73 percent and 74 percent of total inventory values, respectively.



(In millions)	March 31, 2019		December 31, 2018
Raw materials	$	617	$	605
Semi-finished products	1,059		1,021
Finished products	401		404
Supplies and sundry items	56		62
Total	$	2,133	$	2,092

Current acquisition costs were estimated to exceed the above inventory values by $1,159 million and $1,038 million at March 31, 2019 and December 31, 2018, respectively. As a result of the liquidation of LIFO inventories, cost of sales increased and earnings before income and income taxes decreased by $1 million and $2 million in the three months ended March 31, 2019 and March 31, 2018, respectively.

Inventory includes $41 million and $39 million of land held for residential/commercial development as of March 31, 2019 and December 31, 2018, respectively.

-8-

8. Leases

Effective January 1, 2019, U. S. Steel adopted ASU 2016-02 using the optional modified retrospective transition method outlined in ASU 2018-11 which permitted application of ASU 2016-02 on January 1, 2019 using a cumulative effect adjustment to the opening balance of retained earnings. As a result of adoption, an operating lease asset of $234 million and current and noncurrent liabilities for operating leases of $53 million and $185 million, respectively, were recorded as of March 31, 2019 (see below tabular disclosure for further details). There was an insignificant cumulative effect of adoption for operating lease liabilities that exceeded their related asset values for leases where payment started after lease commencement.

Operating lease assets consist primarily of office space, heavy mobile equipment used in our mining operations and facilities and equipment under operating service agreements for electricity generation and scrap processing. We also have operating lease assets for light mobile equipment and information technology assets. Significant finance leases include the Fairfield slab caster lease and heavy mobile equipment used in our mining operations (see Note 16 for further details). Variable lease payments are primarily related to operating service agreements where payment is solely dependent on consumption of certain services, such as raw material and by-product processing. Most long-term leases include renewal options and, in certain leases, purchase options. Generally, we are not reasonably certain that these options will be exercised. We have residual value guarantees under certain light mobile equipment leases. There is no impact to our leased assets for residual value guarantees as the potential loss is not probable (see “Other Contingencies” in Note 22 for further details). We do not have material restrictive covenants associated with our leases or material amounts of sublease income. From time to time, U. S. Steel may enter into arrangements for the construction or purchase of an asset and then enter into a financing arrangement to lease the asset. U. S. Steel recognizes leased assets and liabilities under these arrangements when it obtains control of the asset.

U. S. Steel elected the option within ASU 2016-02 to straight-line expense and not record assets or liabilities for leases with an initial term of 12 months or less. For leases beginning in 2019 and later, we separate non-lease components from lease components for leases under operating service agreements. We do not separate non-lease components for other lease types as they are not significant. The Company does not have secured notes outstanding; therefore, we use an estimated secured borrowing rate as the discount rate for most of our leases. In accordance with the practical expedients outlined in ASU 2016-02, we did not use hindsight in determining the lease term for existing leases and elected not to reassess the following for existing leases: whether contracts contain a lease, lease classification, and initial direct costs.

The following table summarizes the lease amounts included in our Consolidated Balance Sheet as of March 31, 2019.



(In millions)	Balance Sheet Location	March 31, 2019
Assets
Operating	Operating lease assets^(a)	$	234
Finance	Property, plant and equipment^(b)	31
Total Lease Assets		$	265

Liabilities
Current
Operating	Current operating lease liabilities	$	53
Finance	Current portion of long-term debt	6
Non-Current
Operating	Noncurrent operating lease liabilities	185
Finance	Long-term debt less unamortized discount and debt issuance costs	32
Total Lease Liabilities		$	276

^(a) Operating lease assets are recorded net of accumulated amortization of $12 million.

^(b) Finance lease assets are recorded net of depreciation of $21 million.

-9-

Operating lease cost of $21 million and $3 million was recorded in Cost of sales and Selling, general and administrative expenses, respectively, for the three months ended March 31, 2019. The amount recorded in Cost of sales includes $5 million of variable lease cost and an immaterial amount of short-term lease cost. Finance lease cost of $1 million for the three months ended March 31, 2019 was primarily recorded in Depreciation, depletion and amortization.

Lease liability maturities as of March 31, 2019 are shown below:



(In millions)	Operating		Finance		Total
2019	$	53	$	7	$	60
2020	57		8		65
2021	47		8		55
2022	37		14		51
2023	28		3		31
After 2023	74		5		79
Total Lease Payments	$	296	$	45	$	341
Less: Interest	58		7		65
Present value of lease liabilities	$	238	$	38	$	276

Future minimum commitments for capital and operating leases having initial non-cancelable lease terms in excess of one year as of the year ended December 31, 2018 were as follows:



(In millions)	Capital Leases		Operating Leases
2019	$	5	$	66
2020	5		55
2021	5		45
2022	11		37
2023	—		28
Later years	—		72
Total minimum lease payments	$	26	$	303
Less imputed interest costs	4
Present value of net minimum lease payments included in long-term debt	$	22

Lease terms and discount rates are shown below:



	March 31, 2019
Weighted average lease term
Finance	5 years
Operating	6 years

Weighted average discount rate
Finance	6.92	%
Operating	7.16	%

Supplemental cash flow information related to leases was as follows:

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(In millions)	Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	18
Operating cash flows from finance leases	—
Financing cash flows from finance leases	—
Right-of-use assets exchanged for lease liabilities:
Operating leases	8
Finance leases	16

9. Intangible Assets

Intangible assets that are being amortized on a straight-line basis over their estimated useful lives are detailed below:



		As of March 31, 2019						As of December 31, 2018
(In millions)	Useful Lives	Gross Carrying Amount		Accumulated Amortization		Net Amount		Gross Carrying Amount		Accumulated Amortization		Net Amount
Customer relationships	22 Years	$	132	$	72	$	60	$	132	$	70	$	62
Patents	10-15 Years	22		7		15		22		7		15
Other	4-20 Years	14		8		6		14		8		6
Total amortizable intangible assets		$	168	$	87	$	81	$	168	$	85	$	83

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 for both three months ended March 31, 2019 and March 31, 2018. The estimated amortization expense for the remainder of 2019 is $6 million. We expect a consistent level of annual amortization expense through 2023.

The carrying amount of acquired water rights with indefinite lives as of March 31, 2019 and December 31, 2018 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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10. Pensions and Other Benefits

The following table reflects the components of net periodic benefit cost for the three months ended March 31, 2019 and 2018:



	Pension Benefits						Other Benefits
(In millions)	2019			2018			2019			2018
Service cost	$	11		$	13		$	3		$	4
Interest cost	60			58			23			23
Expected return on plan assets	(81		)	(90		)	(20		)	(20		)
Amortization of prior service cost	—			—			7			7
Amortization of actuarial net loss	33			38			1			1
Net periodic benefit cost, excluding below	23			19			14			15
Multiemployer plans	18			14			—			—
Net periodic benefit cost	$	41		$	33		$	14		$	15

Employer Contributions

During the first three months of 2019, U. S. Steel made cash payments of $18 million to the Steelworkers’ Pension Trust and $2 million of pension payments not funded by trusts.

During the first three months of 2019, cash payments of $9 million were made for other postretirement benefit payments not funded by trusts.

Company contributions to defined contribution plans totaled $10 million and $11 million for the three months ended March 31, 2019 and 2018, respectively.

11. 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-employment (OPEB) plans, and foreign currency derivative and remeasurement gains and losses. During the three months ended March 31, 2019 and 2018, net foreign currency gains of $7 million and losses of $4 million, respectively, were recorded in other financial costs. Additionally, during the three months ended March 31, 2018, there was a loss on debt extinguishment of $46 million. There were no debt extinguishment transactions in 2019.

See Note 15 for additional information on U. S. Steel’s use of derivatives to mitigate its foreign currency exchange rate exposure.

12. 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). 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 the awards that were previously granted under the 2005 Plan remain outstanding, all future awards will be granted under the Omnibus Plan. As of March 31, 2019, there were 6,612,640 shares available for future grants under the Omnibus Plan.

Recent grants of stock-based compensation consist of restricted stock units, total shareholder return (TSR) performance awards and return on capital employed (ROCE) performance awards. Shares of common stock under the Omnibus Plan 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 quarter of 2019 and 2018.

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	2019			2018
Grant Details	Shares^(a)	Fair Value^(b)		Shares^(a)	Fair Value^(b)
Restricted Stock Units	975,750	$	23.91	450,240	$	43.99
Performance Awards ^(c)
TSR	210,520	$	29.22	70,470	$	63.87
ROCE	526,140	$	23.92	236,220	$	43.99

^(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 quarter.

^(c) The number of performance awards shown represents the target value of the award.

U. S. Steel recognized pretax stock-based compensation expense in the amount of $8 million and $7 million in the three month periods ended March 31, 2019 and 2018, respectively.

As of March 31, 2019, total future compensation expense related to nonvested stock-based compensation arrangements was $46 million, and the weighted average period over which this expense is expected to be recognized is approximately 18 months.

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 varying levels 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 meets performance criteria during 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.

ROCE performance awards may 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.

For further details about our stock-based compensation incentive plans and stock awards see Note 15 of the United States Steel Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

13. Income Taxes

Tax provision

For the three months ended March 31, 2019 and 2018, we recorded a tax provision of $8 million on our pretax earnings of $62 million and a tax provision of $1 million on our pretax earnings of $19 million, respectively. The tax provision in both periods reflects a benefit for percentage depletion in excess of cost depletion from iron ore that we produce and consume or sell. In 2018, the tax provision also reflects a tax benefit for the release of a portion of the valuation allowance due to pretax income.

The tax provision for the first three months of 2019 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 2019 pretax results for U.S. and foreign income or loss vary from estimates applied herein, the actual tax provision or benefit recognized in 2019 could be materially different from the forecasted amount used to estimate the tax provision for the three months ended March 31, 2019.

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.

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At March 31, 2019, U. S. Steel reviewed all available positive and negative evidence and determined that it is more likely than not that certain 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 March 31, 2019 and December 31, 2018, the total amount of gross unrecognized tax benefits was $34 million and $35 million, respectively. The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $2 million as of both March 31, 2019 and December 31, 2018.

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 March 31, 2019 and December 31, 2018, U. S. Steel had accrued liabilities of $2 million for interest and penalties related to uncertain tax positions.

It is reasonably expected that during the next 12 months unrecognized tax benefits related to income tax positions will decrease by approximately $32 million.

14. 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.

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The computations for basic and diluted earnings per common share from continuing operations are as follows:



	Three Months Ended March 31,
(Dollars in millions, except per share amounts)	2019		2018
Earnings attributable to United States Steel Corporation stockholders	$	54	$	18
Weighted-average shares outstanding (in thousands):
Basic	173,241		176,157
Effect of stock options, restricted stock units and performance awards	1,304		2,132
Adjusted weighted-average shares outstanding, diluted	174,545		178,289
Basic earnings per common share	$	0.31	$	0.10
Diluted earnings per common share	$	0.31	$	0.10

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 March 31,
(In thousands)	2019	2018
Securities granted under the 2016 Omnibus Incentive Compensation Plan, as amended	3,179	1,982

Dividends Paid Per Share

The dividend for the first quarter of 2019 and 2018 was five cents per common share.

15. 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. U. S. Steel uses foreign exchange forward sales contracts (foreign exchange forwards) 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 contracts as hedges. Therefore, changes in their fair value are recognized immediately in the Consolidated Statement of Operations and are also shown in the tabular disclosure below. We mitigate the risk of concentration of counterparty credit risk by purchasing our forwards from several counterparties.

In 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 contracts with remaining maturities up to 20 months 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 (AOCI) until the related contract impacts earnings.

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). We elected cash flow hedge accounting for domestic commodity purchase swaps and utilize mark-to-market accounting for commodity purchase swaps used in our European operations.

Financial swaps are also used to partially manage the sales price of certain hot-rolled coil and iron ore pellet contract sales (sales swaps). We elected cash flow hedge accounting for hot-rolled coil sales swaps effective January 1, 2018 and for iron ore pellet sales swaps effective January 1, 2019.

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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.

The table below shows the outstanding swap quantities used to hedge forecasted purchases and sales as of March 31, 2019 and March 31, 2018:



Hedge Contracts	Classification	March 31, 2019		March 31, 2018
Natural gas (in mmbtus)	Commodity purchase swaps	56,894,000		17,711,000
Tin (in metric tons)	Commodity purchase swaps	1,475		690
Zinc (in metric tons)	Commodity purchase swaps	13,651		10,627
Hot-rolled coils (in tons)	Sales swaps	—		78,000
Foreign currency (in millions of euros)	Foreign exchange forwards	€	296	€	251
Foreign currency (in millions of CAD)	Foreign exchange forwards	C$	48	C$	—

The following summarizes the fair value amounts included in our Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018:



(In millions) Designated as Hedging Instruments	Balance Sheet Location	March 31, 2019		December 31, 2018
Sales swaps	Accounts payable	$	—	$	1
Commodity purchase swaps	Accounts receivable	5		2
Commodity purchase swaps	Accounts payable	1		17
Commodity purchase swaps	Investments and long-term receivables	3		—
Commodity purchase swaps	Other long-term liabilities	3		1
Foreign exchange forwards	Accounts payable	1		1
Foreign exchange forwards	Other long-term liabilities	1		1

Not Designated as Hedging Instruments
Foreign exchange forwards	Accounts receivable	14		12

The table below summarizes the effect of hedge accounting on AOCI and amounts reclassified from AOCI into earnings for the three months ended March 31, 2019 and 2018:



	Gain (Loss) on Derivatives in AOCI						Amount of Gain (Loss) Recognized in Income
(In millions)	March 31, 2019		March 31, 2018			Location of Reclassification from AOCI ^(a)	March 31, 2019			March 31, 2018
Sales swaps ^(b)	$	1	$	(9	)	Net sales	$	(1	)	$	—
Commodity purchase swaps	18		(7		)	Cost of sales ^(c)	(4		)	5
Foreign exchange forwards	1		—			Cost of sales	—			—

^(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 elected hedge accounting prospectively for iron ore pellet sales swaps on January 1, 2019.

^(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 Statement of Operations for the three months ended March 31, 2019 and 2018:

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		Amount of Gain (Loss) Recognized in Income
(In millions)	Consolidated Statement of Operations Location	March 31, 2019		March 31, 2018
Sales swaps ^(a)	Net sales	$	—	$	(1	)
Commodity purchase swaps	Cost of sales	—		1
Foreign exchange forwards	Other financial costs	9		(6		)

^(a)U. S. Steel elected hedge accounting prospectively for iron ore pellet sales swaps on January 1, 2019.

At current contract values, $3 million currently in AOCI as of March 31, 2019 will be recognized as a decrease in cost of sales over the next year as related hedged items are recognized in earnings. The maximum derivative contract duration for commodity purchase swaps is 32 months and the maximum duration for foreign exchange forwards is 20 months. There are no outstanding contracts for sales swaps.

16. Debt



(In millions)	Interest Rates %	Maturity	March 31, 2019		December 31, 2018
2037 Senior Notes	6.650	2037	$	350	$	350
2026 Senior Notes	6.250	2026	650		650
2025 Senior Notes	6.875	2025	750		750
Environmental Revenue Bonds	5.750 - 6.875	2019 - 2042	400		400
Fairfield Caster Lease		2022	21		22
Other finance leases and all other obligations		2019 - 2025	21		6
Fourth Amended and Restated Credit Agreement	Variable	2023	—		—
USSK Credit Agreement	Variable	2023	225		229
USSK credit facilities	Variable	2021	—		—
Total Debt			2,417		2,407
Less unamortized discount and debt issuance costs			25		26
Less short-term debt and long-term debt due within one year			66		65
Long-term debt			$	2,326	$	2,316

To the extent not otherwise discussed below, information concerning the senior notes and other listed obligations can be found in Note 17 of the audited financial statements in the United States Steel Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Fourth Amended and Restated Credit Agreement

As of March 31, 2019, 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 March 31, 2019, 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.

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U. S. Steel Košice (USSK) credit facilities

At March 31, 2019, USSK had borrowings of €200 million (approximately $225 million) under its €460 million (approximately $517 million) unsecured revolving credit facility. 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 March 31, 2019, USSK had availability of €260 million (approximately $292 million) under the USSK Credit Agreement.

At March 31, 2019, USSK had no borrowings under its €20 million and €10 million unsecured credit facilities (collectively, approximately $34 million) and the availability was approximately $33 million due to approximately $1 million of customs and other guarantees outstanding.

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 $1,975 million as of March 31, 2019 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 $21 million or provide a letter of credit to secure the remaining obligation.

17. 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)	March 31, 2019			December 31, 2018
Balance at beginning of year	$	60		$	69
Obligations settled	(1		)	(12		)
Accretion expense	—			3
Balance at end of period	$	59		$	60

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.

18. 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 15 for disclosure of U. S. Steel’s derivative instruments, which are accounted for at fair value on a recurring basis.

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The following table summarizes U. S. Steel’s financial liabilities that were not carried at fair value at March 31, 2019 and December 31, 2018.



	March 31, 2019				December 31, 2018
(In millions)	Fair Value		Carrying Amount		Fair Value		Carrying Amount
Financial liabilities:
Long-term debt ^(a)	$	2,211	$	2,295	$	2,182	$	2,353

(a) Excludes finance 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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19. Statement of Changes in Stockholders’ Equity

The following table reflects the first three months of 2019 and 2018 reconciliation of the carrying amount of total equity, equity attributable to U. S. Steel and equity attributable to noncontrolling interests:



Three Months Ended March 31, 2019 (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	$	4,203		$	1,212		$	(1,026	)	$	177	$	(78	)	$	3,917	$	1
Comprehensive income (loss):
Net earnings	54			54
Other comprehensive income (loss), net of tax:
Pension and other benefit adjustments	32						32
Currency translation adjustment	(17		)				(17		)
Derivative financial instruments	15						15
Employee stock plans	(40		)							1		(48		)	7
Dividends paid on common stock	(9		)	(9		)
Cumulative effect upon adoption of lease accounting standard	(2		)	(2		)
Balance at March 31, 2019	$	4,236		$	1,255		$	(996	)	$	178	$	(126	)	$	3,924	$	1



Three Months Ended March 31, 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):
Net earnings	18			18
Other comprehensive income (loss), net of tax:
Pension and other benefit adjustments	46						46
Currency translation adjustment	40						40
Derivative financial instruments	(16		)				(16		)
Employee stock plans	39									1		75			(37		)
Dividends paid on common stock	(9		)	(9		)
Balance at March 31, 2018	$	3,439		$	142		$	(775	)	$	177	$	(1	)	$	3,895		$	1

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20. Reclassifications from Accumulated Other Comprehensive Income (AOCI)



(In millions)	Pension and Other Benefit Items			Foreign Currency Items			Unrealized Gain (Loss) on Derivatives			Total
Balance at December 31, 2018	$	(1,416	)	$	403		$	(13	)	$	(1,026	)
Other comprehensive income before reclassifications	63			(17		)	25			71
Amounts reclassified from AOCI ^(a)	(31		)	—			(10		)	(41		)
Net current-period other comprehensive income	32			(17		)	15			30
Balance at March 31, 2019	$	(1,384	)	$	386		$	2		$	(996	)

Balance at December 31, 2017	$	(1,309	)	$	463		$	1		$	(845	)
Other comprehensive income before reclassifications	92			40			(13		)	119
Amounts reclassified from AOCI ^(a)	(46		)	—			(3		)	(49		)
Net current-period other comprehensive income	46			40			(16		)	70
Balance at March 31, 2018	$	(1,263	)	$	503		$	(15	)	$	(775	)

(a)See table below for further details.



		Amount reclassified from AOCI
		Three Months Ended March 31,
(In millions)	Details about AOCI components	2019			2018
	Amortization of pension and other benefit items
	Prior service costs ^(a)	$	(7	)	$	(7	)
	Actuarial losses ^(a)	(34		)	(39		)
	Total pensions and other benefits items	(41		)	(46		)
	Derivative reclassifications to Consolidated Statements of Operations	(13		)	(3		)
	Total before tax	(54		)	(49		)
	Tax benefit ^(b)	13			—
	Net of tax	$	(41	)	$	(49	)

(a)These AOCI components are included in the computation of net periodic benefit cost (see Note 10 for additional details).

(b)Amounts in 2018 do not reflect a tax benefit as a result of a full valuation allowance on our domestic deferred tax assets.

21. Transactions with Related Parties

Net sales to related parties and receivables from related parties primarily reflect sales of raw materials and steel products to equity investees. Generally, transactions are conducted under long-term contractual arrangements. Related party sales and service transactions were $375 million and $328 million for the three months ended March 31, 2019 and 2018, respectively.

Purchases from related parties for outside processing services provided by equity investees amounted to $9 million and $7 million for the three months ended March 31, 2019 and 2018, respectively. Purchases of iron ore pellets from related parties amounted to $20 million and $17 million for the three months ended March 31, 2019 and 2018 respectively.

Accounts payable to related parties include balances due to PRO-TEC Coating Company, LLC (PRO-TEC) of $115 million and $80 million at March 31, 2019 and December 31, 2018, respectively for invoicing and receivables collection services provided by U. S. Steel on PRO-TEC's behalf. U. S. Steel, as PRO-TEC’s exclusive sales agent, is responsible for credit risk related to those receivables. U. S. Steel also provides PRO-

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TEC marketing, selling and customer service functions. Payables to other related parties totaled $4 million and $1 million at March 31, 2019 and December 31, 2018, respectively.

22. Contingencies and Commitments

U. S. Steel is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Consolidated Financial Statements. However, management believes that U. S. Steel will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably.

U. S. Steel accrues for estimated costs related to existing lawsuits, claims and proceedings when it is probable that it will incur these costs in the future and the costs are reasonably estimable.

Asbestos matters – As of March 31, 2019, U. S. Steel was a defendant in approximately 745 active cases involving approximately 2,315 plaintiffs. The vast majority of these cases involve multiple defendants. At December 31, 2018, U. S. Steel was a defendant in approximately 755 cases involving approximately 2,320 plaintiffs. About 1,540, or approximately 67 percent, of these plaintiff claims are currently pending in jurisdictions which permit filings with massive numbers of plaintiffs. Based upon U. S. Steel’s experience in such cases, it believes that the actual number of plaintiffs who ultimately assert claims against U. S. Steel will likely be a small fraction of the total number of plaintiffs.

The following table shows the number of asbestos claims in the current period and the prior three years:



Period ended	Opening Number of Claims	Claims Dismissed, Settled and Resolved ^(a)	New Claims	Closing Number of Claims
December 31, 2016	3,315	225	250	3,340
December 31, 2017	3,340	275	250	3,315
December 31, 2018	3,315	1,285	290	2,320
March 31, 2019	2,320	75	70	2,315

^(a) The period ending December 31, 2018 includes approximately 1,000 dismissed cases previously pending in the State of Texas.

Historically, asbestos-related claims against U. S. Steel fall into three groups: (1) claims made by persons who allegedly were exposed to asbestos on the premises of U. S. Steel facilities; (2) claims made by persons allegedly exposed to products manufactured by U. S. Steel; and (3) claims made under certain federal and maritime laws by employees of former operations of U. S. Steel.

The amount U. S. Steel accrues for pending asbestos claims is not material to U. S. Steel’s financial condition. However, U. S. Steel is unable to estimate the ultimate outcome of asbestos-related claims due to a number of uncertainties, including: (1) the rates at which new claims are filed, (2) the number of and effect of bankruptcies of other companies traditionally defending asbestos claims, (3) uncertainties associated with the variations in the litigation process from jurisdiction to jurisdiction, (4) uncertainties regarding the facts, circumstances and disease process with each claim, and (5) any new legislation enacted to address asbestos-related claims.

Further, U. S. Steel does not believe that an accrual for unasserted claims is required. At any given reporting date, it is probable that there are unasserted claims that will be filed against the Company in the future. In 2018, the Company engaged an outside valuation consultant to assist in assessing its ability to estimate an accrual for unasserted claims. This assessment was based on the Company's settlement experience, including recent claims trends. The analysis focused on settlements made over the last several years as these claims are likely to best represent future claim characteristics. After review by the valuation consultant and U. S. Steel management, it was determined that the Company could not estimate an accrual for unasserted claims.

Despite these uncertainties, management believes that the ultimate resolution of these matters will not have a material adverse effect on U. S. Steel’s financial condition.

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Environmental matters – U. S. Steel is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. Changes in accrued liabilities for remediation activities where U. S. Steel is identified as a named party are summarized in the following table:



(In millions)	Three Months Ended March 31, 2019
Beginning of period	$	187
Accruals for environmental remediation deemed probable and reasonably estimable	1
Obligations settled	(4		)
End of period	$	184

Accrued liabilities for remediation activities are included in the following Consolidated Balance Sheet lines:



(In millions)	March 31, 2019		December 31, 2018
Accounts payable	$	37	$	37
Deferred credits and other noncurrent liabilities	147		150
Total	$	184	$	187

Expenses related to remediation are recorded in cost of sales and were immaterial for both three month periods ended March 31, 2019 and March 31, 2018. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Due to uncertainties inherent in remediation projects and the associated liabilities, it is reasonably possible that total remediation costs for active matters may exceed the accrued liabilities by as much as 15 to 25 percent.

Remediation Projects

U. S. Steel is involved in environmental remediation projects at or adjacent to several current and former U. S. Steel facilities and other locations that are in various stages of completion ranging from initial characterization through post-closure monitoring. Based on the anticipated scope and degree of uncertainty of projects, we categorize projects as follows:

(1)

Projects with Ongoing Study and Scope Development - Projects which are still in the development phase. For these projects, the extent of remediation that may be required is not yet known, the remediation methods and plans are not yet developed, and/or cost estimates cannot be determined. Therefore, significant costs, in addition to the accrued liabilities for these projects, are reasonably possible. There are five environmental remediation projects where additional costs for completion are not currently estimable, but could be material. These projects are at Fairfield Works, Lorain Tubular, USS-POSCO Industries (UPI), the Fairless Plant and the former steelmaking plant at Joliet, Illinois. As of March 31, 2019, accrued liabilities for these projects totaled $1 million for the costs of studies, investigations, interim measures, design and/or remediation. It is reasonably possible that additional liabilities associated with future requirements regarding studies, investigations, design and remediation for these projects could be as much as $25 million to $40 million.

(2)

Significant Projects with Defined Scope - Projects with significant accrued liabilities with a defined scope. As of March 31, 2019, there are four significant projects with defined scope greater than or equal to $5 million each, with a total accrued liability of $142 million. These projects are Gary Resource Conservation and Recovery Act (RCRA) (accrued liability of $25 million), the former Geneva facility (accrued liability of $60 million), the Cherryvale zinc site (accrued liability of $11 million) and the former Duluth facility St. Louis River Estuary (accrued liability of $46 million).

(3)

Other Projects with a Defined Scope - Projects with relatively small accrued liabilities for which we believe that, while additional costs are possible, they are not likely to be significant, and also include those projects for which we do not yet possess sufficient information to estimate potential costs to U. S. Steel. There are two other environmental remediation projects which each had an accrued liability of between $1 million and $5 million. The total accrued liability for these projects at March 31, 2019 was $4 million. These projects have progressed through a significant portion of the design phase and material additional costs are not expected.

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The remaining environmental remediation projects each have an accrued liability of less than $1 million each. The total accrued liability for these projects at March 31, 2019 was approximately $4 million. We do not foresee material additional liabilities for any of these sites.

Post-Closure Costs – Accrued liabilities for post-closure site monitoring and other costs at various closed landfills totaled $22 million at March 31, 2019 and were based on known scopes of work.

Administrative and Legal Costs – As of March 31, 2019, U. S. Steel had an accrued liability of $10 million for administrative and legal costs related to environmental remediation projects. These accrued liabilities were based on projected administrative and legal costs for the next three years and do not change significantly from year to year.

Capital Expenditures – For a number of years, U. S. Steel has made substantial capital expenditures to comply with various regulations, laws and other requirements relating to the environment. In the first three months of 2019 and 2018, such capital expenditures totaled $16 million and $13 million, respectively. U. S. Steel anticipates making additional such expenditures in the future, which may be material; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements.

EU Environmental Requirements - Under the Emission Scheme (ETS), USSK's final allocation of allowances for the Phase III period, which covers the years 2013 through 2020 is 48 million allowances. We estimate a shortfall of approximately 15 million allowances for the Phase III period. Based on projected total production levels during Phase III, we started to purchase allowances in the third quarter of 2017 to meet the annual compliance submission in the future. As of March 31, 2019, we have purchased 12 million European Union Allowances (EUA) totaling €128 million (approximately $144 million). However, due to a number of variables such as the future market value of allowances, future production levels and future emissions intensity levels, we cannot reliably estimate the full cost of complying with the ETS regulations at this time.

The EU’s Industry Emission Directive requires implementation of EU determined best available techniques (BAT) for Iron and Steel production to reduce environmental impacts as well as compliance with BAT associated emission levels. Our most recent broad estimate of future capital expenditures for projects to comply with or go beyond BAT requirements is €138 million (approximately $155 million) over the 2017 to 2020 program period. These costs may be mitigated if USSK complies with certain financial covenants, which are assessed annually. USSK complied with these covenants as of March 31, 2019. If we are unable to meet these covenants in the future, USSK might be required to provide additional collateral (e.g. bank guarantee) to secure the full value of estimated expenditures. There could be increased operating costs associated with these projects, such as increased energy and maintenance costs. We are currently unable to reliably estimate what the increase in operating costs will be as many projects are in the development stage.

Environmental indemnifications – Throughout its history, U. S. Steel has sold numerous properties and businesses and many of these sales included indemnifications and cost sharing agreements related to the assets that were divested. These indemnifications and cost sharing agreements have included provisions related to the condition of the property, the approved use, certain representations and warranties, matters of title, and

environmental matters. While most of these provisions have not specifically dealt with environmental issues, there have been transactions in which U. S. Steel indemnified the buyer for clean-up or remediation costs relating to the business sold or its then existing conditions or past practices related to non-compliance with environmental laws. Most of the recent indemnification and cost sharing agreements are of a limited nature, only applying to non-compliance with past and/or current laws. Some indemnifications and cost sharing agreements only run for a specified period of time after the transactions close and others run indefinitely. In addition, current owners or operators of property formerly owned or operated by U. S. Steel may have common law claims and cost recovery and contribution rights against U. S. Steel related to environmental matters. The amount of potential environmental liability associated with these transactions and properties is not estimable due to the nature and extent of the unknown conditions related to the properties divested and deconsolidated. Aside from the environmental liabilities already recorded as a result of these transactions due to specific environmental remediation activities and cases (included in the $184 million of accrued liabilities for remediation discussed above), there are no other known environmental liabilities related to these transactions.

Guarantees – The maximum guarantees of the indebtedness of unconsolidated entities of U. S. Steel totaled $4 million at March 31, 2019.

Other contingencies – Under certain operating lease agreements covering various equipment, U. S. Steel has the option to renew the lease or to purchase the equipment at the end of the lease term. If U. S. Steel does

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not exercise the purchase option by the end of the lease term, U. S. Steel guarantees a residual value of the equipment as determined at the lease inception date (totaling approximately $17 million at March 31, 2019). No liability has been recorded for these guarantees as the potential loss is not probable.

Insurance – U. S. Steel maintains insurance for certain property damage, equipment, business interruption and general liability exposures; however, insurance is applicable only after certain deductibles and retainages. U. S. Steel is self-insured for certain other exposures including workers’ compensation (where permitted by law) and auto liability. Liabilities are recorded for workers’ compensation and personal injury obligations. Other costs resulting from losses under deductible or retainage amounts or not otherwise covered by insurance are charged against income upon occurrence.

U. S. Steel uses surety bonds, trusts and letters of credit to provide whole or partial financial assurance for certain obligations such as workers’ compensation. The total amount of active surety bonds, trusts and letters of credit being used for financial assurance purposes was approximately $180 million as of March 31, 2019, which reflects U. S. Steel’s maximum exposure under these financial guarantees, but not its total exposure for the underlying obligations. A significant portion of our trust arrangements and letters of credit are collateralized by our Credit Facility Agreement. The remaining trust arrangements and letters of credit are collateralized by restricted cash. Restricted cash, which is recorded in other current and noncurrent assets, totaled $33 million and $40 million at March 31, 2019 and December 31, 2018, respectively.

Capital Commitments – At March 31, 2019, U. S. Steel’s contractual commitments to acquire property, plant and equipment totaled $690 million.

Contractual Purchase Commitments – U. S. Steel is obligated to make payments under contractual purchase commitments, including unconditional purchase obligations. Payments for contracts with remaining terms in excess of one year are summarized below (in millions):



Remainder of 2019	2020	2021	2022	2023	Later Years	Total
$554	$605	$389	$322	$312	$730	$2,912

The majority of U. S. Steel’s unconditional purchase obligations relates to the supply of industrial gases, and certain energy and utility services with terms ranging from two to 14 years. Unconditional purchase obligations also include coke and steam purchase commitments related to a coke supply agreement with Gateway Energy & Coke Company LLC (Gateway) under which Gateway is obligated to supply a minimum volume of the expected targeted annual production of the heat recovery coke plant, and U. S. Steel is obligated to purchase the coke from Gateway at the contract price. As of March 31, 2019, if U. S. Steel were to terminate the agreement, it may be obligated to pay in excess of $137 million.

Total payments relating to unconditional purchase obligations were $158 million and $161 million for the three months ended March 31, 2019 and 2018, respectively.

23. Significant Equity Investments

Summarized unaudited income statement information for our significant equity investments for the three months ended March 31, 2019 and 2018 is reported below (amounts represent 100% of investee financial information):



(In millions)	2019		2018
Net sales	$	299	$	261
Cost of sales	259		235
Operating income	28		15
Net earnings	25		12
Net earnings attributable to significant equity investments	25		12

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U. S. Steel's portion of the equity in net earnings of the significant equity investments above was $14 million and $8 million for the three months ended March 31, 2019 and 2018, respectively, which is included in the earnings from investees line on the Consolidated Statement of Operations.

24. Common Stock Repurchase Program

In November 2018, U. S. Steel announced a two year common stock repurchase program that allows for the repurchase of up to $300 million of its outstanding common stock from time to time in the open market or privately negotiated transactions at the discretion of management. During the quarter ended March 31, 2019, U. S. Steel repurchased 2,115,875 shares of common stock for approximately $42 million. As of March 31, 2019, there is approximately $183 million remaining under the share repurchase authorization.

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

RESULTS OF OPERATIONS

Net sales by segment for the three months ended March 31, 2019 and 2018 are set forth in the following table:



	Three Months Ended March 31,
(Dollars in millions, excluding intersegment sales)	2019		2018		% Change
Flat-Rolled Products (Flat-Rolled)	$	2,405	$	2,046	18	%
U. S. Steel Europe (USSE)	737		823		(10	)%
Tubular Products (Tubular)	343		266		29	%
Total sales from reportable segments	3,485		3,135		11	%
Other Businesses	14		14		—	%
Net sales	$	3,499	$	3,149	11	%

Management’s analysis of the percentage change in net sales for U. S. Steel’s reportable business segments for the three months ended March 31, 2019 versus the three months ended March 31, 2018 is set forth in the following table:

Three Months Ended March 31, 2019 versus Three Months Ended March 31, 2018

Steel Products ^(a)

Volume

Price

Mix

FX ^(b)