Exhibit 99.3
U. S. Steel Group
Index to 1999 Financial Statements and Supplementary Data
Page
----
Management's Report............................................ S-1
Audited Financial Statements:
Report of Independent Accountants............................ S-1
Statement of Operations...................................... S-2
Balance Sheet................................................ S-3
Statement of Cash Flows...................................... S-4
Notes to Financial Statements................................ S-5
Selected Quarterly Financial Data.............................. S-21
Principal Unconsolidated Affiliates............................ S-22
Supplementary Information...................................... S-22
U.S. Steel Group
Explanatory Note Regarding Financial Information
Although the financial statements of the U. S. Steel Group and
the Marathon Group separately report the assets, liabilities
(including contingent liabilities) and stockholders' equity of
USX attributed to each such Group, such attribution does not
affect legal title to such assets and responsibility for such
liabilities. Holders of USX - U. S. Steel Group Common Stock and
USX - Marathon Group Common Stock are holders of common stock of
USX and continue to be subject to all the risks associated with
an investment in USX and all of its businesses and liabilities.
Financial impacts arising from one Group that affect the overall
cost of USX's capital could affect the results of operations and
financial condition of the other Group. In addition, net losses
of either Group, as well as dividends or distributions on any
class of USX Common Stock or series of Preferred Stock and
repurchases of any class of USX Common Stock or series of
Preferred Stock, will reduce the funds of USX legally available
for payment of dividends on both classes of USX Common Stock.
Accordingly, the USX consolidated financial information should be
read in connection with the U. S. Steel Group financial
information.
Management's Report
The accompanying financial statements of the U. S. Steel Group are the
responsibility of and have been prepared by USX Corporation (USX) in
conformity with accounting principles generally accepted in the United
States. They necessarily include some amounts that are based on best
judgments and estimates. The U. S. Steel Group financial information
displayed in other sections of this report is consistent with these
financial statements.
USX seeks to assure the objectivity and integrity of its
financial records by careful selection of its managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring that
its policies and methods are understood throughout the organization.
USX has a comprehensive formalized system of internal accounting
controls designed to provide reasonable assurance that assets are
safeguarded and that financial records are reliable. Appropriate
management monitors the system for compliance, and the internal
auditors independently measure its effectiveness and recommend
possible improvements thereto. In addition, as part of their audit of
the financial statements, USX's independent accountants, who are
elected by the stockholders, review and test the internal accounting
controls selectively to establish a basis of reliance thereon in
determining the nature, extent and timing of audit tests to be
applied.
The Board of Directors pursues its oversight role in the area of
financial reporting and internal accounting control through its Audit
Committee. This Committee, composed solely of nonmanagement directors,
regularly meets (jointly and separately) with the independent
accountants, management and internal auditors to monitor the proper
discharge by each of its responsibilities relative to internal
accounting controls and the consolidated and group financial
statements.
Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny
Chairman, Board of Directors Vice Chairman Vice President
& Chief Executive Officer & Chief Financial Officer & Comptroller
Report of Independent Accountants
To the Stockholders of USX Corporation:
In our opinion, the accompanying financial statements appearing on
pages S-2 through S-20 present fairly, in all material respects, the
financial position of the U. S. Steel Group at December 31, 1999 and
1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
These financial statements are the responsibility of USX's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The U. S. Steel Group is a business unit of USX Corporation (as
described in Note 1, page S-5); accordingly, the financial statements
of the U. S. Steel Group should be read in connection with the
consolidated financial statements of USX Corporation.
PricewaterhouseCoopers LLP
600 Grant Street, Pittsburgh, Pennsylvania 15219-2794
February 8, 2000
S-1
Statement of Operations
(Dollars in millions) 1999 1998 1997
------------------------------------------------------------------------------------------------------------
Revenues:
Sales $5,380 $6,184 $6,814
Income (loss) from affiliates (89) 46 69
Net gains on disposal of assets 21 54 57
Other income (loss) 2 (1) 1
------ ------ ------
Total revenues 5,314 6,283 6,941
------ ------ ------
Costs and expenses:
Cost of sales (excludes items shown below) 4,928 5,410 5,762
Selling, general and administrative expenses (credits) (Note 11) (283) (201) (137)
Depreciation, depletion and amortization 304 283 303
Taxes other than income taxes 215 212 240
------ ------ ------
Total costs and expenses 5,164 5,704 6,168
------ ------ ------
Income from operations 150 579 773
Net interest and other financial costs (Note 6) 74 42 87
------ ------ ------
Income before income taxes and extraordinary losses 76 537 686
Provision for estimated income taxes (Note 14) 25 173 234
------ ------ ------
Income before extraordinary losses 51 364 452
Extraordinary losses (Note 5) 7 - -
------ ------ ------
Net income 44 364 452
Noncash credit from exchange of preferred stock (Note 18) - - 10
Dividends on preferred stock (9) (9) (13)
------ ------ ------
Net income applicable to Steel Stock $ 35 $ 355 $ 449
------------------------------------------------------------------------------------------------------------
Income Per Common Share Applicable to Steel Stock
1999 1998 1997
------------------------------------------------------------------------------------------------------------
Basic:
Income before extraordinary losses $ .48 $ 4.05 $ 5.24
Extraordinary losses .08 - -
------ ------ ------
Net income $ .40 $ 4.05 $ 5.24
Diluted:
Income before extraordinary losses $ .48 $ 3.92 $ 4.88
Extraordinary losses .08 - -
------ ------ ------
Net income $ .40 $ 3.92 $ 4.88
------------------------------------------------------------------------------------------------------------
See Note 21, for a description and computation of income per common
share.
The accompanying notes are an integral part of these financial
statements.
S-2
Balance Sheet
(Dollars in millions) December 31 1999 1998
-------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 22 $ 9
Receivables, less allowance for doubtful accounts
of $10 and $9 838 392
Income taxes receivable (Note 12) 97 -
Inventories (Note 13) 743 698
Deferred income tax benefits (Note 14) 281 176
------ ------
Total current assets 1,981 1,275
Investments and long-term receivables,
less reserves of $3 and $10 (Notes 12 and 15) 572 743
Property, plant and equipment - net (Note 17) 2,516 2,500
Prepaid pensions (Note 11) 2,404 2,172
Other noncurrent assets 52 59
------ ------
Total assets $7,525 $6,749
-------------------------------------------------------------------------------------------------------------
Liabilities
Current liabilities:
Notes payable $ - $ 13
Accounts payable 739 501
Payroll and benefits payable 322 330
Accrued taxes 177 150
Accrued interest 15 10
Long-term debt due within one year (Note 10) 13 12
------ ------
Total current liabilities 1,266 1,016
Long-term debt (Note 10) 902 464
Deferred income taxes (Note 14) 348 129
Employee benefits (Note 11) 2,245 2,315
Deferred credits and other liabilities 459 484
Preferred stock of subsidiary (Note 9) 66 66
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior subordinated
convertible debentures of USX (Note 18) 183 182
Stockholders' Equity (Note 19)
Preferred stock 3 3
Common stockholders' equity 2,053 2,090
------ ------
Total stockholders' equity 2,056 2,093
------ ------
Total liabilities and stockholders' equity $7,525 $6,749
-------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
S-3
Statement of Cash Flows
(Dollars in millions) 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income $ 44 $ 364 $ 452
Adjustments to reconcile to net cash provided from (used in) operating activities:
Extraordinary losses 7 - -
Depreciation, depletion and amortization 304 283 303
Pensions and other postretirement benefits (256) (215) (349)
Deferred income taxes 107 158 193
Net gains on disposal of assets (21) (54) (57)
Changes in: Current receivables - sold (320) (30) -
- operating turnover (242) 232 (24)
Inventories (14) 7 (57)
Current accounts payable and accrued expenses 239 (285) 61
All other - net 72 (80) (46)
----- ----- -----
Net cash provided from (used in) operating activities (80) 380 476
----- ----- -----
Investing activities:
Capital expenditures (287) (310) (261)
Disposal of assets 10 21 420
Restricted cash - withdrawals 15 35 -
- deposits (17) (35) -
Affiliates - investments (15) (73) (26)
- loans and advances - (1) -
- repayments of loans and advances - - 2
All other - net - 14 (1)
----- ----- -----
Net cash provided from (used in) investing activities (294) (349) 134
----- ----- -----
Financing activities (Note 9):
Increase (decrease) in U. S. Steel Group's portion of
USX consolidated debt 147 13 (561)
Specifically attributed debt:
Borrowings 350 - -
Repayments (11) (4) (6)
Steel Stock issued - 55 48
Preferred stock repurchased (2) (8) -
Dividends paid (97) (96) (96)
----- ----- -----
Net cash provided from (used in) financing activities 387 (40) (615)
----- ----- -----
Net increase (decrease) in cash and cash equivalents 13 (9) (5)
Cash and cash equivalents at beginning of year 9 18 23
----- ----- -----
Cash and cash equivalents at end of year $ 22 $ 9 $ 18
------------------------------------------------------------------------------------------------------------------------
See Note 8, for supplemental cash flow information.
The accompanying notes are an integral part of these financial
statements.
S-4
Notes to Financial Statements
1. Basis of Presentation
After the redemption of the USX - Delhi Group stock on January
26, 1998, USX Corporation (USX) has two classes of common stock:
USX - U. S. Steel Group Common Stock (Steel Stock) and USX -
Marathon Group Common Stock (Marathon Stock), which are intended
to reflect the performance of the U. S. Steel Group and the
Marathon Group, respectively.
The financial statements of the U. S. Steel Group include
the financial position, results of operations and cash flows for
all businesses of USX other than the businesses, assets and
liabilities included in the Marathon Group, and a portion of the
corporate assets and liabilities and related transactions which
are not separately identified with ongoing operating units of
USX. The U. S. Steel Group financial statements are prepared
using the amounts included in the USX consolidated financial
statements. For a description of the U. S. Steel Group's
operating segment, see Note 7.
Although the financial statements of the U. S. Steel Group
and the Marathon Group separately report the assets, liabilities
(including contingent liabilities) and stockholders' equity of
USX attributed to each such Group, such attribution of assets,
liabilities (including contingent liabilities) and stockholders'
equity between the U. S. Steel Group and the Marathon Group for
the purpose of preparing their respective financial statements
does not affect legal title to such assets or responsibility for
such liabilities. Holders of Steel Stock and Marathon Stock are
holders of common stock of USX, and continue to be subject to all
the risks associated with an investment in USX and all of its
businesses and liabilities. Financial impacts arising from one
Group that affect the overall cost of USX's capital could affect
the results of operations and financial condition of the other
Group. In addition, net losses of either Group, as well as
dividends and distributions on any class of USX Common Stock or
series of preferred stock and repurchases of any class of USX
Common Stock or series of preferred stock at prices in excess of
par or stated value, will reduce the funds of USX legally
available for payment of dividends on both classes of Common
Stock. Accordingly, the USX consolidated financial information
should be read in connection with the U. S. Steel Group financial
information.
- -------------------------------------------------------------------------------
2. Summary of Principal Accounting Policies
Principles applied in consolidation - These financial statements
include the accounts of the U. S. Steel Group. The U. S. Steel
Group and the Marathon Group financial statements, taken
together, comprise all of the accounts included in the USX
consolidated financial statements.
Investments in entities over which the U. S. Steel Group has
significant influence are accounted for using the equity method
of accounting and are carried at the U. S. Steel Group's share of
net assets plus loans and advances.
Investments in companies whose stock is publicly traded are
carried at market value. The difference between the cost of these
investments and market value is recorded in other comprehensive
income (net of tax). Investments in companies whose stock has no
readily determinable fair value are carried at cost.
Use of estimates - Generally accepted accounting principles
require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the year. Significant
items subject to such estimates and assumptions include the
carrying value of long-lived assets; valuation allowances for
receivables, inventories and deferred income tax assets;
environmental liabilities; liabilities for potential tax
deficiencies and potential litigation claims and settlements; and
assets and obligations related to employee benefits.
Additionally, certain estimated liabilities are recorded when
management commits to a plan to close an operating facility or to
exit a business activity. Actual results could differ from the
estimates and assumptions used.
Revenue recognition - Revenues principally include sales,
dividend and affiliate income, gains or losses on the disposal of
assets and gains or losses from changes in ownership interests.
Sales are recognized when products are shipped or services
are provided to customers. Income from affiliates includes the U.
S. Steel Group's proportionate share of income from equity method
investments.
When long-lived assets depreciated on an individual basis
are sold or otherwise disposed of, any gains or losses are
reflected in income. Gains on disposal of long-lived assets are
recognized when earned, which is generally at the time of
closing. If a loss on disposal is expected, such losses are
recognized when long-lived assets are reclassified as assets held
for sale. Proceeds from disposal of long-lived assets depreciated
on a group basis are credited to accumulated depreciation,
depletion and amortization with no immediate effect on income.
Gains or losses from a change in ownership of an
unconsolidated affiliate are recognized in revenues in the period
of change.
S-5
Cash and cash equivalents - Cash and cash equivalents include
cash on hand and on deposit and highly liquid debt instruments
with maturities generally of three months or less.
Inventories - Inventories are carried at lower of cost or
market. Cost of inventories is determined primarily under the
last-in, first-out (LIFO) method.
Derivative instruments - The U. S. Steel Group uses commodity-
based derivative instruments to manage its exposure to price
risk. Management is authorized to use futures, forwards, swaps
and options related to the purchase of natural gas, refined
products and nonferrous metals used in steel operations. For
transactions that qualify for hedge accounting, the resulting
gains or losses are deferred and subsequently recognized in
income from operations, as a component of sales or cost of
sales, in the same period as the underlying physical
transaction. To qualify for hedge accounting, derivative
positions cannot remain open if the underlying physical market
risk has been removed. Recorded deferred gains or losses are
reflected within other current and noncurrent assets or accounts
payable and deferred credits and other liabilities, as
appropriate.
Long-lived assets - Depreciation is generally computed using a
modified straight-line method based upon estimated lives of
assets and production levels. The modification factors range
from a minimum of 85% at a production level below 81% of
capability, to a maximum of 105% for a 100% production level. No
modification is made at the 95% production level, considered the
normal long-range level.
Depletion of mineral properties is based on rates which are
expected to amortize cost over the estimated tonnage of minerals
to be removed.
U. S. Steel Group evaluates impairment of its long-lived
assets on an individual asset basis or by logical groupings of
assets. Assets deemed to be impaired are written down to their
fair value, including any related goodwill, using discounted
future cash flows and, if available, comparable market values.
Environmental remediation - The U. S. Steel Group provides for
remediation costs and penalties when the responsibility to
remediate is probable and the amount of associated costs is
reasonably determinable. Generally, the timing of remediation
accruals coincides with completion of a feasibility study or the
commitment to a formal plan of action. Remediation liabilities
are accrued based on estimates of known environmental exposure
and are discounted in certain instances.
Postemployment benefits - The U. S. Steel Group recognizes an
obligation to provide postemployment benefits, primarily for
disability-related claims covering indemnity and medical
payments. The obligation for these claims and the related
periodic costs are measured using actuarial techniques and
assumptions, including an appropriate discount rate, analogous
to the required methodology for measuring pension and other
postretirement benefit obligations. Actuarial gains and losses
are deferred and amortized over future periods.
Insurance - The U. S. Steel Group is insured for catastrophic
casualty and certain property and business interruption
exposures, as well as those risks required to be insured by law
or contract. Costs resulting from noninsured losses are charged
against income upon occurrence.
Reclassifications - Certain reclassifications of prior years'
data have been made to conform to 1999 classifications.
S-6
- ------------------------------------------------------------------------------
3. New Accounting Standards
Effective January 1, 1997, USX adopted American Institute of
Certified Public Accountants Statement of Position No. 96-1,
"Environmental Remediation Liabilities" (SOP 96-1), which
provides additional interpretation of existing accounting
standards related to recognition, measurement and disclosure of
environmental remediation liabilities. As a result of adopting
SOP 96-1, the U. S. Steel Group identified additional
environmental remediation liabilities of $35 million, of which
$28 million was discounted to a present value of $13 million and
$7 million was not discounted. Assumptions used in the
calculation of the present value amount included an inflation
factor of 2% and an interest rate of 7% over a range of 22 to 30
years. The net unfavorable effect of adoption on the U. S. Steel
Group's income from operations at January 1, 1997, was $20
million.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(SFAS No. 133). This new Standard requires recognition of all
derivatives as either assets or liabilities at fair value. SFAS
No. 133 may result in additional volatility in both current
period earnings and other comprehensive income as a result of
recording recognized and unrecognized gains and losses resulting
from changes in the fair value of derivative instruments. The
transition adjustment resulting from adoption of SFAS No. 133
will be reported as a cumulative effect of a change in accounting
principle.
Under the new Standard, USX may elect not to designate
certain derivative instruments as hedges even if the strategy
qualifies for hedge accounting treatment. This approach would
eliminate the administrative effort needed to measure
effectiveness and monitor such instruments; however, this
approach also may result in additional volatility in current
period earnings.
USX cannot reasonably estimate the effect of adoption on
either the financial position or results of operations. It is not
possible to estimate what effect this Statement will have on
future results of operations, although greater period-to-period
volatility is likely. USX plans to adopt the Standard effective
January 1, 2001.
- --------------------------------------------------------------------------------
4. Corporate Activities
Financial activities - As a matter of policy, USX manages most
financial activities on a centralized, consolidated basis. Such
financial activities include the investment of surplus cash; the
issuance, repayment and repurchase of short-term and long-term
debt; the issuance, repurchase and redemption of preferred stock;
and the issuance and repurchase of common stock. Transactions
related primarily to invested cash, short-term and long-term debt
(including convertible debt), related net interest and other
financial costs, and preferred stock and related dividends are
attributed to the U. S. Steel Group, the Marathon Group and,
prior to November 1, 1997, the Delhi Group based upon the cash
flows of each group for the periods presented and the initial
capital structure of each group. Most financing transactions are
attributed to and reflected in the financial statements of the
groups. See Note 9, for the U. S. Steel Group's portion of USX's
financial activities attributed to the groups. However,
transactions such as leases, certain collateralized financings,
certain indexed debt instruments, financial activities of
consolidated entities which are less than wholly owned by USX and
transactions related to securities convertible solely into any
one class of common stock are or will be specifically attributed
to and reflected in their entirety in the financial statements of
the group to which they relate.
Corporate general and administrative costs - Corporate general
and administrative costs are allocated to the U. S. Steel Group,
the Marathon Group and, prior to November 1, 1997, the Delhi
Group based upon utilization or other methods management believes
to be reasonable and which consider certain measures of business
activities, such as employment, investments and sales. The costs
allocated to the U. S. Steel Group were $17 million in 1999, $24
million in 1998 and $33 million in 1997, and primarily consist of
employment costs including pension effects, professional
services, facilities and other related costs associated with
corporate activities.
Income taxes - All members of the USX affiliated group are
included in the consolidated United States federal income tax
return filed by USX. Accordingly, the provision for federal
income taxes and the related payments or refunds of tax are
determined on a consolidated basis. The consolidated provision
and the related tax payments or refunds have been reflected in
the U. S. Steel Group, the Marathon Group and, prior to November
1, 1997, the Delhi Group financial statements in accordance
S-7
with USX's tax allocation policy. In general, such policy
provides that the consolidated tax provision and related tax
payments or refunds are allocated among the U. S. Steel Group,
Marathon Group and, prior to November 1, 1997, the Delhi Group,
for group financial statement purposes, based principally upon
the financial income, taxable income, credits, preferences and
other amounts directly related to the respective groups.
For tax provision and settlement purposes, tax benefits
resulting from attributes (principally net operating losses and
various tax credits), which cannot be utilized by one of the
groups on a separate return basis but which can be utilized on a
consolidated basis in that year or in a carryback year, are
allocated to the group that generated the attributes. To the
extent that one of the groups is allocated a consolidated tax
attribute which, as a result of expiration or otherwise, is not
ultimately utilized on the consolidated tax return, the prior
years' allocation of such attribute is adjusted such that the
effect of the expiration is borne by the group that generated the
attribute. Also, if a tax attribute cannot be utilized on a
consolidated basis in the year generated or in a carryback year,
the prior years' allocation of such consolidated tax effects is
adjusted in a subsequent year to the extent necessary to allocate
the tax benefits to the group that would have realized the tax
benefits on a separate return basis. As a result, the allocated
group amounts of taxes payable or refundable are not necessarily
comparable to those that would have resulted if the groups had
filed separate tax returns.
- -------------------------------------------------------------------------------
5. Extraordinary Losses
In 1999, USX irrevocably deposited with a trustee the entire 5.5
million common shares it owned in RTI International Metals, Inc.
(RTI). The deposit of the shares resulted in the satisfaction of
USX's obligation under its 6 3/4/% Exchangeable Notes (indexed
debt) due February 1, 2000. Under the terms of the indenture, the
trustee exchanged one RTI share for each note at maturity. All
shares were required for satisfaction of the indexed debt;
therefore, none reverted back to USX.
As a result of the above transaction, USX recorded in 1999
an extraordinary loss of $5 million, net of a $3 million income
tax benefit, representing prepaid interest expense and the write-
off of unamortized debt issue costs, and a pretax charge of $22
million, representing the difference between the carrying value
of the investment in RTI and the carrying value of the indexed
debt, which is included in net gains on disposal of assets.
In December 1996, USX had issued $117 million of notes
indexed to the common share price of RTI. At maturity, USX would
have been required to exchange the notes for shares of RTI common
stock, or redeem the notes for the equivalent amount of cash.
Since USX's investment in RTI was attributed to the U. S. Steel
Group, the indexed debt was also attributed to the U. S. Steel
Group. USX had a 26% investment in RTI and accounted for its
investment using the equity method of accounting.
Republic Technologies International, LLC, an equity method
affiliate of USX, recorded in 1999 an extraordinary loss related
to the early extinguishment of debt. As a result, the U. S. Steel
Group recorded an extraordinary loss of $2 million, net of a $1
million income tax benefit, representing its share of the
extraordinary loss.
- --------------------------------------------------------------------------------
6. Net Interest and Other Financial Costs
(In millions) 1999 1998 1997
----------------------------------------------------------------------------------------
Interest and other financial income/(a)/-
Interest income $ 1 $ 5 $ 4
----- ----- -----
Interest and other financial costs/(a)/:
Interest incurred 45 40 57
Less interest capitalized 6 6 7
----- ----- -----
Net interest 39 34 50
Interest on tax issues 15 16 13
Financial costs on trust preferred securities 13 13 10
Financial costs on preferred stock of subsidiary 5 5 5
Amortization of discounts 1 2 2
Expenses on sales of accounts receivable 15 21 21
Adjustment to settlement value of indexed debt (13) (44) (10)
----- ----- -----
Total 75 47 91
----- ----- -----
Net interest and other financial costs/(a)/ $ 74 $ 42 $ 87
----------------------------------------------------------------------------------------
/(a)/ See Note 4, for discussion of USX net interest and other
financial costs attributable to the U. S. Steel Group.
S-8
- --------------------------------------------------------------------------------
7. Segment Information
The U. S. Steel Group consists of one operating segment, U.
S. Steel. U. S. Steel is engaged in the production and sale
of steel mill products, coke and taconite pellets. U. S.
Steel also engages in the following related business
activities: the management of mineral resources, domestic
coal mining, engineering and consulting services, and real
estate development and management.
Segment income represents income from operations
allocable to U. S. Steel and does not include net interest
and other financial costs and provisions for estimated
income taxes. Additionally, the following items are not
allocated to operating segments:
. Pension credits associated with pension plan assets
and liabilities allocated to pre-1987 retirees and
former businesses
. Certain costs related to former U. S. Steel Group
business activities
. USX corporate general and administrative costs.
These costs primarily consist of employment costs
including pension effects, professional services,
facilities and other related costs associated with
corporate activities.
. Certain other items not allocated to operating
segments for business performance reporting purposes
(see reconcilement schedule below)
The following table represents the operations of U. S.
Steel:
(In millions) 1999 1998 1997
--------------------------------------------------------------------------------------------
Revenues:
Customer $5,363 $6,180 $6,812
Intergroup/(a)/ 17 2 2
Equity in earnings (losses) of unconsolidated affiliates (43) 46 69
Other 46 55 58
------ ------ ------
Total revenues $5,383 $6,283 $6,941
====== ====== ======
Segment income (loss) $ (128) $ 330 $ 618
Significant noncash items included in segment income:
Depreciation, depletion and amortization 304 283 303
Pension expenses/(b)/ 219 187 169
Capital expenditures/(c)/ 286 305 256
Affiliates - investments/(c)/ 15 71 26
--------------------------------------------------------------------------------------------
/(a)/ Intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
/(b)/ Differences between segment total and group total represent
unallocated pension credits and amounts included in
administrative expenses.
/(c)/ Differences between segment total and group total represent
amounts related to corporate administrative activities.
The following schedule reconciles segment revenues and income
to amounts reported in the U. S. Steel Group's financial statements:
(In millions) 1999 1998 1997
--------------------------------------------------------------------------------------------
Revenues:
Revenues of reportable segment $5,383 $6,283 $6,941
Items not allocated to segment:
Impairment and other costs related to an
investment in an equity affiliate (47) - -
Loss on investment in RTI stock used
to satisfy indexed debt obligations (22) - -
------ ------ ------
Total Group revenues $5,314 $6,283 $6,941
====== ====== ======
Income:
Income (loss) for reportable segment $ (128) $ 330 $ 618
Items not allocated to segment:
Impairment and other costs related to an
investment in an equity affiliate (47) - -
Loss on investment in RTI stock used
to satisfy indexed debt obligations (22) - -
Administrative expenses (17) (24) (33)
Pension credits 447 373 313
Costs related to former businesses activities (83) (100) (125)
------ ------ ------
Total Group income from operations $ 150 $ 579 $ 773
--------------------------------------------------------------------------------------------
S-9
Geographic Area:
The information below summarizes the operations in different geographic
areas.
Revenues
-------------------------------
Within Between
Geographic Geographic
(In millions) Year Areas Areas Total Assets/(a)/
- --------------------------------------------------------------------------------
United States 1999 $5,296 $ - $ $5,296 $2,889
1998 6,266 - 6,266 3,043
1997 6,926 - 6,926 3,023
Foreign Countries 1999 18 - 18 63
1998 17 - 17 69
1997 15 - 15 1
Total 1999 $5,314 $ - $5,314 $2,952
1998 6,283 - 6,283 3,112
1997 6,941 - 6,941 3,024
- --------------------------------------------------------------------------------
/(a)/ Includes property, plant and equipment and investments in affiliates.
Sales by Product:
(In millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Sheet and semi-finished steel products $3,345 $3,501 $3,820
Tubular, plate and tin mill products 1,118 1,513 1,754
Raw materials (coal, coke and iron ore) 505 679 724
Other/(a)/ 414 490 517
- --------------------------------------------------------------------------------
/(a)/ Includes revenue from the sale of steel production by-products,
engineering and consulting services, real estate development and resource
management.
- --------------------------------------------------------------------------------
8. Supplemental Cash Flow Information
(In millions) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Cash used in operating activities included:
Interest and other financial costs paid
(net of amount capitalized) $ (77) $ (76) $ (99)
Income taxes (paid) refunded, including
settlements with other groups 3 (29) (48)
-----------------------------------------------------------------------------------------------------------
USX debt attributed to all groups - net:
Commercial paper:
Issued $ 6,282 $ - $ -
Repayments (6,117) - -
Credit agreements:
Borrowings 5,529 17,486 10,454
Repayments (5,980) (16,817) (10,449)
Other credit arrangements - net (95) 55 36
Other debt:
Borrowings 319 671 10
Repayments (87) (1,053) (741)
------- -------- --------
Total $ (149) $ 342 $ (690)
-----------------------------------------------------------------------------------------------------------
U. S. Steel Group activity $ 147 $ 13 $ (561)
Marathon Group activity (296) 329 97
Delhi Group activity - - (226)
------- -------- --------
Total $ (149) $ 342 $ (690)
-----------------------------------------------------------------------------------------------------------
Noncash investing and financing activities:
Steel Stock issued for dividend reinvestment and
employee stock plans $ 2 $ 2 $ 5
Trust preferred securities exchanged for preferred stock - - 182
Disposal of assets:
Deposit of RTI common shares in satisfaction of indexed debt 56 - -
Interest in USS/Kobe contributed to Republic 40 - -
Other disposals of assets - notes or common stock received 1 2 -
Business combinations:
Liabilities assumed 26 - -
Affiliate liabilities consolidated in step acquisition 26 - -
-----------------------------------------------------------------------------------------------------------
S-10
- --------------------------------------------------------------------------------
9. Financial Activities Attributed to Groups
The following is the portion of USX financial activities attributed
to the U. S. Steel Group. These amounts exclude amounts
specifically attributed to the U. S. Steel Group.
U. S. Steel Group Consolidated USX/(a)/
-------------------- ----------------------
(In millions) December 31 1999 1998 1999 1998
---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 1 $ - $ 9 $ 4
Other noncurrent assets 1 1 8 8
----- ----- ----- ------
Total assets $ 2 $ 1 $ 17 $ 12
-------------------------------------------------------------------------------------------------------------
Notes payable $ - $ 13 $ - $ 145
Accrued interest 13 8 95 88
Long-term debt due within one year (Note 10) 7 7 54 66
Long-term debt (Note 10) 466 306 3,771 3,762
Preferred stock of subsidiary 66 66 250 250
----- ----- ------ ------
Total liabilities $ 552 $ 400 $4,170 $4,311
-------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
U. S. Steel Group/(b)/ Consolidated USX
------------------------- ---------------------------
(In millions) 1999 1998 1997 1999 1998 1997
----------------------------------------------------------------------------------------------------------------
Net interest and other financial costs (Note 6) $ 39 $ 29 $ 46 $ 334 $ 324 $ 309
----------------------------------------------------------------------------------------------------------------
/(a)/ For details of USX long-term debt and preferred stock of
subsidiary, see Notes 16 and 23, respectively, to the USX
consolidated financial statements.
/(b)/ The U. S. Steel Group's net interest and other financial
costs reflect weighted average effects of all financial
activities attributed to all groups.
- --------------------------------------------------------------------------------
10. Long-Term Debt
The U. S. Steel Group's portion of USX's consolidated long-term
debt is as follows:
U. S. Steel Group Consolidated USX/(a)/
----------------- --------------------
(In millions) December 31 1999 1998 1999 1998
-------------------------------------------------------------------------------------------------------------
Specifically attributed debt/(b)/:
Receivables facility $ 350 $ - $ 350 $ -
Sale-leaseback financing and capital leases 92 95 107 95
Indexed debt less unamortized discount - 68 - 68
Other - - 1 -
----- ----- ------ ------
Total 442 163 458 163
Less amount due within one year 6 5 7 5
----- ----- ------ ------
Total specifically attributed long-term debt $ 436 $ 158 $ 451 $ 158
-------------------------------------------------------------------------------------------------------------
Debt attributed to groups/(c)/ $ 477 $ 316 $3,852 $3,853
Less unamortized discount 4 3 27 25
Less amount due within one year 7 7 54 66
----- ----- ------ ------
Total long-term debt attributed to groups $ 466 $ 306 $3,771 $3,762
-------------------------------------------------------------------------------------------------------------
Total long-term debt due within one year $ 13 $ 12 $ 61 $ 71
Total long-term debt due after one year 902 464 4,222 3,920
-------------------------------------------------------------------------------------------------------------
/(a)/ See Note 16, to the USX consolidated financial statements
for details of interest rates, maturities and other terms of
long-term debt.
/(b)/ As described in Note 4, certain financial activities are
specifically attributed only to the U. S. Steel Group and
the Marathon Group.
/(c)/ Most long-term debt activities of USX Corporation and its
wholly owned subsidiaries are attributed to all groups (in
total, but not with respect to specific debt issues) based
on their respective cash flows (Notes 4, 8 and 9).
S-11
- --------------------------------------------------------------------------------
11. Pensions and Other Postretirement Benefits
The U. S. Steel Group has noncontributory defined benefit pension
plans covering substantially all employees. Benefits under these
plans are based upon years of service and final average pensionable
earnings, or a minimum benefit based upon years of service,
whichever is greater. In addition, pension benefits are also
provided to most salaried employees based upon a percent of total
career pensionable earnings. Certain of these plans provide
benefits to USX corporate employees, and the related costs or
credits for such employees are allocated to all groups (Note 4).
The U. S. Steel Group also participates in multiemployer plans,
most of which are defined benefit plans associated with coal
operations.
The U. S. Steel Group also has defined benefit retiree health
and life insurance plans (other benefits) covering most employees
upon their retirement. Health benefits are provided through
comprehensive hospital, surgical and major medical benefit
provisions or through health maintenance organizations, both
subject to various cost sharing features. Life insurance benefits
are provided to nonunion retiree beneficiaries primarily based on
employees' annual base salary at retirement. These plans provide
benefits to USX corporate employees, and the related costs for such
employees are allocated to all groups (Note 4). For union retirees,
benefits are provided for the most part based on fixed amounts
negotiated in labor contracts with the appropriate unions. Except
for certain life insurance benefits paid from reserves held by
insurance carriers and benefits required to be funded by union
contracts, most other benefits have not been prefunded.
Pension Benefits Other Benefits
--------------------- ----------------------
(In millions) 1999 1998 1999 1998
------------------------------------------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligations at January 1 $ 7,549 $ 7,314 $ 2,113 $ 2,070
Service cost 87 71 15 15
Interest cost 473 487 133 141
Plan amendments 381 /(a)/ 8 14 -
Actuarial (gains) losses (822) 516 (225) 23
Plan merger and acquisition 42 - 7 -
Settlements, curtailments and termination benefits (207) 10 - 7
Benefits paid (787) (857) (161) (143)
-------- -------- ------- --------
Benefit obligations at December 31 $ 6,716 $ 7,549 $ 1,896 $ 2,113
------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at January 1 $ 10,243 $ 9,775 $ 265 $ 258
Actual return on plan assets 729 1,308 20 31
Acquisition 26 - 1 -
Employer contributions - - 34 -
Trustee distributions/(b)/ (14) - - -
Settlements paid (207) - - -
Benefits paid from plan assets (782) (840) (39) (24)
-------- -------- ------- --------
Fair value of plan assets at December 31 $ 9,995 $ 10,243 $ 281 $ 265
------------------------------------------------------------------------------------------------------------------
Funded status of plans at December 31 $ 3,279 /(c)/ $ 2,694 /(c)/ $(1,615) $ (1,848)
Unrecognized net gain from transition (69) (140) - -
Unrecognized prior service cost 817 518 19 7
Unrecognized actuarial gains (1,639) (905) (526) (292)
Additional minimum liability/(d)/ (16) (57) - -
-------- -------- ------- --------
Prepaid (accrued) benefit cost $ 2,372 $ 2,110 $ (2,122) $ (2,133)
------------------------------------------------------------------------------------------------------------------
/(a)/ Results primarily from a new five-year labor contract with
the United Steelworkers of America ratified in August 1999.
/(b)/ Represents transfers of excess pension assets to fund
retiree health care benefits accounts under Section 420 of
the Internal Revenue Code.
/(c)/ Includes several plans that have accumulated benefit
obligations in excess of plan assets:
Aggregate accumulated benefit obligations $ (29) $ (62)
Aggregate projected benefit obligations (39) (68)
Aggregate plan assets - -
/(d)/ Additional minimum liability recorded was offset
by the following:
Intangible asset $ 6 $ 16
-------- --------
Accumulated other comprehensive income
(losses):
Beginning of year $ (27) $ (25)
Change during year (net of tax) 20 (2)
-------- --------
Balance at end of year $ (7) $ (27)
------------------------------------------------------------------------------------------------------------------
S-12
Pension Benefits Other Benefits
----------------------------------- -----------------------------------
(In millions) 1999 1998 1997 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------
Components of net periodic
benefit cost (credit)
Service cost $ 87 $ 71 $ 65 $ 15 $ 15 $ 15
Interest cost 473 487 517 133 141 153
Expected return on plan assets (781) (769) (743) (21) (21) (11)
Amortization - net transition gain (67) (69) (69) - - -
- prior service costs 83 72 72 4 4 4
- actuarial (gains) losses 6 6 3 (12) (16) (13)
Multiemployer and other plans - 1 2 7/(a)/ 13/(a)/ 15/(a)/
Settlement and termination (gains) losses (35)/(b)/ 10/(b)/ 4 - - -
----- ----- ----- ------ ------ -----
Net periodic benefit cost (credit) $(234) $(191) $(149) $ 126 $ 136 $ 163
--------------------------------------------------------------------------------------------------------------------
/(a)/ Represents payments to a multiemployer health care benefit
plan created by the Coal Industry Retiree Health Benefit Act
of 1992 based on assigned beneficiaries receiving benefits.
The present value of this unrecognized obligation is broadly
estimated to be $90 million, including the effects of future
medical inflation, and this amount could increase if
additional beneficiaries are assigned.
/(b)/ Relates primarily to the 1998 voluntary early retirement
program.
Pension Benefits Other Benefits
---------------------- --------------------
(In millions) 1999 1998 1999 1998
--------------------------------------------------------------------------------------------------------------
Weighted average actuarial assumptions
at December 31:
Discount rate 8.0% 6.5% 8.0% 6.5%
Expected annual return on plan assets 8.5% 9.0% 8.5% 9.0%
Increase in compensation rate 4.0% 4.0% 4.0% 4.0%
--------------------------------------------------------------------------------------------------------------
For measurement purposes, a 7.5% annual rate of increase in
the per capita cost of covered health care benefits was assumed
for 2000. The rate was assumed to decrease gradually to 5% for
2005 and remain at that level thereafter.
A one-percentage-point change in assumed health care cost
trend rates would have the following effects:
1-Percentage- 1-Percentage-
(In millions) Point Increase Point Decrease
--------------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 14 $ (12)
Effect on other postretirement benefit obligations 149 (127)
--------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
12. Intergroup Transactions
Sales and purchases - U. S. Steel Group sales to the Marathon
Group totaled $17 million in 1999 and $2 million in 1998. U. S.
Steel Group purchases from the Marathon Group totaled $41
million, $21 million and $29 million in 1999, 1998 and 1997,
respectively. At December 31, 1999 and 1998, U. S. Steel Group
accounts payable included $5 million and $3 million,
respectively, related to transactions with the Marathon Group.
These transactions were conducted under terms comparable to those
with unrelated parties.
Income taxes receivable from/payable to the Marathon Group - At
December 31, 1999 and 1998, amounts receivable or payable for
income taxes were included in the balance sheet as follows:
(In millions) December 31 1999 1998
---------------------------------------------------------------------------------------
Current:
Income tax receivable $ 97 $ -
Accounts payable 1 2
Noncurrent:
Investments and long-term receivables 97 97
---------------------------------------------------------------------------------------
These amounts have been determined in accordance with the
tax allocation policy described in Note 4. Amounts classified as
current are settled in cash in the year succeeding that in which
such amounts are accrued. Noncurrent amounts represent estimates
of intergroup tax effects of certain issues for years that are
still under various stages of audit and administrative review.
Such tax effects are not settled between the groups until the
audit of those respective tax years is closed. The amounts
ultimately settled for open tax years will be different than
recorded noncurrent amounts based on the final resolution of all
of the audit issues for those years.
S-13
- --------------------------------------------------------------------------------
13. Inventories
(In millions) December 31 1999 1998
----------------------------------------------------------------------------------------
Raw materials $ 101 $ 185
Semi-finished products 392 282
Finished products 193 182
Supplies and sundry items 57 49
----- -----
Total $ 743 $ 698
----------------------------------------------------------------------------------------
At December 31, 1999 and 1998, respectively, the LIFO method
accounted for 93% and 94% of total inventory value. Current
acquisition costs were estimated to exceed the above inventory
values at December 31 by approximately $370 million and $310
million in 1999 and 1998, respectively.
- --------------------------------------------------------------------------------
14. Income Taxes
Income tax provisions and related assets and liabilities
attributed to the U. S. Steel Group are determined in accordance
with the USX group tax allocation policy (Note 4).
Provisions (credits) for estimated income taxes were:
1999 1998 1997
----------------------------- ---------------------------- -----------------------------
(In millions) Current Deferred Total Current Deferred Total Current Deferred Total
--------------------------------------------------------------------------------------------------------------------
Federal $(84) $ 99 $15 $19 $ 149 $ 168 $ 37 $ 168 $ 205
State and local 1 8 9 3 9 12 4 25 29
Foreign 1 - 1 (7) - (7) - - -
---- ----- --- --- ----- ----- ----- ----- -----
Total $(82) $ 107 $25 $15 $ 158 $ 173 $ 41 $ 193 $ 234
--------------------------------------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate (35%) to
total provisions follows:
(In millions) 1999 1998 1997
------------------------------------------------------------------------------------------------------------
Statutory rate applied to income before income taxes $ 27 $ 188 $ 240
Excess percentage depletion (7) (11) (10)
Effects of foreign operations, including foreign tax
credits (2) (11) (3)
State and local income taxes after federal income tax effects 6 8 19
Credits other than foreign tax credits (3) (3) (15)
Effects of partially owned companies - - (3)
Adjustment of prior years' federal income taxes - - 6
Adjustment of valuation allowances - - (1)
Other 4 2 1
----- ------ ------
Total provisions $ 25 $ 173 $ 234
------------------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities resulted from the
following:
(In millions) December 31 1999 1998
-----------------------------------------------------------------------------------------------------------
Deferred tax assets:
Minimum tax credit carryforwards $ 131 $ 185
State tax loss carryforwards (expiring in 2000 through 2019) 65 64
Employee benefits 998 969
Receivables, payables and debt 68 52
Contingency and other accruals 52 48
Other 11 12
Valuation allowances - state (41) (44)
------ -------
Total deferred tax assets/(a)/ 1,284 1,286
------ -------
Deferred tax liabilities:
Property, plant and equipment 274 272
Prepaid pensions 921 792
Inventory 16 16
Investments in subsidiaries and affiliates 96 116
Federal effect of state deferred tax assets - 3
Other 44 40
------ -------
Total deferred tax liabilities 1,351 1,239
------ -------
Net deferred tax assets (liabilities) $ (67) $ 47
-----------------------------------------------------------------------------------------------------------
/(a)/ USX expects to generate sufficient future taxable income to
realize the benefit of the U. S. Steel Group's deferred tax
assets.
The consolidated tax returns of USX for the years 1990
through 1997 are under various stages of audit and administrative
review by the IRS. USX believes it has made adequate provision
for income taxes and interest which may become payable for years
not yet settled.
S-14
- --------------------------------------------------------------------------------
15. Investments and Long-Term Receivables
(In millions) December 31 1999 1998
-----------------------------------------------------------------------------------------------------------
Equity method investments $ 397 $ 564
Other investments 39 48
Receivables due after one year 11 10
Income taxes receivable 97 97
Deposits of restricted cash 2 -
Other 26 24
------ ------
Total $ 572 $ 743
-----------------------------------------------------------------------------------------------------------
Summarized financial information of affiliates accounted for
by the equity method of accounting follows:
(In millions) 1999 1998 1997
----------------------------------------------------------------------------------------------------------
Income data - year:
Revenues $3,027 $3,163 $3,143
Operating income (loss) (57) 193 228
Net income (loss) (193) 97 139
----------------------------------------------------------------------------------------------------------
Balance sheet data - December 31:
Current assets $ 995 $1,028
Noncurrent assets 2,402 2,149
Current liabilities 1,181 631
Noncurrent liabilities 1,251 883
----------------------------------------------------------------------------------------------------------
In 1999, USX and Kobe Steel, Ltd. (Kobe Steel) completed a
transaction that combined the steelmaking and bar producing
assets of USS/Kobe Steel Company (USS/Kobe) with companies
controlled by Blackstone Capital Partners II. The combined entity
was named Republic Technologies International, LLC (Republic). In
addition, USX made a $15 million equity investment in Republic.
USX owned 50% of USS/Kobe and now owns 16% of Republic. USX
accounts for its investment in Republic under the equity method
of accounting. Income (loss) from affiliates in 1999 includes $47
million in charges related to the impairment of the carrying
value of USX's investment in USS/Kobe and costs related to the
formation of Republic. The seamless pipe business of USS/Kobe was
excluded from this transaction. That business, now known as
Lorain Tubular Company, LLC, became a wholly owned subsidiary of
USX at the close of business on December 31, 1999.
Dividends and partnership distributions received from equity
affiliates were $2 million in 1999, $19 million in 1998 and $13
million in 1997.
U. S. Steel Group purchases of transportation services and
semi-finished steel from equity affiliates totaled $361 million,
$331 million and $424 million in 1999, 1998 and 1997,
respectively. At December 31, 1999 and 1998, U. S. Steel Group
payables to these affiliates totaled $22 million and $15 million,
respectively. U. S. Steel Group sales of steel and raw materials
to equity affiliates totaled $831 million, $725 million and $802
million in 1999, 1998 and 1997, respectively. At December 31,
1999 and 1998, U. S. Steel Group receivables from these
affiliates were $177 million. Generally, these transactions were
conducted under long-term, market-based contractual arrangements.
- --------------------------------------------------------------------------------
16. Leases
Future minimum commitments for capital leases (including sale-
leasebacks accounted for as financings) and for operating leases
having remaining noncancelable lease terms in excess of one year
are as follows:
Capital Operating
(In millions) Leases Leases
----------------------------------------------------------------------------------
2000 $ 11 $104
2001 11 122
2002 11 51
2003 11 36
2004 11 32
Later years 105 80
Sublease rentals - (69)
---- ----
Total minimum lease payments 160 $356
---- ====
Less imputed interest costs (68)
----
Present value of net minimum lease payments
included in long-term debt $ 92
----------------------------------------------------------------------------------
S-15
Operating lease rental expense:
(In millions) 1999 1998 1997
--------------------------------------------------------------------
Minimum rental $ 124 $ 131 $ 130
Contingent rental 18 19 15
Sublease rentals (6) (7) (7)
----- ----- -----
Net rental expense $ 136 $ 143 $ 138
--------------------------------------------------------------------
The U. S. Steel Group leases a wide variety of facilities and
equipment under operating leases, including land and building space,
office equipment, production facilities and transportation equipment.
Most long-term leases include renewal options and, in certain leases,
purchase options. In the event of a change in control of USX, as
defined in the agreements, or certain other circumstances, lease
obligations totaling $1 million may be declared immediately due and
payable.
- -------------------------------------------------------------------------------
17. Property, Plant and Equipment
(In millions) December 31 1999 1998
--------------------------------------------------------------------------------------------------
Land and depletable property $ 152 $ 151
Buildings 484 469
Machinery and equipment 8,007 7,711
Leased assets 105 108
------ -----------
Total 8,748 8,439
Less accumulated depreciation, depletion and amortization 6,232 5,939
------ -----------
Net $2,516 $2,500
--------------------------------------------------------------------------------------------------
Amounts in accumulated depreciation, depletion and amortization
for assets acquired under capital leases (including sale-leasebacks
accounted for as financings) were $81 million and $77 million at
December 31, 1999 and 1998, respectively.
- -------------------------------------------------------------------------------
18. Trust Preferred Securities
In 1997, USX exchanged approximately 3.9 million 6.75% Convertible
Quarterly Income Preferred Securities (Trust Preferred Securities) of
USX Capital Trust I, a Delaware statutory business trust (Trust), for
an equivalent number of shares of its 6.50% Cumulative Convertible
Preferred Stock (6.50% Preferred Stock) (Exchange). The Exchange
resulted in the recording of Trust Preferred Securities at a fair
value of $182 million and a noncash credit to Retained Earnings of $10
million.
USX owns all of the common securities of the Trust, which was
formed for the purpose of the Exchange. (The Trust Common Securities
and the Trust Preferred Securities are together referred to as the
Trust Securities.) The Trust Securities represent undivided beneficial
ownership interests in the assets of the Trust, which consist solely
of USX 6.75% Convertible Junior Subordinated Debentures maturing March
31, 2037 (Debentures), having an aggregate principal amount equal to
the aggregate initial liquidation amount ($50.00 per security and $203
million in total) of the Trust Securities issued by the Trust.
Interest and principal payments on the Debentures will be used to make
quarterly distributions and to pay redemption and liquidation amounts
on the Trust Preferred Securities. The quarterly distributions, which
accumulate at the rate of 6.75% per annum on the Trust Preferred
Securities and the accretion from fair value to the initial
liquidation amount, are charged to income and included in net interest
and other financial costs.
Under the terms of the Debentures, USX has the right to defer
payment of interest for up to 20 consecutive quarters and, as a
consequence, monthly distributions on the Trust Preferred Securities
will be deferred during such period. If USX exercises this right,
then, subject to limited exceptions, it may not pay any dividend or
make any distribution with respect to any shares of its capital stock.
S-16
The Trust Preferred Securities are convertible at any time prior
to the close of business on March 31, 2037 (unless such right is
terminated earlier under certain circumstances) at the option of the
holder, into shares of Steel Stock at a conversion price of $46.25 per
share of Steel Stock (equivalent to a conversion ratio of 1.081 shares
of Steel Stock for each Trust Preferred Security), subject to
adjustment in certain circumstances.
The Trust Preferred Securities may be redeemed at any time at the
option of USX, at a premium of 102.60% of the initial liquidation
amount through March 31, 2000, and thereafter, declining annually to
the initial liquidation amount on April 1, 2003, and thereafter. They
are mandatorily redeemable at March 31, 2037, or earlier under certain
circumstances.
Payments related to quarterly distributions and to the payment of
redemption and liquidation amounts on the Trust Preferred Securities
by the Trust are guaranteed by USX on a subordinated basis. In
addition, USX unconditionally guarantees the Trust's Debentures. The
obligations of USX under the Debentures, and the related indenture,
trust agreement and guarantee constitute a full and unconditional
guarantee by USX of the Trust's obligations under the Trust Preferred
Securities.
- --------------------------------------------------------------------------------
19. Stockholders' Equity
(In millions, except per share data) 1999 1998 1997
--------------------------------------------------------------------------------------------------
Preferred stock:
Balance at beginning of year $ 3 $ 3 $ 7
Exchanged for trust preferred securities - - (4)
------ ------ ------
Balance at end of year $ 3 $ 3 $ 3
--------------------------------------------------------------------------------------------------
Common stockholders' equity:
Balance at beginning of year $2,090 $1,779 $1,559
Net income 44 364 452
6.50% preferred stock:
Repurchased (2) (8) -
Exchanged for trust preferred securities (Note 18) - - (188)
Steel Stock issued 2 59 53
Dividends on preferred stock (9) (9) (13)
Dividends on Steel Stock (per share $1.00) (88) (88) (86)
Deferred compensation 1 - -
Accumulated other comprehensive income (loss)/(a)/:
Foreign currency translation adjustments (5) (5) -
Minimum pension liability adjustments (Note 11) 20 (2) (8)
Other - - 10
------ ------ ------
Balance at end of year $2,053 $2,090 $1,779
--------------------------------------------------------------------------------------------------
Total stockholders' equity $2,056 $2,093 $1,782
--------------------------------------------------------------------------------------------------
/(a)/ See page U-7 of the USX consolidated financial statements
relative to the annual activity of these adjustments. Total
comprehensive income for the U. S. Steel Group for the years
1999, 1998 and 1997 was $59 million, $357 million and $444
million, respectively.
- --------------------------------------------------------------------------------
20. Dividends
In accordance with the USX Restated Certificate of Incorporation,
dividends on the Steel Stock and Marathon Stock are limited to the
legally available funds of USX. Net losses of either Group, as well as
dividends and distributions on any class of USX Common Stock or series
of preferred stock and repurchases of any class of USX Common Stock or
series of preferred stock at prices in excess of par or stated value,
will reduce the funds of USX legally available for payment of
dividends on both classes of Common Stock. Subject to this limitation,
the Board of Directors intends to declare and pay dividends on the
Steel Stock based on the financial condition and results of operations
of the U. S. Steel Group, although it has no obligation under Delaware
law to do so. In making its dividend decisions with respect to Steel
Stock, the Board of Directors considers, among other things, the long-
term earnings and cash flow capabilities of the U. S. Steel Group as
well as the dividend policies of similar publicly traded steel
companies.
Dividends on the Steel Stock are further limited to the Available
Steel Dividend Amount. At December 31, 1999, the Available Steel
Dividend Amount was at least $3,300 million. The Available Steel
Dividend Amount will be increased or decreased, as appropriate, to
reflect U. S. Steel Group net income, dividends, repurchases or
issuances with respect to the Steel Stock and preferred stock
attributed to the U. S. Steel Group and certain other items.
S-17
- --------------------------------------------------------------------------------
21. Income Per Common Share
The method of calculating net income per share for the Steel
Stock, the Marathon Stock and, prior to November 1, 1997, the
Delhi Stock reflects the USX Board of Directors' intent that the
separately reported earnings and surplus of the U. S. Steel
Group, the Marathon Group and the Delhi Group, as determined
consistent with the USX Restated Certificate of Incorporation,
are available for payment of dividends to the respective classes
of stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily
correspond with these amounts.
Basic net income per share is calculated by adjusting net
income for dividend requirements of preferred stock and, in 1997,
the noncash credit on exchange of preferred stock and is based on
the weighted average number of common shares outstanding.
Diluted net income per share assumes conversion of
convertible securities for the applicable periods outstanding and
assumes exercise of stock options, provided in each case, the
effect is not antidilutive.
1999 1998 1997
------------------ ----------------- -----------------
Basic Diluted Basic Diluted Basic Diluted
-------- -------- -------- ------- -------- -------
Computation of Income Per Share
-------------------------------
Net income (millions):
Income before extraordinary losses $ 51 $ 51 $ 364 $ 364 $ 452 $ 452
Dividends on preferred stock (9) (9) (9) - (13) -
Noncash credit from exchange of preferred stock - - - - 10 -
Extraordinary losses (7) (7) - - - -
------- ------- ------- ------- ------- -------
Net income applicable to Steel Stock 35 35 355 364 449 452
Effect of dilutive securities:
Trust preferred securities - - - 8 - 6
Convertible debentures - - - - - 2
------- ------- ------- ------- ------- -------
Net income assuming conversions $ 35 $ 35 $ 355 $ 372 $ 449 $ 460
======= ======= ======= ======= ======= =======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,392 88,392 87,508 87,508 85,672 85,672
Effect of dilutive securities:
Trust preferred securities - - - 4,256 - 2,660
Preferred stock - - - 3,143 - 4,811
Convertible debentures - - - - - 1,025
Stock options - 4 - 36 - 35
------- ------- ------- ------- ------- -------
Average common shares and dilutive effect 88,392 88,396 87,508 94,943 85,672 94,203
======= ======= ======= ======= ======= =======
Per share:
Income before extraordinary losses $ .48 $ .48 $ 4.05 $ 3.92 $ 5.24 $ 4.88
Extraordinary losses .08 .08 - - - -
------- ------- ------- ------- ------- -------
Net income $ .40 $ .40 $ 4.05 $ 3.92 $ 5.24 $ 4.88
======= ======= ======= ======= ======= =======
- --------------------------------------------------------------------------------
22. Stock-Based Compensation Plans and Stockholder Rights Plan
USX Stock-Based Compensation Plans and Stockholder Rights
Plan are discussed in Note 19, and Note 21, respectively, to the
USX consolidated financial statements.
The U. S. Steel Group's actual stock-based compensation
expense was $1 million in 1999, none in 1998 and $8 million in
1997. Incremental compensation expense, as determined under a
fair value model, was not material ($.02 or less per share for
all years presented). Therefore, pro forma net income and
earnings per share data have been omitted.
S-18
- --------------------------------------------------------------------------------
23. Derivative Instruments
The U. S. Steel Group remains at risk for possible changes in the
market value of the derivative instrument; however, such risk should
be mitigated by price changes in the underlying hedged item. The U. S.
Steel Group is also exposed to credit risk in the event of
nonperformance by counterparties. The credit worthiness of
counterparties is subject to continuing review, including the use of
master netting agreements to the extent practical, and full
performance is anticipated.
The following table sets forth quantitative information by class
of derivative instrument:
Fair Carrying Recorded
Value Amount Deferred Aggregate
Assets Assets Gain or Contract
(In millions) (Liabilities)/(a)/ (Liabilities) (Loss) Values /(b)/
----------------------------------------------------------------------------------------------------------------
December 31, 1999:
OTC commodity swaps - other than trading/(c)/ $ 3 $ 3 $ 3 $ 37
----------------------------------------------------------------------------------------------------------------
December 31, 1998:
OTC commodity swaps - other than trading $(7) $(7) $(7) $ 54
----------------------------------------------------------------------------------------------------------------
/(a)/ The fair value amounts are based on exchange-traded index
prices and dealer quotes.
/(b)/ Contract or notional amounts do not quantify risk exposure,
but are used in the calculation of cash settlements under the
contracts.
/(c)/ The OTC swap arrangements vary in duration with certain
contracts extending into 2000.
- --------------------------------------------------------------------------------
24. Fair Value of Financial Instruments
Fair value of the financial instruments 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. The following table summarizes financial
instruments, excluding derivative financial instruments disclosed in
Note 23, by individual balance sheet account. As described in Note 4,
the U. S. Steel Group's specifically attributed financial instruments
and the U. S. Steel Group's portion of USX's financial instruments
attributed to all groups are as follows:
1999 1998
----------------- -----------------
Fair Carrying Fair Carrying
(In millions) December 31 Value Amount Value Amount
------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 22 $ 22 $ 9 $ 9
Receivables (including intergroup receivables) 935 935 392 392
Investments and long-term receivables 122 122 120 120
------ ------ ------ --------
Total financial assets $1,079 $1,079 $ 521 $ 521
------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Notes payable $ - $ - $ 13 $ 13
Accounts payable 739 739 501 501
Accrued interest 15 15 10 10
Long-term debt (including amounts due within one year) 835 823 406 381
Preferred stock of subsidiary and trust
preferred securities 232 249 231 248
------ ------ ------ --------
Total financial liabilities $1,821 $1,826 $1,161 $1,153
------------------------------------------------------------------------------------------------------------------
Fair value of financial instruments classified as current assets
or liabilities approximates carrying value due to the short-term
maturity of the instruments. Fair value of investments and long-term
receivables was based on discounted cash flows or other specific
instrument analysis. Fair value of preferred stock of subsidiary and
trust preferred securities was based on market prices. Fair value of
long-term debt instruments was based on market prices where available
or current borrowing rates available for financings with similar terms
and maturities.
The U. S. Steel Group's unrecognized financial instruments
consist of receivables sold in 1998 and financial guarantees. It is
not practicable to estimate the fair value of these forms of financial
instrument obligations because there are no quoted market prices for
transactions which are similar in nature. For details relating to
financial guarantees, see Note 25.
S-19
- --------------------------------------------------------------------------------
25. Contingencies and Commitments
USX is the subject of, or party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the U. S.
Steel Group 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 U. S. Steel Group
financial statements. However, management believes that USX will
remain a viable and competitive enterprise even though it is possible
that these contingencies could be resolved unfavorably to the U. S.
Steel Group.
Environmental matters -
The U. S. Steel Group is subject to federal, state, and local
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.
Accrued liabilities for remediation totaled $101 million and $97
million at December 31, 1999 and 1998, respectively. 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.
For a number of years, the U. S. Steel Group has made substantial
capital expenditures to bring existing facilities into compliance with
various laws relating to the environment. In 1999 and 1998, such
capital expenditures totaled $32 million and $49 million,
respectively. The U. S. Steel Group anticipates making additional such
expenditures in the future; however, the exact amounts and timing of
such expenditures are uncertain because of the continuing evolution of
specific regulatory requirements.
Guarantees -
Guarantees by USX of the liabilities of affiliated entities of
the U. S. Steel Group totaled $88 million at December 31, 1999, and
$81 million at December 31, 1998. In the event that any defaults of
guaranteed liabilities occur, USX has access to its interest in the
assets of the affiliates to reduce potential U. S. Steel Group losses
resulting from these guarantees. As of December 31, 1999, the largest
guarantee for a single affiliate was $61 million.
Commitments -
At December 31, 1999 and 1998, the U. S. Steel Group's contract
commitments to acquire property, plant and equipment totaled $83
million and $188 million, respectively.
USX entered into a 15-year take-or-pay arrangement in 1993, which
requires the U. S. Steel Group to accept pulverized coal each month or
pay a minimum monthly charge of approximately $1 million. Charges for
deliveries of pulverized coal totaled $23 million in both 1999 and
1998. If USX elects to terminate the contract early, a maximum
termination payment of $102 million, which declines over the duration
of the agreement, may be required.
S-20
Selected Quarterly Financial Data (Unaudited)
1999
-------------------------------------------------------------
(In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- --------------------------------------------------------------------------------------------------------------------
Revenues $1,462 $ 1,337 /(a)/ $1,304 $1,211
Income (loss)
from operations 75 (26) /(a)/ 103 (2)
Income (loss) before
extraordinary losses 34 (29) /(a)/ 55 (9)
Net income (loss) 34 (31) 55 (14)
- --------------------------------------------------------------------------------------------------------------------
Steel Stock data:
- ----------------
Income (loss) before
extraordinary losses
applicable to Steel Stock $ 32 $ (31) /(a)/ $ 52 $ (11)
- Per share: basic .35 (.35) /(a)/ .60 (.13)
diluted .35 (.35) /(a)/ .59 (.13)
Dividends paid per share .25 .25 .25 .25
Price range of Steel Stock/(b)/:
- Low 21-/3/4/ 24-/9/16/ 23-/1/2/ 22-/1/4/
- High 33 30-/1/16/ 34-/1/4/ 29-/1/8/
- --------------------------------------------------------------------------------------------------------------------
1998
-------------------------------------------------------------
(In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- --------------------------------------------------------------------------------------------------------------------
Revenues $1,357 $1,497 $1,733 $1,696
Income (loss)
from operations 95 105 217 162
Income (loss) before
extraordinary losses 76 65 136 87
Net income (loss) 76 65 136 87
- --------------------------------------------------------------------------------------------------------------------
Steel Stock data:
- ----------------
Income (loss) before
extraordinary losses
applicable to Steel Stock $ 74 $ 63 $ 133 $ 85
- Per share: basic .83 .72 1.53 .98
diluted .81 .71 1.46 .95
Dividends paid per share .25 .25 .25 .25
Price range of Steel Stock/(b)/:
- Low 21-/5/8/ 20-/7/16/ 31 28-/7/16/
- High 27-/3/4/ 33-/1/2/ 43-/1/16/ 42-/1/8/
- --------------------------------------------------------------------------------------------------------------------
/(a)/ Restated to reflect current classifications.
/(b)/ Composite tape.
S-21
Principal Unconsolidated Affiliates (Unaudited)
December 31, 1999
Company Country Ownership Activity
- -----------------------------------------------------------------------------------------------------------
Clairton 1314B Partnership, L.P. United States 10% Coke & Coke By-Products
Double Eagle Steel Coating Company United States 50% Steel Processing
PRO-TEC Coating Company United States 50% Steel Processing
Republic Technologies International, LLC United States 16% Steel Products
Transtar, Inc. United States 46% Transportation
USS-POSCO Industries United States 50% Steel Processing
VSZ U. S. Steel, s. r.o. Slovak Republic 50% Tin Mill Products
Worthington Specialty Processing United States 50% Steel Processing
- -----------------------------------------------------------------------------------------------------------
Supplementary Information on Mineral Reserves (Unaudited)
See the USX consolidated financial statements for Supplementary Information on
Mineral Reserves relating to the U. S. Steel Group, page U-30.
S-22