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| X > SEC Filings for X > Form 10-Q on 30-Oct-2007 | All Recent SEC Filings |
30-Oct-2007
Quarterly Report
Certain sections of Management's Discussion and Analysis include forward-looking statements concerning trends or events potentially affecting the businesses of United States Steel Corporation (U. S. Steel). These statements typically contain words such as "anticipates," "believes," "estimates," "expects," "intends" or similar words indicating that future outcomes are not known with certainty and are subject to risk factors that could cause these outcomes to differ significantly from those projected. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors that could cause future outcomes to differ materially from those set forth in forward-looking statements. For discussion of risk factors affecting the businesses of U. S. Steel, see Item 1A. Risk Factors and "Supplementary Data - Disclosures About Forward-Looking Statements" in U. S. Steel's Annual Report on Form 10-K for the year ended December 31, 2006 and Item 1A. Risk Factors in this Form 10-Q. References in this Quarterly Report on Form 10-Q to "U. S. Steel", "the Company", "we", "us" and "our" refer to U. S. Steel and its consolidated subsidiaries unless otherwise indicated by the context.
On June 14, 2007, U. S. Steel acquired all of the outstanding shares of Lone Star Technologies, Inc. (Lone Star), a domestic manufacturer of high-quality welded oil country tubular goods (OCTG), standard and line pipe and tubular couplings, and a provider of finishing services. See Note 4 to Financial Statements for information regarding the acquisition. The results of operations for Lone Star are included in our Tubular segment from the date of the acquisition. The facilities that were acquired include Lone Star Steel Company, a manufacturer of oilfield tubular products, standard and line pipe and specialty tubing products; Wheeling Machine Products, Inc. and Wheeling Machine Products of Texas, Inc., suppliers of couplings used to connect individual sections of oilfield casing and tubing; Delta Tubular Processing, a provider of thermal treating and end-finishing services for oilfield production tubing; Delta Tubular International, a provider of high-quality threading, inspection and storage services to the OCTG market; Bellville Tube Company, L.P., an OCTG manufacturer; and Fintube Technologies, Inc., a manufacturer of specialty tubular products used in heat recovery technology applications. Lone Star also has a 50 percent ownership interest in Apolo Mecanica e Estruturas LTDA, a Brazilian supplier of welded casing, tubing, line pipe and other tubular products.
The acquisition of Lone Star increased our annual North American tubular manufacturing capability to 2.8 million tons.
RESULTS OF OPERATIONS
Net sales by segment for the third quarter and first nine months of 2007 and
2006 are set forth in the following table:
Quarter Nine Months
Ended Ended
September 30, September 30,
(Dollars in millions, excluding % %
intersegment sales) 2007 2006 Change 2007 2006 Change
Flat-rolled $ 2,439 $ 2,545 -4 % $ 7,137 $ 7,452 -4 %
USSE 1,167 1,036 13 % 3,566 2,893 23 %
Tubular 637 455 40 % 1,398 1,384 1 %
Total sales from reportable segments 4,243 4,036 5 % 12,101 11,729 3 %
Other Businesses 111 70 59 % 237 212 12 %
Net sales $ 4,354 $ 4,106 6 % $ 12,338 $ 11,941 3 %
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Quarter Ended September 30, 2007 versus Quarter Ended September 30, 2006
Coke &
Steel Products Sales (a) Other
Sales
Volume Price Mix FX (b) Net Change
Flat-rolled -2 % 1 % -2 % 0 % -1 % -4 %
USSE -4 % 5 % 3 % 6 % 3 % 13 %
Tubular 48 % -5 % -2 % 0 % -1 % 40 %
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(a) Excludes intersegment sales
(b) Foreign currency effects
Net sales were $4,354 million in the third quarter of 2007, compared with $4,106 million in the same quarter last year. The decrease in sales for the Flat-rolled segment primarily reflected decreased shipments of sheet products and a less favorable product mix. The increase in sales for the European segment was primarily due to favorable currency effects, higher average realized prices and a more favorable product mix, partially offset by lower shipments. Including the currency effects, average realized prices increased $98 per ton from the third quarter of 2006. The increase in sales for the Tubular segment resulted mainly from increased shipments as a result of the Lone Star acquisition, partially offset by lower average realized prices.
Management's analysis of the percentage change in net sales for U. S. Steel's reportable business segments for the nine months ended September 30, 2007 versus the nine months ended September 30, 2006 is set forth in the following table:
Nine Months Ended September 30, 2007 versus Nine Months Ended September 30, 2006
Coke &
Steel Products Sales (a) Other
Sales
Volume Price Mix FX (b) Net Change
Flat-rolled -6 % 8 % -6 % 0 % 0 % -4 %
USSE 0 % 11 % 2 % 7 % 3 % 23 %
Tubular 6 % -1 % -4 % 0 % 0 % 1 %
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(a) Excludes intersegment sales
(b) Foreign currency effects
Net sales were $12,338 million in the first nine months of 2007, compared with $11,941 million in the same period last year. Sales for the Flat-rolled segment were down mainly on lower shipments of sheet products and a less favorable product mix, partially offset by higher average realized prices (up $18 per ton). Sales for USSE increased mainly as a result of higher average realized prices and favorable currency effects. Including the currency effects, average realized prices increased $121 per ton from the first nine months of 2006. Tubular sales were up slightly due primarily to increased shipments, partially offset by an unfavorable change in product mix.
Operating expenses
Total operating expenses as a percent of sales were 92 percent in the third quarter of 2007, compared to 86 percent in the third quarter of 2006. Total operating expenses as a percent of sales were 91 percent in the first nine months of 2007, compared to 88 percent in the first nine months of 2006.
Profit-based union payments
Results for the third quarter and first nine months of 2007 and 2006 included costs related to profit-based payments pursuant to the provisions of the 2003 labor agreement negotiated with the United Steelworkers (USW), and to payments pursuant to agreements with other unions. All of these costs are included in cost of sales on the statement of operations.
Third Quarter Nine Months
Ended Ended
September 30, % September 30, %
(Dollars in millions) 2007 2006 Change 2007 2006 Change
Allocated to segment results $ 36 $ 53 -32 % $ 100 $ 129 -22 %
Retiree benefit expenses 29 41 -29 % 84 105 -20 %
Total $ 65 $ 94 -31 % $ 184 $ 234 -21 %
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Profit-based payment amounts per the agreement with the USW are calculated as percentages of consolidated income from operations after special items (as defined in the agreement) and are: (1) to be used to assist retirees from National Steel with health care costs, based on between 6 percent and 7.5 percent of profit; and (2) paid as profit sharing to active union employees based on 7.5 percent of profit between $10 and $50 per ton and 10 percent of profit above $50 per ton.
Pension and other benefit costs
Defined benefit and multiemployer pension plan costs totaled $32 million in the third quarter of 2007, compared to $59 million in the third quarter of 2006. Defined benefit and multiemployer pension plan costs totaled $88 million in the first nine months of 2007, compared to $154 million in the same period of 2006. The reductions in both periods were due to the completion of the amortization of prior service costs for a 1992 contract amendment, the transfer of certain surviving spouse liabilities to retired life (included in other benefits), and better than expected asset investment performance in 2006, which resulted in lower pension expense in 2007. Costs related to defined contribution plans totaled $6 million and $18 million in the third quarter and first nine months of 2007, respectively, compared to $6 million and $16 million in last year's third quarter and first nine months, respectively.
Other benefit costs totaled $32 million and $94 million in the third quarter and first nine months of 2007, respectively, compared to $28 million and $83 million in the comparable periods last year.
Selling, general and administrative expenses
Selling, general and administrative expenses were $134 million in the third quarter of 2007, compared to $144 million in the third quarter of 2006. Selling, general and administrative expenses were $411 million in the first nine months of 2007, compared to $458 million in the first nine months of 2006. The decreases in both periods were primarily due to lower pension expense as discussed above.
Nine Months
Quarter Ended Ended
September 30, % September 30, %
(Dollars in millions) 2007 2006 Change 2007 2006 Change
Flat-rolled $ 170 $ 230 -26 % $ 337 $ 569 -41 %
USSE 152 219 -31 % 602 532 13 %
Tubular 74 164 -55 % 273 487 -44 %
Total income from reportable segments 396 613 -35 % 1,212 1,588 -24 %
Other Businesses 37 39 -5 % 40 72 -44 %
Segment income from operations 433 652 -34 % 1,252 1,660 -25 %
Retiree benefit expenses (46 ) (70 ) -34 % (128 ) (190 ) -33 %
Other items not allocated to segments:
Tubular inventory transition effects (27 ) - (27 ) -
Workforce reduction charges - (21 ) - (21 )
Asset impairment charge - - - (5 )
Total income from operations $ 360 $ 561 -36 % $ 1,097 $ 1,444 -24 %
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Segment results for Flat-rolled
Nine Months
Quarter Ended Ended
September 30, % September 30, %
2007 2006 Change 2007 2006 Change
Income from operations ($
millions) $ 170 $ 230 -26 % $ 337 $ 569 -41 %
Raw steel production (mnt) 4,328 4,359 -1 % 12,157 13,085 -7 %
Capability utilization 88.5 % 89.1 % -1 % 83.8 % 90.2 % -7 %
Steel shipments (mnt) 3,601 3,695 -3 % 10,388 11,102 -6 %
Average realized steel price
per ton $ 643 $ 651 -1 % $ 648 $ 630 3 %
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The decrease in third quarter 2007 Flat-rolled income from operations as compared to third quarter 2006 resulted mainly from higher raw material and repair and maintenance costs, partially offset by lower accruals for profit-based payments. The decrease in first nine months 2007 income from operations as compared to the same period in 2006 was mainly due to higher raw material, repair and maintenance and outage costs; reduced operating efficiencies; and decreased shipments. These were partially offset by increased average realized prices.
Segment results for USSE
Nine Months
Quarter Ended Ended
September 30, % September 30, %
2007 2006 Change 2007 2006 Change
Income from operations ($ millions) $ 152 $ 219 -31 % $ 602 $ 532 13 %
Raw steel production (mnt) 1,661 1,734 -4 % 5,325 5,290 1 %
Capability utilization 88.7 % 92.7 % -4 % 95.9 % 95.3 % 1 %
Steel shipments (mnt) 1,486 1,552 -4 % 4,754 4,712 1 %
Average realized steel price per ton $ 738 $ 640 15 % $ 710 $ 589 21 %
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Segment results for Tubular
Nine Months
Quarter Ended Ended
September 30, % September 30, %
2007 2006 Change 2007 2006 Change
Income from operations ($ millions) $ 74 $ 164 -55 % $ 273 $ 487 -44 %
Steel shipments (mnt) 473 303 56 % 1,008 920 10 %
Average realized steel price per ton $ 1,282 $ 1,491 -14 % $ 1,350 $ 1,492 -10 %
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The decreases in Tubular income from operations in the third quarter and first nine months of 2007 as compared to the same periods of 2006 mainly resulted from lower average realized prices and lower shipments of seamless products.
Results for Other Businesses
Other Businesses generated income of $37 million in the third quarter of 2007, compared to $39 million in the third quarter of 2006. Income from Other Businesses for the first nine months of 2007 was $40 million, compared with income of $72 million in the first nine months of 2006. The decrease in the nine month period was mainly due to lower results for iron ore operations as a result of repair outages and longer-term mine development expense, partially offset by improved results for real estate operations.
Items not allocated to segments
Tubular inventory transition effects of $27 million in the third quarter and first nine months of 2007 reflected the effects of conforming certain inventories acquired from Lone Star to our unified business model, and the impact of selling acquired inventory, which had been recorded at fair value.
Workforce reduction charges of $21 million in the third quarter and first nine months of 2006 reflected employee severance and net benefit charges related to a voluntary workforce reduction program at USSB.
In the first quarter of 2006, an impairment review was completed in accordance with Statement of Accounting Financial Standards (FAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" due to the potential sale of a small wholly owned German subsidiary of U. S. Steel Kosice (USSK), which was subsequently sold in the fourth quarter of 2006. As a result, an asset impairment charge of $5 million was recorded in depreciation, depletion and amortization on the statement of operations.
Nine Months
Quarter Ended Ended
September 30, % September 30, %
(Dollars in millions) 2007 2006 Change 2007 2006 Change
Interest and other financial
costs $ 37 $ 30 23 % $ 87 $ 93 -6 %
Interest income (11 ) (17 ) -35 % (46 ) (49 ) -6 %
Foreign currency (gains) losses (4 ) (6 ) (6 ) (7 )
Charge from early extinguishment
of debt - - 26 -
Total $ 22 $ 7 214 % $ 61 $ 37 65 %
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In the first nine months of 2007, net interest and other financial costs included pre-tax charges of $26 million related to the early redemption of our outstanding 9 3/4% Senior Notes due 2010 in June 2007, and the early redemption of our 10% Senior Quarterly Income Debt Securities in January 2007. Interest and other financial costs in both 2007 periods reflected additional interest expense resulting from the issuance on May 21, 2007 of $300 million principal amount of 5.65% Senior Notes due 2013, $450 million principal amount of 6.05% Senior Notes due 2017 and $350 million principal amount of 6.65% Senior Notes due 2037, and our entry into a $500 million term loan on June 11, 2007. These were partially offset by the absence of interest expense related to most of our 10 3/4% Senior Notes that we purchased in December 2006, our 10% Senior Quarterly Income Debt Securities that we redeemed in January 2007 and our 9 3/4% Senior Notes that we redeemed in June 2007. The changes also reflected decreased interest income.
The provision for income taxes in the third quarter and first nine months of 2007 was $68 million and $187 million, compared to $136 million and $317 million in the respective periods in 2006. The income tax provision in the first nine months of 2007 reflects an estimated annual effective tax rate of 17 percent, excluding $13 million of discrete items. Our effective tax rate is being favorably influenced by the relative earnings projected for the year from our European versus domestic operations.
During 2007 and 2006, a current tax provision was recorded for USSK because the provisions of the Slovak Income Tax Act permit USSK to claim a tax credit of 50 percent of the current statutory rate of 19 percent for the years 2005 through 2009, compared to a 100 percent credit in previous years. As a result of conditions imposed when Slovakia joined the European Union (EU) that were amended by a 2004 settlement with the EU, the total tax credit granted to USSK for the period 2000 through 2009 is limited to $430 million. Based on the credits previously used and forecasts of future taxable income, management anticipates fully utilizing the remaining credits in 2008. It is expected that this will cause a higher effective tax rate in 2008 and subsequent years.
As of September 30, 2007, U. S. Steel had a net domestic deferred tax asset of $182 million. At September 30, 2007, the amount of net foreign deferred tax assets recorded was $17 million, net of an established valuation allowance of $119 million. Net foreign deferred tax assets will fluctuate as the value of the U.S. dollar changes with respect to the euro, the Slovak koruna and the Serbian dinar. A full valuation allowance of $105 million is provided for the Serbian deferred tax assets, which mainly consist of investment tax credits. Although investment tax credits can be carried forward for up to ten years, it is expected that future year investment tax credits, which are required to be used first, will completely offset future income taxes.
For further information on income taxes see Note 10 to Financial Statements.
BALANCE SHEET
See Note 4 to Financial Statements for the fair value of assets acquired and liabilities assumed as a result of the Lone Star acquisition.
Receivables increased by $510 million from year-end 2006 mainly due to higher shipments in the third quarter of 2007 compared to the fourth quarter of 2006, and the Lone Star acquisition.
Inventories, property, plant and equipment and deferred income tax liabilities increased from year-end 2006 primarily as a result of the Lone Star acquisition.
Intangible assets of $231 million primarily consist of water rights and customer relationships acquired with Lone Star.
Goodwill of $1,155 million reflects the difference between the Lone Star purchase price of $1,990 million and the fair value of the net assets acquired.
Assets held for sale consist primarily of railroad operating land, track and equipment related to the potential sale of the majority of the operating assets of Elgin, Joliet and Eastern Railway Company to Canadian National Railway Company. See Note 5 to Financial Statements.
Payroll and benefits payable included a $430 million payable that will be used to assist National retirees with health care costs. This liability increased by $85 million during the first nine months of 2007 and remains outstanding because the associated trust arrangement has not been established.
The $343 million increase in accounts payable from December 31, 2006 mainly reflected increased production volumes and higher raw material costs compared to the fourth quarter of 2006, as well as the Lone Star acquisition.
Long-term debt increased by $1,160 million from year-end 2006. On May 21, 2007, U. S. Steel issued $300 million principal amount of 5.65% Senior Notes due 2013, $450 million principal amount of 6.05% Senior Notes due 2017 and $350 million principal amount of 6.65% Senior Notes due 2037. In addition, on June 11, 2007, U. S. Steel entered into a $500 million term loan. These were partially offset by the early redemption on June 20, 2007 of $378 million of 9 3/4% Senior Notes due 2010 and the early redemption on January 2, 2007 of $49 million of 10% Senior Quarterly Income Debt Securities due 2031.
CASH FLOW
Net cash provided from operating activities was $1,354 million for the first nine months of 2007, compared with $1,035 million in the same period last year. Cash from operating activities in the first nine months of 2007 was reduced by $140 million of voluntary contributions to our main defined benefit pension plan. Cash from operating activities in the first nine months of 2006 was reduced by a $140 million voluntary contribution to our main defined benefit pension plan and a $50 million voluntary contribution to our trust for retiree health and life insurance. U. S. Steel's Board of Directors has authorized additional voluntary contributions of up to $160 million to our trusts for pensions and health care by the end of 2008.
U. S. Steel's contract commitments to acquire property, plant and equipment at September 30, 2007, totaled $166 million.
Capital expenditures for 2007 are expected to be approximately $725 million.
Acquisition of Lone Star Technologies reflected $2,050 million paid at closing, . . .
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