UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the Fiscal Year Ended December 31, 20192020
Or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the transition period from to .
Commission file number 1-16811
United States Steel CorporationCorporation
(Exact name of registrant as specified in its charter)
| Delaware | 25-1897152 | |||||||
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |||||||
600 Grant Street,, Pittsburgh,, PA15219-2800
(Address of principal executive offices)
Tel. No. (412) (412) 433-1121
Securities registered pursuant to Section 12 (b) of the Act:
| Title of Each Class | Trading Symbol | Name of Exchange on which Registered | ||||||
| United States Steel Corporation Common Stock, par value $1.00 | X | New York Stock Exchange | ||||||
| United States Steel Corporation Common Stock, par value $1.00 | X | Chicago Stock Exchange | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ☑ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No þ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes þ☑ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ☑ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definition of “large accelerated filer,” “accelerated filer," “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___ | ☐ | ||||||||||||||||||||||||||||
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☑No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Aggregate market value of Common Stock held by non-affiliates as of June 28, 201930, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter): $2.6$1.6 billion. The amount shown is based on the closing price of the registrant’s Common Stock on the New York Stock Exchange composite tape on that date. Shares of Common Stock held by executive officers and directors of the registrant are not included in the computation. However, the registrant has made no determination that such individuals are “affiliates” within the meaning of Rule 405 under the Securities Act of 1933.
There were 170,047,076262,471,855 shares of United States Steel Corporation Common Stock outstanding as of February 10, 2020.8, 2021.
Documents Incorporated By Reference:
Portions of the Proxy Statement for the 20202021 Annual Meeting of Stockholders are incorporated into Part III.
INDEX
| Item 1. | |||||||||
| Item 1A | |||||||||
| Item 1B | |||||||||
| Item 2. | |||||||||
| Item 3. | |||||||||
| Item 4. | |||||||||
| Item 5. | |||||||||
| Item 6. | |||||||||
| Item 7. | |||||||||
| Item 7A | |||||||||
| Item 8. | |||||||||
| Item 9. | |||||||||
| Item 9A | |||||||||
| Item 9B | |||||||||
| Item 10. | |||||||||
| Item 11. | |||||||||
| Item 12. | |||||||||
| Item 13. | |||||||||
| Item 14. | |||||||||
| Item 15. | |||||||||
| Item 16. | |||||||||
| TOTAL NUMBER OF PAGES | |||||||||
FORWARD-LOOKING STATEMENTS
This report contains information that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in those sections. Generally, we have identified such forward-looking statements by using the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “target,” “forecast,” “aim,” “should,” “will”“will,” "may" and similar expressions or by using future dates in connection with any discussion of, among other things, operating performance, trends, events or developments that we expect or anticipate will occur in the future, statements relating to volume changes, share of sales and earnings per share changes, anticipated cost savings, potential capital and operational cash improvements, U. S. Steel's future abilityanticipated disruptions to our operations and plansindustry due to take ownershipthe COVID-19 pandemic, changes in global supply and demand conditions and prices for our products, international trade duties and other aspects of itsinternational trade policy, the integration of Big River Steel joint venture as a wholly owned subsidiary,in our existing business, business strategies related to the combined business and statements expressing general views about future operating results. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. Forward-looking statements are not historical facts, but instead represent only the Company’s beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of the Company’s control. It is possible that the Company’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Management believes that these forward-looking statements are reasonable as of the time made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. Our Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to the risks and uncertainties described in this report in “Item 1A. Risk Factors” and those described from time to time in our future reports filed with the Securities and Exchange Commission.
References in this Annual Report on Form 10-K to "U. S. Steel," "the Company," "we," "us," and "our" refer to United States Steel Corporation and its consolidated subsidiaries unless otherwise indicated by the context.
Non-Generally Accepted Accounting Principles (non-GAAP) Financial Measures
This report contains certain non-GAAP financial measures such as earnings (loss) before interest, income taxes, depreciation, depletion and amortization (EBITDA), adjusted EBITDA, adjusted net earnings (loss), adjusted net earnings (loss) per diluted share, free cash flow, net debt and cash conversion cycle.
We believe that EBITDA, considered along with the net earnings (loss), is a relevant indicator of trends relating to cash generating activity and provides management and investors with additional information for comparison of our operating results to the operating results of other companies.
Adjusted net earnings (loss) and adjusted net earnings (loss) per diluted share are non-GAAP measures that exclude the effects of items that include: the asset impairment charge, restructuring and other charges, the Fairless property sale, the Big River Steel options and forward adjustments, the December 24, 2018 Clairton coke making facility fire, the Big River Steel options mark to market, the impact of the tax valuation allowance, loss on extinguishment of debt and other related costs, the 2018 United SteelworkersUSW labor agreement signing bonus and related costs, Granite City Works temporary idlingrestart and restart charges, the loss on shutdown of certain tubular pipe mill assets, gains associated with the sale of our retained interest in U. S. Steel Canada Inc., gainsrelated costs and gain on equity investee transactions loss on extinguishment of debt and other related costs, the effect of tax reform and other adjustments that are not part of the Company's core operations (Adjustment Items). Adjusted EBITDA is also a non-GAAP measure that excludes the effects of thecertain Adjustment Items. We present adjusted net earnings (loss), adjusted net earnings (loss) per diluted share and adjusted EBITDA to enhance the understanding of our ongoing operating performance and established trends affecting our core operations, by excluding the effects of events that can obscure underlying trends. U. S. Steel's management considers adjusted net earnings (loss), adjusted net earnings (loss) per diluted share and adjusted EBITDA as alternative measures of operating performance and not alternative measures of the Company's liquidity. U. S. Steel’s management considers adjusted net earnings (loss), adjusted net earnings (loss) per diluted share and adjusted EBITDA useful to investors by facilitating a comparison of our operating performance to the operating performance of our competitors. Additionally, the presentation of adjusted net earnings (loss), adjusted net earnings (loss) per diluted share and adjusted EBITDA provides insight into management’s view and assessment of the Company’s ongoing operating performance, because management does not consider the adjusting items when evaluating the Company’s financial performance. Adjusted net earnings (loss), adjusted net earnings (loss) per diluted share and adjusted EBITDA should not be considered a substitute for net earnings (loss),
earnings (loss) per diluted share or other financial measures as computed in accordance with U.S. GAAP and is not necessarily comparable to similarly titled measures used by other companies.
Net debt is a non-GAAP measure calculated as total debt less cash and cash equivalents. We believe net debt is a useful measure in calculating enterprise value. Both EBITDA and net debt are used by analysts to refine and improve the accuracy of their financial models which utilize enterprise value.
Free cash flow is a measure of cash generated from operations, after any investing activity and dividends paid to stockholders. We believe that free cash flow provides further insight into the Company's overall utilization of cash.
3
We believe the cash conversion cycle is a useful measure in providing investors with information regarding our cash management performance and is a widely accepted measure of working capital management efficiency. The cash conversion cycle should not be considered in isolation or as an alternative to other GAAP metrics as an indicator of performance.
10-K SUMMARY
This section provides an overview of U. S. Steel's business, strategy and financial performance for 2019.2020. It does not contain all of the information that may be important to a reader. Please read the entire Annual Report on Form 10-K.
Our vision is for U. S. Steel to be a solutions provider to our customers through a unique offering of product and process innovation that is unmatched in the industry leader in delivering high-quality, value-added products and innovative solutions that address our customers' most challenging steel needs.industry. Underlying our efforts is our belief that we must operate as a principled company committed to a code of conduct that is rooted in our Gary Principles and our core values. Our core values are articulated in our S.T.E.E.L. Principles - Safety First, Trust and Respect, Environmentally Friendly Activities, Ethical Behavior, and Lawful Business Conduct. These core values guide U. S. Steel and help support the economic and societal benefits associated with strong domestic manufacturing capabilities, of which steel is a foundational industry.
We aim to achieve our vision by successfullyare executing on our customer-centric strategy to transform U. S. Steel into a world-competitive, “bestBest of both” strategy. By bringing togetherBothSM, steelmaker by combining the best of the integrated steelmaking model with the best of the mini mill steelmaking model, wemodel. Our strategy will transformdeliver product and process innovation to create unmatched value for our business to drivecustomers while enhancing our earnings profile and delivering long-term cash flow through industry cycles. We aim to offer anBy offering unparalleled product platform to servecapabilities, including the “green” steels (steels made with low greenhouse gas emissions intensity) our customers are increasingly demanding, we can achieve world-competitive positioning in strategic, high-margin end markets, and deliver high-quality, sustainable, value-added products and innovative solutions that addresssolutions. To get to our customers' most challenging steel needs. To become a “bestBest of both” company,Both future, we are investing to create distinct cost and capability advantages, enhancing our focus on operational and commercial excellence and promoting technological innovation, so we can establishdeliver an unmatched value proposition to our customers while creating a more competitivevariable cost structure, and enhance our capabilities … two key drivers for our strategy.
The diagram below illustrates our world-competitive, “bestBest of both”Both strategic framework and highlights the key actions to transform our businessbusiness.
Over the past several years, we have proactively re-shaped our footprint and transformed our balance sheet. We used the strength and foundation of our business to align our balance sheet with the investment horizon to execute our strategy.
Our strategy is informed by our critical success factors, which are the bedrock of the “bestBest of both"Both strategy: (1) Move
Down the Cost Curve; (2) Win in Strategic Markets; and (3) Move Up the Talent Curve. Several of the strategic projects we are undertaking
4
are expected to result in operational improvements. Additionally, the enhanced operating model and organizational structure we implemented beginning in 2020 will also position U. S. Steel to lower its structural fixed costs. We are also investing in new technologies to improve our cost position and increase our capabilities, including our investment inacquisition of Big River Steel in January 2021, the completed electric arc furnace (EAF) at Fairfield Tubular Operations endless casting and rolling at Mon Valley Works, Gary Works hot strip mill upgrades and the dynamo linecommissioning of a new Continuous Galvanizing Line for AHSS substrates at our USSK facility which is within our USSE segment.Pro-Tec Coating Company joint venture that incorporates proprietary U. S. Steel technology. We will focus on strategic markets, where there is the greatest opportunity to provide differentiated, innovative and value-added solutions that will help our customers succeed. We know that to accomplish our objectives, we also need to move up the talent curve, which wecurve. We are doing by investing in our employees and providing the training and resources they need to succeed. This will help us reinforce a culture where accountability, fairness and respect are foundational, and high performance and inclusion in all its forms are valued and celebrated.
In 2019,addition, we announced several transformation initiatives key to our strategy. On October 31, 2019, U. S. Steel acquired a 49.9% ownership interest inare bringing Big River Steel atSteel’s focused, innovative, and entrepreneurial mindset into the way we do business. By bringing these two world-class workforces together, with a purchase price of approximately $683 million in cash, with ashared values-based culture, we can create significant value across the enterprise.
2020 was another strategically transformational year despite the challenges presented by the COVID-19 pandemic. On December 8, 2020, we exercised our call option to acquire the remaining 50.1% within the next four years. Our investment inequity of Big River Steel. The purchase of Big River Steel will add sustainable steel making technology toclosed on January 15, 2021 for $723 million in cash and the assumption of approximately $50 million in liabilities. The successful completion of the acquisition marked a major milestone in our footprint and improve our competitive positioning.Best of Both strategy. By fully acquiring Big River Steel we have created North America’s only Best of Both steel technology company. Our Best of Both steel technology company combines leading advanced high-strength steel intellectual property with a technologically advanced and low-greenhouse gas emissions mini mill.
On October 26, 2020, we announced the successful start-up of our new, technologically advanced EAF steelmaking facility at our Fairfield, Alabama operations. The EAF is used to produce rounds as substrate for our seamless pipe facility. By insourcing rounds production we expect to structurally improve the Tubular segment's cost position by approximately $90 per seamless ton.
We also announced two significant steps towards the Company’s strategic objective to monetize its iron ore assets. First, on April 30, 2020, we granted Stelco Inc. (Stelco) at a technological leader combining mini mill technology with aspectspurchase price of $100 million the option to acquire a 25 percent interest in the Company’s Minntac iron ore mining operations for an aggregate purchase price of $600 million. The option can be exercised any time before January 31, 2027 and, upon exercise, Stelco will make an additional payment of $500 million to acquire its 25 percent interest in the new cost-sharing joint venture. This agreement ensures U. S. Steel will continue to be the operator and majority owner of the integrated modelMinntac mine. We also entered into a seven year agreement to sell significant volumes of iron ore pellets to Stelco. Second, on May 18, 2020, we announced a four-year agreement to sell substantial volumes of quality iron ore pellets to Ontario, Canada based Algoma Steel Inc. The purchase agreement, which runs from 2021 through 2024, provides incremental volume and a new long-term iron ore customer for U. S. Steel’s Minnesota mines.
We also made considerable progress on our commitment to reduce fixed costs by $200 million. We are on-track to achieve the benefits of each. In December 2019, we announced our intention to indefinitely idle a significant portion of our Great Lakes Works operation near Detroit, Michigan. We expect to begin idling the iron and steelmaking facilities on or around April 1, 2020, and the hot strip mill rolling facility before the end of 2020. This action will transition our footprint to focus on facilities and assets that are differentiatedthis goal by cost and/or capability.2022.
Ultimately, we intend to center our North American Flat-Rolled operations around three distinct, market-leading assets: Big River Steel, Mon Valley Works, and Gary Works, to transform the business to offer customers differentiated products and to deliver highly competitive long-term cash flow generation through higher earnings and lower maintenance capital expenditures.
5
KEY PERFORMANCE INDICATORS
This section provides an overview of select key performance indicators for U. S. Steel which management and investors use to assess the Company's financial performance. It does not contain all of the information you should consider. Fluctuations for year to year changes are explained in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations."
 •The net loss in 2020 reflects a significant decline in demand related to the economic impacts of the COVID-19 pandemic, disruption in the Tubular market that led to oversupply during a time of declining demand and continued high-levels of imports. The decline in demand in the Tubular market was considered a triggering event that led to an impairment of $263 million for our welded tubular asset group. In addition, the Company recognized $138 million of restructuring charges during 2020 to better align its operations with customer demand and reduce fixed costs. See Notes 1 and 25 to the Consolidated Financial Statements for further details. •Our2019 net loss includes unfavorable restructuring impacts of $275 million for the indefinite idling of certain of our Flat-Rolled facilities, headcount reductions and plant exit costs at USSE and Company-wide headcount reductions. Our financial results were also negatively impacted by lower average realized prices across all of our business segments, significant market challenges in our USSE segment and a $334 million non-cash charge to tax expense that increased the valuation allowance related to our net domestic deferred tax asset. • |
Our 2018 net earnings include a favorable impact of $374 million due to the reversal of a portion of our deferred tax asset valuation allowance.
6
•These amounts are derived starting from net (loss) earnings include an $81 million income tax benefitas shown on page 6. For a full reconciliation of adjusted net (loss) earnings see page 17.
•The earnings decrease from enacted tax legislation.
•Earnings decreased from 2018 we faced a challenging year into 2019 as market conditions in the U.S. weakened in the latter half of the year. Our2019 and our USSE segment faced significant market challenges from weakening economic conditions, primarily in the manufacturing sector.
7
•See reconciliation from diluted net (loss) earnings per share to adjusted diluted net earnings per share on page 19.18.
8
•These amounts are derived starting from net (loss) earnings as shown on page 7.6. For a full reconciliation of adjusted EBITDA see page 20.
•In 2020, Flat-Rolled and Tubular EBITDA declined. Flat-Rolled shipments declined due to customer operating restrictions and lower demand as a result of the COVID-19 pandemic. North American steel demand declined dramatically with capacity utilization rates dropping to almost 50% in the second quarter accompanied by significant spot price erosion. In Tubular, the continued disruption in the oil and gas industry, as well as pandemic-related impacts, reduced demand for oil and gas and severely impacted energy prices, creating significant reductions of drilling activity in the U.S.
9  •The decrease in net sales in 2020 as compared to 2019 was primarily due to lower shipments and lower average realized prices in all of our reportable segments primarily caused by the economic impacts of the COVID-19 pandemic and the disruption in the oil and gas industry. •The decrease in net sales in 2019 as compared to 2018 was primarily due to lower |
10
•In 2020, the positive cash flow from operations was primarily due to improved market conditions. Improved market conditions for our Flat-Rolled segment reflected accelerated demand for steel products in line with the recent economic growth, as well as the supply-demand balance between imported and domestic steel. The restartefficient use of the two blast furnaces at our Granite City Works during 2018 enabled us to take advantage of the improved market dynamics in 2018.working capital partially offset by declining financial performance.
•In 2019, the positive cash flow from operations was primarily due to efficient use of working capital.
•In 2018, and 2017, improved financial performance more than offset the investment in working capital.
•Our cash conversion cycle was 30, 28, 37 and 3724 days for 2017, 2018, 2019 and 2019,2020, respectively. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Cash FlowsLiquidity and Liquidity – Cash Flows”Capital Resources” for the calculation of our cash conversion cycle.
11
•The free cash flow shown above was derived starting from cash flow from operations as shown on page 12.11. For a full reconciliation of free cash flow see page 21.20.
•In 2020, the Company was faced with significant market challenges that resulted in decreased profitability and reduced capital spending to preserve liquidity.
•A portion of our cash from operations in 2019 was spent on majorstrategic projects to pursuein furtherance of our strategy to become a world-competitive, "bestBest of both" steel company. Our capital expenditures of $1.3 billion included spending on the new endless casting and rolling facility at our Mon Valley Works and upgrades to the Gary Works hot strip mill, which are both in our Flat-Rolled segment, and spending on the new EAF in our Tubular segment.Both strategy.
•Capital expenditures totaled $1.0 billion in 2018 a significant increase from 2017. Our 2018 capital expenditures includedincluding $335 million on asset revitalization projects that were focused on delivering improvements in safety, quality, delivery and cost for critical assets in our Flat-Rolled segment.
12
•Maintaining strong cash and liquidity to support and enable execution of our Best of Both strategy continues to be ais an important priority. Despite the economic challenges we faced in 2020, we maintained strong liquidity which enabled the January 2021 purchase of the remaining interest in Big River Steel primarily with cash.
•Our total liquidity was also strong in 2018 and 2019 remained strong and supported our ability to satisfy short-term obligations, fund working capital requirements, and enable execution of key strategic priorities includingpriorities.
13
•The increase in debt in 2020 was primarily related to the acquisitionissuance of our 49.9% ownership interest in Big River Steel, restart of construction of2025 Senior Secured Notes and the electric arc furnace (EAF) atExport-Import Credit Agreement and Export Credit Agreement borrowings. These borrowings strengthened our Fairfield Tubular Operations, invest inbalance sheet and increased liquidity during the endless casting and rolling facility at Mon Valley Works and invest in the new Dynamo line within our USSE segment.COVID-19 pandemic.
•The increase in debt in 2019 was primarily related to net drawings that totaledtotaled approximately $760 million on our credit facilities, the $350 million issuance of senior convertible notes and the net increase in environmental revenue bonds of $220 million.
•Net debt was derived starting from total debt as shown in the full reconciliation on page 21.20.
•The increase in net debt in 2019 was primarily related to the increase in debt described above and the use of funds to purchase our 49.9% ownership interest in Big River Steel, fund the electric arc furnace construction at Fairfield Tubular Operations and finance other capital expenditures.
14
•The decrease in 2020 net periodic benefit cost from 2019 was primarily due to better than expected 2019 asset performance, lower amortization of prior service costs, lower future healthcare costs and reduced participation in our retiree healthcare plans.
•The increase in 2019 pension and OPEB expensenet periodic benefit cost from 2018 was mainly due to increased contributions to the Steelworkers' Pension Trust (SPT) in 2019 in accordance with the increase in the contribution rate per hour required under the 2018 Labor Agreements (defined below).Agreements.
•For further details, see Note 18 to the Consolidated Financial Statements.
15
•The funded status of our pension plan improved by $250$265 million in 20192020 primarily due to higherfavorable 2020 asset performance and an update to our mortality assumptions partially offset by a decrease in the discount rate. The funded status of our OPEBother post-employment benefits (OPEB) plan improved by $410$121 million in 20192020 primarily due to higher asset performance, reductionsa decrease in expected future health carehealthcare costs and changes in assumptions on future participant enrollment.favorable 2020 asset performance.
•At the end of 2019,2020, on a U.S. GAAP basis the funded status was 93%98% and 108%115% for our pension and OPEB obligations respectively as compared to a funded status of 88% for both obligations93% and 108% at the end of 2018.2019, respectively.
•For further details, see Note 18 to the Consolidated Financial Statements.
16
NON-GAAP FINANCIAL MEASURES
Throughout this report, we present EBITDA, adjusted EBITDA, adjusted net (loss) earnings (loss) and adjusted net (loss) earnings (loss) per diluted share, free cash flow and net debt which are non-GAAP measures, as additional measurements to enhance the understanding of our operating performance, cash flow and financial position and to facilitate comparison with our competitors. See page 3 for an explanation of our use of certain non-GAAP financial measures.
RECONCILIATION TO ADJUSTED NET (LOSS) EARNINGS (a) | ||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Reconciliation to adjusted net (loss) earnings attributable to United States Steel Corporation | ||||||||||||||||||||
| Net (loss) earnings attributable to United States Steel Corporation, as reported | $ | (1,165) | $ | (630) | $ | 1,115 | ||||||||||||||
| Asset impairment charge | 263 | — | — | |||||||||||||||||
| Restructuring and other charges | 131 | 263 | — | |||||||||||||||||
| Tubular inventory impairment | 24 | — | — | |||||||||||||||||
Big River Steel debt extinguishment charges (b) | 18 | — | — | |||||||||||||||||
| Uncertain tax positions | 13 | — | — | |||||||||||||||||
| Big River Steel financing costs | 8 | — | — | |||||||||||||||||
| Big River Steel transaction and other related costs | 3 | — | — | |||||||||||||||||
| Fairless property sale | (145) | — | — | |||||||||||||||||
Big River Steel options and forward adjustments (c) | (39) | 7 | — | |||||||||||||||||
| Gain on previously held investment in UPI | (25) | — | — | |||||||||||||||||
| December 24, 2018 Clairton coke making facility fire | (6) | 41 | — | |||||||||||||||||
| Tax valuation allowance | — | 334 | (374) | |||||||||||||||||
| Loss on extinguishment of debt and other related costs | — | — | 101 | |||||||||||||||||
| USW labor agreement signing bonus and related costs | — | — | 81 | |||||||||||||||||
| Granite City Works restart and related costs | — | — | 80 | |||||||||||||||||
| Gain on equity investee transactions | — | — | (38) | |||||||||||||||||
| Granite City Works temporary idling charges | — | — | (8) | |||||||||||||||||
| Total Adjustments | 245 | 645 | (158) | |||||||||||||||||
| Adjusted net (loss) earnings attributable to United States Steel Corporation | $ | (920) | $ | 15 | $ | 957 | ||||||||||||||
RECONCILIATION TO ADJUSTED NET EARNINGS (LOSS) (a) | ||||||||||||
| Year Ended December 31, | ||||||||||||
| (Dollars in millions) | 2019 | 2018 | 2017 | |||||||||
| Reconciliation to adjusted net earnings (loss) attributable to United States Steel Corporation | ||||||||||||
| Net (loss) earnings attributable to United States Steel Corporation, as reported | $ | (630 | ) | $ | 1,115 | $ | 387 | |||||
| December 24, 2018 Clairton coke making facility fire | 41 | — | — | |||||||||
Restructuring and other charges (b) | 263 | — | — | |||||||||
Big River Steel options mark to market, net (c) | 7 | — | — | |||||||||
| USW labor agreement signing bonus and related costs | — | 81 | — | |||||||||
| Granite City Works restart and related costs | — | 80 | — | |||||||||
| Tax valuation allowance | 334 | (374 | ) | — | ||||||||
Loss on shutdown of certain tubular assets (b) | — | — | 35 | |||||||||
| Gain associated with retained interest in U. S. Steel Canada Inc. | — | — | (72 | ) | ||||||||
Granite City Works temporary idling charges | — | (8 | ) | 17 | ||||||||
| (Gain) loss on equity investee transactions | — | (38 | ) | (2 | ) | |||||||
| Loss on extinguishment of debt and other related costs | — | 101 | 57 | |||||||||
| Effect of tax reform | — | — | (81 | ) | ||||||||
| Total Adjustments | 645 | (158 | ) | (46 | ) | |||||||
| Adjusted net (loss) earnings attributable to United States Steel Corporation | $ | 15 | $ | 957 | $ | 341 | ||||||
(b) IncludedThe Big River Steel debt extinguishment charges were related to Big River Steel refinancing activity that was recognized by U. S. Steel in restructuring and other charges on theLoss (earnings) from investees in its Consolidated Statement of Operations.
(c) The Big River Steel options mark to market, net representsand forward adjustments represent the earnings impact of the change in fair value of options related to our investment in a 49.9% ownership interest in Big River Steel and the recognition of the contingent forward for the exercise of the call option to purchase the remaining interest in Big River Steel. See Note 5 to the Consolidated Financial Statements for further details.
RECONCILIATION TO ADJUSTED NET EARNINGS (LOSS) PER SHARE (a) | ||||||||||||
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Reconciliation to adjusted diluted net earnings (loss) per share | ||||||||||||
| Diluted net (loss) earnings per share, as reported | $ | (3.67 | ) | $ | 6.25 | $ | 2.19 | |||||
| December 24, 2018 Clairton coke making facility fire | 0.23 | — | — | |||||||||
Restructuring and other charges (b) | 1.53 | — | — | |||||||||
Big River Steel options mark to market, net (c) | 0.04 | — | — | |||||||||
| USW labor agreement signing bonus and related costs | — | 0.45 | — | |||||||||
| Granite City Works restart and related costs | — | 0.45 | — | |||||||||
| Tax valuation allowance | 1.96 | (2.11 | ) | — | ||||||||
Loss on shutdown of certain tubular assets (b) | — | — | 0.20 | |||||||||
| Gain associated with retained interest in U. S. Steel Canada Inc. | — | — | (0.41 | ) | ||||||||
| Granite City Works temporary idling charges | — | (0.04 | ) | 0.10 | ||||||||
| Gain on equity investee transactions | — | (0.21 | ) | (0.01 | ) | |||||||
| Loss on extinguishment of debt and other related costs | — | 0.57 | 0.33 | |||||||||
| Effect of tax reform | — | — | (0.46 | ) | ||||||||
| Total adjustments | 3.76 | (0.89 | ) | (0.25 | ) | |||||||
| Adjusted diluted net earnings (loss) per share | $ | 0.09 | $ | 5.36 | $ | 1.94 | ||||||
17
RECONCILIATION TO ADJUSTED NET (LOSS) EARNINGS PER SHARE (a) | ||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Reconciliation to adjusted diluted net (loss) earnings per share | ||||||||||||||||||||
| Diluted net (loss) earnings per share, as reported | $ | (5.92) | (3.67) | 6.25 | ||||||||||||||||
| Asset impairment charge | 1.34 | — | — | |||||||||||||||||
| Restructuring and other charges | 0.67 | 1.53 | — | |||||||||||||||||
| Tubular inventory impairment | 0.12 | — | — | |||||||||||||||||
Big River Steel debt extinguishment charges (b) | 0.09 | — | — | |||||||||||||||||
| Uncertain tax positions | 0.07 | |||||||||||||||||||
| Big River Steel financing costs | 0.04 | — | — | |||||||||||||||||
| Big River Steel transaction and other related costs | 0.02 | — | — | |||||||||||||||||
| Fairless property sale | (0.74) | — | — | |||||||||||||||||
Big River Steel options and forward adjustments (c) | (0.20) | 0.04 | — | |||||||||||||||||
| Gain on previously held investment in UPI | (0.13) | — | — | |||||||||||||||||
| December 24, 2018 Clairton coke making facility fire | (0.03) | 0.23 | — | |||||||||||||||||
| Tax valuation allowance | — | 1.96 | (2.11) | |||||||||||||||||
| Loss on extinguishment of debt and other related costs | — | — | 0.57 | |||||||||||||||||
| USW labor agreement signing bonus and related costs | — | — | 0.45 | |||||||||||||||||
| Granite City Works restart and related costs | — | — | 0.45 | |||||||||||||||||
| Gain on equity investee transactions | — | — | (0.21) | |||||||||||||||||
| Granite City Works temporary idling charges | — | — | (0.04) | |||||||||||||||||
| Total adjustments | 1.25 | 3.76 | (0.89) | |||||||||||||||||
| Adjusted diluted net (loss) earnings per share | $ | (4.67) | $ | 0.09 | $ | 5.36 | ||||||||||||||
(a) The 2020 adjustments included in this table have been tax effected for our European operations and not tax effected for our U.S. operations due to the full valuation allowance on our domestic deferred tax assets. The 2019 adjustments included in this table have been tax effected through the third quarter of 2019 as a valuation allowance was not applied to our deferred tax assets until the endfourth quarter of the year.2019. The 2018 and 2017 adjustments included in this table have not been tax effected due to the recognition of a full valuation allowance on our domestic deferred tax assets, which was established in the fourth quarter of 2015.assets.
(b)Included The Big River Steel debt extinguishment charges were related to Big River Steel refinancing activity that was recognized by U. S. Steel in restructuring and other charges and cost of salesLoss (earnings) from investees in theits Consolidated Statement of Operations.
(c) The Big River Steel options mark to market, netand forward adjustments represents the earnings impact of the change in fair value of options related to our investment in a 49.9% ownership interest in Big River Steel and the recognition of the contingent forward for the exercise of the call option to purchase the remaining interest in Big River Steel. See Note 5 to the Consolidated Financial Statements for further details.
18
| RECONCILIATION TO EBITDA AND ADJUSTED EBITDA | RECONCILIATION TO EBITDA AND ADJUSTED EBITDA | RECONCILIATION TO EBITDA AND ADJUSTED EBITDA | ||||||||||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||
| (Dollars in millions) | (Dollars in millions) | 2019 | 2018 | 2017 | (Dollars in millions) | 2020 | 2019 | 2018 | ||||||||||||||||||||||||
| Reconciliation to EBITDA and Adjusted EBITDA | Reconciliation to EBITDA and Adjusted EBITDA | Reconciliation to EBITDA and Adjusted EBITDA | ||||||||||||||||||||||||||||||
| Net (loss) earnings attributable to United States Steel Corporation | $ | (630 | ) | $ | 1,115 | $ | 387 | Net (loss) earnings attributable to United States Steel Corporation | $ | (1,165) | $ | (630) | $ | 1,115 | ||||||||||||||||||
| Income tax (benefit) provision | 178 | (303 | ) | (86 | ) | Income tax (benefit) provision | (142) | 178 | (303) | |||||||||||||||||||||||
| Net interest and other financial costs | 222 | 312 | 368 | Net interest and other financial costs | 232 | 222 | 312 | |||||||||||||||||||||||||
| Depreciation, depletion and amortization expense | 616 | 521 | 501 | Depreciation, depletion and amortization expense | 643 | 616 | 521 | |||||||||||||||||||||||||
| EBITDA | 386 | 1,645 | 1,170 | EBITDA | (432) | 386 | 1,645 | |||||||||||||||||||||||||
| December 24, 2018 Clairton coke making facility fire | 50 | — | — | Asset impairment charge | 263 | — | — | |||||||||||||||||||||||||
Restructuring and other charges (a) | 275 | — | — | Restructuring and other charges | 138 | 275 | — | |||||||||||||||||||||||||
| USW labor agreement signing bonus and related costs | — | 81 | — | Tubular inventory impairment | 24 | — | — | |||||||||||||||||||||||||
| Granite City Works restart and related costs | — | 80 | — | Big River Steel debt extinguishment charges (a) | 18 | — | — | |||||||||||||||||||||||||
Loss on shutdown of certain tubular assets (a) | — | — | 35 | Big River Steel transaction and other related costs | 3 | — | — | |||||||||||||||||||||||||
| Gain associated with retained interest in U. S. Steel Canada Inc. | — | — | (72 | ) | Fairless property sale | (145) | — | — | ||||||||||||||||||||||||
| Granite City Works temporary idling charges | — | (8 | ) | 17 | Gain on previously held investment in UPI | (25) | — | — | ||||||||||||||||||||||||
| Gain on equity investee transactions | — | (38 | ) | (2 | ) | December 24, 2018 Clairton coke making facility fire | (6) | 50 | — | |||||||||||||||||||||||
| Adjusted EBITDA | $ | 711 | $ | 1,760 | $ | 1,148 | USW labor agreement signing bonus and related costs | — | — | 81 | ||||||||||||||||||||||
| Granite City Works restart and related costs | — | — | 80 | |||||||||||||||||||||||||||||
| Gain on equity investee transactions | — | — | (38) | |||||||||||||||||||||||||||||
| Granite City Works temporary idling charges | — | — | (8) | |||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | (162) | $ | 711 | $ | 1,760 | ||||||||||||||||||||||||||
(a) IncludedThe Big River Steel debt extinguishment charges were related to Big River Steel refinancing activity that was recognized by U. S. Steel in restructuring and other chargesLoss (earnings) from investees in theits Consolidated Statement of Operations.
19
| RECONCILIATION TO FREE CASH FLOW | ||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Reconciliation to Free Cash Flow | ||||||||||||||||||||
| Net cash provided by operating activities | $ | 138 | $ | 682 | $ | 938 | ||||||||||||||
| Capital expenditures | (725) | (1,252) | (1,001) | |||||||||||||||||
| Dividends paid | (8) | (35) | (36) | |||||||||||||||||
| Free Cash Flow | $ | (595) | $ | (605) | $ | (99) | ||||||||||||||
| RECONCILIATION TO TOTAL DEBT AND NET DEBT | ||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Reconciliation to Total Debt and Net Debt | ||||||||||||||||||||
| Short-term debt and current maturities of long-term debt | $ | 192 | $ | 14 | $ | 65 | ||||||||||||||
| Long-term debt, less unamortized discount and debt issuance costs | 4,695 | 3,627 | 2,316 | |||||||||||||||||
| Total Debt | 4,887 | 3,641 | 2,381 | |||||||||||||||||
| Less: Cash and cash equivalents | $ | 1,985 | $ | 749 | $ | 1,000 | ||||||||||||||
| Net Debt | $ | 2,902 | $ | 2,892 | $ | 1,381 | ||||||||||||||
20
| RECONCILIATION TO FREE CASH FLOW | ||||||||||||
| Year Ended December 31, | ||||||||||||
| (Dollars in millions) | 2019 | 2018 | 2017 | |||||||||
| Reconciliation to Free Cash Flow | ||||||||||||
| Net cash provided by operating activities | 682 | 938 | 826 | |||||||||
| Capital expenditures | (1,252 | ) | (1,001 | ) | (505 | ) | ||||||
| Dividends paid | (35 | ) | (36 | ) | (35 | ) | ||||||
| Free Cash Flow | $ | (605 | ) | $ | (99 | ) | $ | 286 | ||||
| RECONCILIATION TO TOTAL DEBT AND NET DEBT | ||||||||||||
| Year Ended December 31, | ||||||||||||
| (Dollars in millions) | 2019 | 2018 | 2017 | |||||||||
| Reconciliation to Total Debt and Net Debt | ||||||||||||
| Short-term debt and current maturities of long-term debt | $ | 14 | $ | 65 | $ | 3 | ||||||
| Long-term debt, less unamortized discount and debt issuance costs | 3,627 | 2,316 | 2,700 | |||||||||
| Total Debt | 3,641 | 2,381 | 2,703 | |||||||||
| Less: Cash and cash equivalents | $ | 749 | $ | 1,000 | 1,553 | |||||||
| Net Debt | $ | 2,892 | $ | 1,381 | $ | 1,150 | ||||||
PART I
Item 1. BUSINESS
United States Steel Corporation (U. S. Steel), with operations in the U.S. and Central Europe, is transforming itself into a customer-centric, world-competitive, Best of BothSM steelmaker. By combining the best of the integrated and mini mill steelmaking models, U. S. Steel will deliver unmatched process and product innovation for our customers. Our Best of Both strategy is creating a value proposition that only U. S. Steel is uniquely positioned to offer at scale. We are executing on our strategy by investing where we have distinct cost and capability advantages to be a steel solutions provider for our customers. By offering unparalleled product capabilities and process innovation, including the green steels that our customers are increasingly demanding, we can achieve world-competitive positioning in strategic, high-margin end markets, and deliver high-quality, sustainable, value-added products and innovative solutions.
As a mini mill steelmaker, we can utilize the sustainable and flexible EAF steelmaking process to meet our customers’ needs while creating a more variable cost structure and reducing our overall capital intensity. As an integrated steel producer we can create the virgin steel to meet some of flat-rolled and tubular products with major production operations inour customers’ most demanding applications while utilizing the United States and Europe. An integrated steel producer usescompetitive advantage of our fully-integrated iron ore and coke as primary raw materials for steel production. mines.
U. S. Steel has annual raw steel production capability of 22.022.9 million net tons (17.0(17.9 million tons in the United States and 5.0 million tons in Europe). With the acquisition of Big River Steel raw steel production will increase by 3.3 million net tons to a total U. S. Steel and United States capability of 26.2 million and 21.2 million net tons, respectively. U. S. Steel performs a wide range of applied research, development and technical support functions at facilities in Pennsylvania, Michigan, Texas and Slovakia. U. S. Steel supplies customers throughout the world primarily in the automotive, construction, consumer (packaging and appliance), electrical, industrial equipment, service center/distribution, structural tubing and energy (oil country tubular goods (OCTG) and line pipe) markets. According to the World Steelworldsteel Association’s latest published statistics, in 20182019 U. S. Steel was the third largest steel producer in the United States and the twenty-sixthtwenty-seventh largest steel producer in the world. U. S. Steel is also engaged in other business activities consisting primarily of railroad services and real estate operations. U. S. Steel is a Delaware corporation established in 1901.
Acquisitions
On December 8, 2020, the Company exercised its option to acquire the remaining equity of Big River Steel. The acquisition closed on January 15, 2021.
Segments
U. S. Steel has three reportable segments: North American Flat-Rolled (Flat-Rolled), U. S. Steel Europe (USSE) and Tubular Products (Tubular). The results of our 49.9% ownership interest in Big River Steel and our railroad and real estate businesses that do not constitute reportable segments are combined and disclosed in the Other Businesses category. Beginning in 2021, we will report the results of Big River Steel in a separate “Mini Mill” segment.
Flat-Rolled
The Flat-Rolled segment includes the operating results of U. S. Steel’s integrated steel plants and equity investees in North America (except for Big River Steel, which is included in Other Businesses) involved in the production of slabs, strip mill plates, sheets and tin mill products, as well as all iron ore and coke production facilities in the United States. These operations primarily serve North American customers in the automotive, appliance, construction, container, transportation and service center conversion, transportation (including automotive), construction, container, and appliance and electrical markets.
Flat-Rolled has aggregate annual raw steel production capability of 17.0 million tons produced at our Gary Works, Mon Valley Works, Great Lakes Works and Granite City Works facilities. Raw steel production was 9.3 million tons in 2020, 11.4 million tons in 2019 and 11.9 million tons in 2018 and 10.8 million tons in 2017.2018. Raw steel production averaged 55 percent of capability in 2020, 67 percent of capability in 2019 and 70 percent of capability in 2018 and 64 percent of capability in 2017. During December 2015 the Granite City Works steelmaking operations were temporarily idled. The steelmaking operations and hot strip mill were restarted during 2018 and 2017, respectively. If its production capability is excluded during the temporary idle period, Flat-Rolled production would have been 76 percent in 2017.2018.
European Operations
The USSE segment includes the operating results of U. S. Steel Košice (USSK), U. S. Steel’s integrated steel plant and coke production facilities in Slovakia, and its subsidiaries. USSE conducts its business mainly in Central and Western Europe and primarily serves customers in the European transportation (including automotive), construction, container, appliance, electrical, service center, conversion and oil, gas and petrochemical markets. USSE produces and sells slabs, strip mill plate, sheet, tin mill products and spiral welded pipe, as well as refractory ceramic materials.
USSE has annual raw steel production capability of 5.0 million tons. USSE’s raw steel production was 3.4 million tons in 2020, 3.9 million tons in 2019, and 5.0 million tons in 2018, and 5.1 million tons in 2017.2018. USSE’s raw steel production averaged 67 percent of capability in 2020, 78 percent of capability in 2019 and 100 percent of capability in 2018 and 102 percent2018.
21
Tubular
The Tubular segment includes the operating results of U. S. Steel’s tubular production facilities and an equity investee in the United States. These operations produce and sell seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as OCTG), and standard and line pipe and mechanical tubing and primarily serve customers in the oil, gas and petrochemical markets. Tubular'sThe start-up of the new 1.6 million ton electric arc furnace at Fairfield, Alabama in October 2020 is currently used to feed our 0.9 million ton rounds caster. As a result, the Tubular segment now has annual raw steel production capability isof 0.9 million tons. In 2020 raw steel production was 16 thousand tons and averaged 7 percent of capability. Tubular has total production capability of 1.9 million tons.
In 2020, Tubular indefinitely idled the Lone Star Tubular Operations and Lorain Tubular Operations thereby effectively reducing on-line tubular production capacity by 790 and 380 thousand tons, respectively. U. S. Steel Tubular Products, Inc. (USSTP), a wholly owned subsidiary of U. S. Steel, continues to design and develop a range of premium and semi-premium connections to address the growing needs for technical solutions for our end users' well site production challenges. Through its wholly owned subsidiary, U. S. Steel Oilwell Services, LLC, USSTP
For further information, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 to the Consolidated Financial Statements.
22
Steel Shipments by Market and Segment
The following table except where noted in Footnote 1 (1) below does not include shipments to end customers by joint ventures and other equity investees of U. S. Steel. Shipments of materials to these entities are included in the “Further Conversion – Joint Ventures” market classification. No single customer accounted for more than 10 percent of gross annual revenue.
| (Thousands of Tons) | Flat-Rolled | USSE | Tubular | Total | (Thousands of Tons) | Flat-Rolled | USSE | Tubular | Total | |||||||||||||||||||||||||||||
| Major Market – 2019 | ||||||||||||||||||||||||||||||||||||||
| Major Market – 2020 | Major Market – 2020 | |||||||||||||||||||||||||||||||||||||
| Steel Service Centers | 1,902 | 740 | — | 2,642 | Steel Service Centers | 1,450 | 690 | — | 2,140 | |||||||||||||||||||||||||||||
| Further Conversion – Trade Customers | 2,823 | 214 | — | 3,037 | Further Conversion – Trade Customers | 2,063 | 202 | — | 2,265 | |||||||||||||||||||||||||||||
– Joint Ventures (1) | 819 | — | — | 819 | – Joint Ventures (1) | 415 | — | — | 415 | |||||||||||||||||||||||||||||
Transportation and Automotive (1) | 2,620 | 676 | — | 3,296 | Transportation and Automotive (1) | 2,012 | 517 | — | 2,529 | |||||||||||||||||||||||||||||
| Construction and Construction Products | 1,076 | 1,048 | 44 | 2,168 | Construction and Construction Products | 1,261 | 775 | 34 | 2,070 | |||||||||||||||||||||||||||||
| Containers and Packaging | 652 | 440 | — | 1,092 | Containers and Packaging | 913 | 435 | — | 1,348 | |||||||||||||||||||||||||||||
| Appliances and Electrical Equipment | 570 | 220 | — | 790 | Appliances and Electrical Equipment | 497 | 194 | — | 691 | |||||||||||||||||||||||||||||
| Oil, Gas and Petrochemicals | — | — | 725 | 725 | Oil, Gas and Petrochemicals | — | 5 | 430 | 435 | |||||||||||||||||||||||||||||
| All Other | 238 | 252 | — | 490 | All Other | 100 | 223 | — | 323 | |||||||||||||||||||||||||||||
| TOTAL | 10,700 | 3,590 | 769 | 15,059 | TOTAL | 8,711 | 3,041 | 464 | 12,216 | |||||||||||||||||||||||||||||
Major Market – 2018 (2) | ||||||||||||||||||||||||||||||||||||||
| Major Market – 2019 | Major Market – 2019 | |||||||||||||||||||||||||||||||||||||
| Steel Service Centers | 1,904 | 799 | — | 2,703 | Steel Service Centers | 1,902 | 740 | — | 2,642 | |||||||||||||||||||||||||||||
| Further Conversion – Trade Customers | 2,273 | 287 | — | 2,560 | Further Conversion – Trade Customers | 2,823 | 214 | — | 3,037 | |||||||||||||||||||||||||||||
– Joint Ventures (1) | 810 | — | — | 810 | – Joint Ventures (1) | 819 | — | — | 819 | |||||||||||||||||||||||||||||
Transportation & Automotive (1) | 2,874 | 728 | — | 3,602 | Transportation & Automotive (1) | 2,620 | 676 | — | 3,296 | |||||||||||||||||||||||||||||
| Construction and Construction Products | 953 | 1,637 | 38 | 2,628 | Construction and Construction Products | 1,076 | 1,048 | 44 | 2,168 | |||||||||||||||||||||||||||||
| Containers and Packaging | 768 | 439 | — | 1,207 | Containers and Packaging | 652 | 440 | — | 1,092 | |||||||||||||||||||||||||||||
| Appliances and Electrical Equipment | 599 | 261 | — | 860 | Appliances and Electrical Equipment | 570 | 220 | — | 790 | |||||||||||||||||||||||||||||
| Oil, Gas and Petrochemicals | — | 11 | 742 | 753 | Oil, Gas and Petrochemicals | — | — | 725 | 725 | |||||||||||||||||||||||||||||
| All Other | 329 | 295 | — | 624 | All Other | 238 | 252 | — | 490 | |||||||||||||||||||||||||||||
| TOTAL | 10,510 | 4,457 | 780 | 15,747 | TOTAL | 10,700 | 3,590 | 769 | 15,059 | |||||||||||||||||||||||||||||
Major Market – 2017 (2) | ||||||||||||||||||||||||||||||||||||||
Major Market – 2018 (2) | Major Market – 2018 (2) | |||||||||||||||||||||||||||||||||||||
| Steel Service Centers | 1,953 | 761 | — | 2,714 | Steel Service Centers | 1,904 | 799 | — | 2,703 | |||||||||||||||||||||||||||||
| Further Conversion – Trade Customers | 1,738 | 284 | — | 2,022 | Further Conversion – Trade Customers | 2,273 | 287 | — | 2,560 | |||||||||||||||||||||||||||||
– Joint Ventures (1) | 715 | — | — | 715 | – Joint Ventures (1) | 810 | — | — | 810 | |||||||||||||||||||||||||||||
Transportation and Automotive (1) | 2,982 | 708 | — | 3,690 | Transportation and Automotive (1) | 2,874 | 728 | — | 3,602 | |||||||||||||||||||||||||||||
| Construction and Construction Products | 910 | 1,831 | 41 | 2,782 | Construction and Construction Products | 953 | 1,637 | 38 | 2,628 | |||||||||||||||||||||||||||||
| Containers and Packaging | 715 | 438 | — | 1,153 | Containers and Packaging | 768 | 439 | — | 1,207 | |||||||||||||||||||||||||||||
| Appliances and Electrical Equipment | 594 | 247 | — | 841 | Appliances and Electrical Equipment | 599 | 261 | — | 860 | |||||||||||||||||||||||||||||
| Oil, Gas and Petrochemicals | — | �� | 10 | 647 | 657 | Oil, Gas and Petrochemicals | — | 11 | 742 | 753 | ||||||||||||||||||||||||||||
| All Other | 280 | 306 | — | 586 | All Other | 329 | 295 | — | 624 | |||||||||||||||||||||||||||||
| TOTAL | 9,887 | 4,585 | 688 | 15,160 | TOTAL | 10,510 | 4,457 | 780 | 15,747 | |||||||||||||||||||||||||||||
(1) PRO-TEC automotive substrate shipments are included in the Transportation and Automotive category.
23
Steel Industry Background and Competition
The global steel industry is cyclical, highly competitive and has historically been reclassifiedcharacterized by overcapacity.
U. S. Steel's competitive position may be affected by, among other things, differences among U. S. Steel's and its competitors' cost structure, labor costs, environmental remediation and compliance costs, global capacity and the existence and magnitude of government subsidies provided to one of the other categories to which they relate.competitors.
U. S. Steel competes with many North American and international steel producers. Competitors include 1) integrated producers, which, like U. S. Steel, use iron ore and coke as the primary raw materials for steel production, 2) EAF producers, which primarily use steel scrap and other iron-bearing feedstocks as raw materials and 3) slab re-rollers, who purchase mostly imported, but some domestic, semi-finished products and convert them into sheet products. Global steel production increased by 55 million metric tons in 2019 to 1.869 billion metric tons. Furthermore, capacity has continued to increase, with notable changes in 2019 Chinese crude steel production of 996 million metric tons, a 8.3% increase from 2018, and estimated to be more than 76 million metric tons above the apparent crude steel demand in China (source: worldsteel). In addition, other materials, such as aluminum, plastics and composites, compete with steel in several applications.
EAF producers typically require lower capital expenditures for construction of facilities and may have lower total employment costs; however, these competitive advantages may be minimized or eliminated by the cost of scrap when scrap prices are high. Some EAF producers utilize thin slab casting technology to produce flat-rolled products and are increasingly able to compete directly with integrated producers in many flat-rolled product applications previously produced only by integrated steelmakers. Slab re-rollers do not incur the cost of melting steel, their input costs are driven by the market price of slabs.
U. S. Steel provides defined benefit pension and/or other post-employment benefits to approximately 80,000 current employees, retirees and their beneficiaries. Many of our competitors do not have comparable retiree obligations. Participation in U. S. Steel's main defined benefit pension plan was closed to new entrants on July 1, 2003 and benefit accruals for all non-represented participants were frozen effective December 31, 2015. Participation in U. S. Steel’s retiree medical and life insurance programs for United Steelworkers (USW)-represented employees were closed to employees hired or rehired (except in limited circumstances) on or after January 1, 2016. Retiree medical and life insurance benefits for non-represented employees were eliminated for those who retired after December 31, 2017.
We believe that our major North American and many European integrated steel competitors are confronted with substantially similar environmental regulatory conditions and therefore do not believe that our relative position with regard to such competitors will be materially affected by the impact of environmental laws and regulations. However, if future regulations do not recognize the fact that the integrated steel process involves a series of chemical reactions involving carbon that create carbon dioxide (CO2) emissions without linking these emissions to steel scrap as well, our competitive position relative to mini-mills will be adversely impacted. Our competitive position compared to producers in developing nations such as China, Russia, Ukraine, Turkey, Brazil and India, will be harmed unless such nations require commensurate reductions in CO2 emissions or there are border adjustment tariffs for CO2. Competing materials such as plastics may not be similarly impacted. The specific impact on each competitor will vary depending on a number of factors, including the age and location of its operating facilities and its production methods. U. S. Steel is also responsible for remediation costs related to former and present operating locations and disposal of environmentally sensitive materials. Many of our competitors, including North American producers, or their successors, that have been the subject of bankruptcy relief have no or substantially lower liabilities for such environmental remediation matters.
In 2021, additional steelmaking capacity is expected to enter the domestic steel market as competitors' growth projects come on-line throughout the year.
Business Strategy
We are executing on our customer-centric strategy to transform U. S. Steel into a world-competitive, Best of Both, steelmaker by combining the best of the integrated steelmaking model with the best of the mini mill steelmaking model. Our strategy will deliver product and process innovation to create unmatched value for our customers while enhancing our earnings profile and delivering long-term cash flow through industry cycles. By offering unparalleled product capabilities, including the green steels our customers are increasingly demanding, we can achieve world-competitive positioning in strategic, high-margin end markets, and deliver high-quality, sustainable, value-added products and innovative solutions. To get to our Best of Both future, we are investing to create distinct cost and capability advantages, enhancing our focus on operational and commercial excellence and promoting technological innovation, so we can deliver an unmatched value proposition to our customers while creating a more variable cost structure, and lowering the capital intensity of the business.
Foundational to our efforts is our belief that we must operate as a principled company committed to our S.T.E.E.L. Principles, outlined in our Code of Ethical Business Conduct. Our core value of safety - the safety of our employees, our environment, our communities and our facilities and equipment - has served us well for much of our history and our commitment to it remains as strong as the products we make every day.
24
Our strategy is informed by our critical success factors, which are the bedrock of the Best of Both strategy: (1) Move Down the Cost Curve, (2) Win in Strategic Markets, and (3) Move Up the Talent Curve.
We continuously aim to move down the cost curve. We made considerable progress on this critical success factor in 2020. The successful acquisition of Big River Steel is expected to improve our cost position by making our cost structure more variable and reducing the capital intensity of the business. We also successfully completed the construction of the EAF at our Tubular Operations in Fairfield, Alabama and became self-sufficient in our rounds supply. We also made considerable progress and remain on track towards our stated goal of reducing fixed costs by $200 million.
We are focused on winning in strategic markets through a customer-focused business model with an emphasis on creating differentiated, innovative and value-added solutions that will help our customers succeed. As part of this effort, in 2020 we implemented an enhanced operating model and organizational structure to accelerate the company’s strategic transformation and better serve its customers. The realignment of U. S. Steel’s leadership team around more nimble and efficient executive functions, notably to sharpen focus on operational and commercial excellence and promote technological innovation, will enable the company to establish a more competitive cost structure with enhanced capabilities to serve customers in strategic markets.
Core to our strategy is moving up the talent curve. The success of our business is driven by the efforts of our hard-working employees. We know that we must work to identify, attract and retain best-in-class diverse talent. Our goal is to build a pipeline mapping the right people to the right value-driving roles. This includes providing the training and resources they need to succeed and fostering a culture where accountability, fairness and respect are foundational, and high performance and diversity in all its forms are valued and celebrated. This type of environment incentivizes the right behavior and allows for a best talent wins environment to help us achieve our Best of Both strategy.
U. S. Steel will continue to evaluate potential strategic and organizational opportunities, which may include the acquisition, divestiture or consolidation of assets. Given the cyclicality of our industry, we are focused on strategically maintaining and spending cash, in order to invest in areas consistent with the execution of our Best of Both strategy, such as sustainable steel technologies, and are considering various possibilities, including exiting lines of business and the sale of certain assets, that we believe would ultimately result in greater stockholder value. The Company will pursue opportunities based on its long-term strategy, and what the Board of Directors determines to be in the best interests of the Company's stockholders at the time. In addition, we are bringing Big River Steel’s focused, innovative, and entrepreneurial mindset into the way we do business. By bringing these two world-class workforces together, with a shared values-based culture, we believe we can create significant value across the enterprise.
Strategic Projects and Technology Investments
In October 2019, the Company completed the first step in acquiring Big River Steel in Osceola, Arkansas through the purchase of a 49.9% ownership interest at a purchase price of approximately $700 million in cash, with a call option to acquire the remaining 50.1% within the next four years at an agreed-upon price formula. With the completion of its Phase II expansion in November 2020, Big River Steel operates two technologically advanced EAFs with approximately 3.3 million tons of steel making capacity. On December 8, 2020 the Company announced it exercised its call option to acquire the remaining equity of Big River Steel. The purchase of the remaining interest in Big River Steel closed on January 15, 2021 for approximately $723 million in cash and the assumption of liabilities of approximately $50 million. The successful completion of the acquisition marked a major milestone in our Best of Both strategy. Full ownership of Big River Steel creates North America’s only Best of Both steel technology company by combining leading advanced high-strength steel intellectual property with a technologically advanced and low-greenhouse gas emissions mini mill.
In May 2019, U. S. Steel announced that it plans to construct a new endless casting and rolling facility at its Edgar Thomson Plant in Braddock, Pennsylvania, and a cogeneration facility at its Clairton Plant in Clairton, Pennsylvania, both part of the Company's Mon Valley Works. This investment in state-of-the-art sustainable steel technology is expected to significantly upgrade the production capability of our lowest liquid steel cost mill in the U.S., while further reducing conversion costs through improved process efficiencies, yield and energy consumption. Since announcement, the Company identified the potential need for additional equipment at the Edgar Thomson steel shop. The Company has amended the environmental permit applications to include a new ladle metallurgy facility (LMF). In addition, the expected capital costs of achieving the Company’s ambitious environmental targets from its future cogeneration facility have increased. The Company expects the total investment for the new endless casting and rolling facility at its Edgar Thomson Plant and cogeneration facility at its Clairton Plant to be at least $1.5 billion, with the expected incremental run-rate EBITDA benefits of approximately $275 million unchanged. The Company purchased certain equipment for this project before delaying groundbreaking in March 2020 in response to COVID-19. In 2021, the Company plans to resume equipment purchases for the project, which will be partially funded from our Export Credit Agreement.
The installation of endless casting and rolling technology will allow differentiated product capabilities to serve strategic markets. In 2020 we announced a delay in the construction of our endless casting and rolling line at Mon Valley Works, but plan to resume equipment purchases in 2021 as we monitor the right time to fully resume the project. With this technology the Mon Valley Works should become the principal source of substrate for the production of the Company's industry-leading XG3TM advanced high strength steel (AHSS), a market leading solution for our customers to improve fuel efficiency. The cogeneration facility, equipped with state-of-the-art emissions control systems at the Company's Clairton Plant, will convert a portion of the coke oven gas
25
generated at its Clairton Plant into electricity to power the steelmaking and finishing facilities throughout U. S. Steel's Mon Valley operations. This project, in addition to producing sustainable AHSS, is expected to improve environmental performance, energy conservation and reduce our carbon footprint associated with Mon Valley Works.
In February 2019, U. S. Steel restarted construction of the EAF steelmaking facility at its Tubular Operations in Fairfield, Alabama. The EAF is expected to structurally improve the Company's competitive position and reduce rounds cost by $90 per seamless ton as the Company becomes self-sufficient in its rounds supply. Construction of the EAF was completed in October 2020. Utilization of the EAF will be subject to overall demand in the Tubular business.
The Company expects to invest approximately $550 million, of which approximately 50 percent has already been spent, to upgrade the Gary Works hot strip mill through a series of projects focused on expanding the line's competitive advantages. The Gary Works hot strip mill will further differentiate itself as a leader in heavy-gauge products in strategic markets. The Company has resumed certain capability upgrades in conjunction with planned outages after having delayed upgrades as part of the Company's comprehensive response to impacts from COVID-19. The Company will continue to evaluate the pace and timeline for completing the remaining investments in the Gary Works hot strip mill.
In January 2019, U. S. Steel announced the construction of a new Dynamo line at USSE. The new line, a $130 million investment, has an annual capacity of approximately 100,000 metric tons. Construction on the Dynamo line began in mid-2019 but due to challenging market conditions, has been paused. Upon its completion, the new line would enable production of sophisticated silicon grades of non-grain oriented (NGO) electrical steels to support increased demand in vehicles and generators.
Commercial Strategy
Beginning January 1, 2020, the Company implemented an enhanced operating model and organizational structure to accelerate its strategic transformation and better serve its customers. The new operating model is centered around manufacturing, commercial, and technological excellence. Our former “commercial entity” structure was put into place to deepen understanding of business ownership and our relationships with customers and allowed the Company to identify the technology that would differentiate our products and processes on the basis of cost and/or capabilities. The new enhanced operating model enables us to implement our Best of Both strategy faster by making us a more nimble and technologically superior customer driven company positioned to deliver the benefits of our strategy through the business cycle.
We have successfully produced several grades of green steel using Big River Steel substrate, including our Ultra High Strength Steels (UHSS) and XG3TM advanced high strength steel (AHSS) grades that our customers are increasingly demanding.
Our commercial strategy is focused on providing customer focused solutions with differentiated and value-added steel products, which includes advanced high strength steels such as our newly developed grades of GEN3 steel, coated sheets for the automotive and appliance industries, electrical steel sheets for the manufacture of motors and electrical equipment, both bare and prepainted galvanized and Galvalume® sheets for construction, heavy gauge hot rolled coils used in the production of American Petroleum Institute (API) line pipe used for energy transmission line pipe, tin mill products for the packaging industry and pipe, connections, accessories and rig site services for use in drilling for oil and gas.
We are responsive to our customers' changing needs by developing new steel products and uses for steel that meet the evolving market and regulatory demands imposed upon them. In connection with this commitment, we have research centers in Pittsburgh, Pennsylvania, Košice, Slovakia, and Houston, Texas, as well as an automotive center in Troy, Michigan. The focus of these centers is to develop new products and to collaborate with our customers to better provide innovative solutions to serve their needs.
For automotive markets, we commissioned a first of its kind GEN3 hot dipped galvanize line at our PRO-TEC Coating Company (PRO-TEC) joint venture in 2020, and have embedded application engineers at original equipment manufacturers to demonstrate how to best utilize the highly formable, cost effective material in body design to meet automobile passenger safety requirements while significantly reducing weight to meet future vehicle fuel efficiency standards.
In our tubular markets, we continue development of premium and semi-premium tubular connections designed for our customers that operate in challenging drilling environments. These connections optimize well construction activities and provide outstanding sealing capabilities for onshore and offshore oil and gas drilling in North America. An example is the USS-TALON HTQ™, which was introduced in 2020 for customers that are constructing onshore natural gas and oil wells with long laterals requiring best-in-class torque capacity and optimized well-bore clearances. Please refer to Item I. Business Strategy for further details of related strategies.
Human Capital Management
At U. S. Steel, we are focused on attracting and retaining the top talent needed to support our strategic transformation and meet our customers’ evolving needs as a sustainable steel solutions provider. The support and development of our people is foundational to achieving our Best of Both strategy. We refer to this strategic talent pillar as “Moving Up the Talent Curve.”
26
Our focus on people extends to our current and future employees. We aim to have an engaged and diverse workforce to promote new ideas and innovation, reflect the communities where we operate, and deliver exceptional customer service. We seek to build an inclusive environment where people feel free to bring their whole selves to work. To achieve the Best of Both strategy, we must have the “Best from All.” More about our focus on people and human capital management can be found in our 2019 Sustainability Report.
| Approximate Active Employees as of December 31, 2020 | |||||
| North America | 13,975 | ||||
| Slovakia | 9,375 | ||||
| Total | 23,350 | ||||
Ethics & Compliance
Our culture is based on our S.T.E.E.L. Principles: Safety First; Trust and Respect; Environmentally Friendly Activities; Ethical Behavior; and Lawful Business Conduct. We expect our employees and members of our board of directors to take personal responsibility to “do what’s right,” and our Code of Ethical Business Conduct serves as the foundation for the actions of our employees and directors. To further ensure that employees understand the Company’s expectations and all applicable rules, we provide formal ethics and compliance training to our employees and have frequent communication with information about key compliance topics, which include messages from senior management underscoring the importance of doing business with integrity. Employees also receive summaries of current events that demonstrate the need to do business lawfully that include reminders of the company’s expectations for all employees. In addition, through our annual policy certification process, employees and directors certify their ongoing compliance with our Code of Ethical Business Conduct.
Employee Health & Safety
At U. S. Steel, we have a long-standing commitment to the safety and health of the men and women who work in our facilities. Safety is our primary core value. Every employee deserves to return home safely at the end of every day, and we are working to eliminate all injuries and incidents atincidents. In addition, the psychological safety of all employees is important to us. We have combined physical safety and psychological safety into the construct of our facilities.360° safety. Ensuring a safe workplace also improves productivity, quality, reliability and financial performance. By making safety and health a personal responsibility, our employees are making a daily commitment to follow safe work practices, look out for the safety of co-workers and ensure safe working conditions for everyone. A “Safety First” mindset is as essential to our success as the tools and technologies we rely on to do business. This past year, we relied on our strong safety culture to ensure the health and safety of our employees during the COVID-19 pandemic, as described below.
Our objective is to attain a sustainable zero harm culture supported by leadership and owned by an engaged and highly skilled workforce, empowered with the capabilities and resources needed to assess, reduce, and eliminate workplace risks and hazards. In support of these objectives, we have developed an enhanced Safety Management System, initiated new safety communication methods and enhanced contractor safety processes.
27
For 2020, we had a corporate DAFW rate of 0.07, which is 86%0.53 better than the U.S. Bureau of Labor Statistics for Iron & Steel rate of 0.70 and 68% better than AmericanStatistics' Iron and Steel Institutebenchmark DAFW rate of 0.31. Notably, 0.100.60.
Inclusion & Diversity
Attracting, developing, and retaining a workforce of talented, diverse people is essential to having high-performing teams that drive results for our Company’s stakeholders. As part of our commitment to cultivating a new Company recordculture of caring, we have inclusive benefits available for our U.S. non-represented workforce, including expanded parental leave, back-up dependent care, infertility coverage, gender reassignment coverage and healthcare continuation for the families of employees who suffered work-related or military service fatalities. In 2020, U. S. Steel earned a 100 percent score on the Human Rights Campaign’s annual Corporate Equality Index in recognition of our comprehensive and inclusive benefits. We also support several employee resource groups (ERGs) to enhance employee engagement, promote a culture of acceptance, foster diversity in the workplace, and raise awareness related to issues of identity and intersectionality. Our ERGs also provide leadership development, mentorship and networking opportunities for their members.
Talent Development and Retention
We believe that could not have been accomplished without the dedicationdevelopment and retention of talent is essential to our success, and we seek to provide opportunities for continuous learning and development. All of our employees at a director-level and strongabove have a formal professional development plan that is assessed at least annually. In addition, we proactively measure our attrition rates, and take targeted actions to ensure our highest potential and performing employees are incentivized to remain with the Company. Over the past five years, our regrettable voluntary turnover rate has been at or below 5 percent.
Labor Relations
Approximately 80 percent of our employees in North America and Slovakia are covered by collective bargaining agreements. We work closely with union representatives to provide safe and productive workplaces that enable our employees to deliver high-quality products and meet the needs of our customers. Our partnership with the United Steelworkers.Steelworkers includes not only a commitment to safety programs, but also a common approach to combating the unfairly traded imports that threaten our industry, our company, and ultimately the jobs of our employees.
Impact of COVID-19
The spread of the coronavirus pandemic across the globe significantly impacted global markets and nearly every industry, U. S. Steel included. We quickly recognized the uncertainty and potential severity the pandemic would cause, and implemented our crisis response plan. Overseen by our Board of Directors, and led by our executive team, we implemented a comprehensive and adaptive response to the pandemic focused on protecting lives and livelihoods, preserving cash and liquidity, remaining nimble to execute our strategy and supporting our customers and communities, all in line with our foundational S.T.E.E.L. Principles. Some of the measures we implemented and continue to practice include:
•Issuing weekly communication, including preventive tips, and a dedicated website for employees and their families;
28
•Providing employees with protective equipment, masks, and sanitizing and cleaning supplies and enhanced cleaning frequency;
•Permitting a majority of our employees in our administrative offices and headquarters to work from home; and
•Intensifying our focus on preserving cash and proactively raised approximately $1.7 billion of incremental capital to support our balance sheet.
In May 2019, U. S. Steel took another step in the execution of our strategy to become the “best of both” in the steel industry with the announcement of its commitment to reduce greenhouse gas emissions intensity across its global footprint. The Company has set a goal to reduce its global greenhouse gas emissions intensity by 20 percent, as measured by the rate of carbon dioxide (CO2) equivalents emitted per ton of finished steel shipped, by 2030 based on 2018 baseline levels. This target will apply to U. S. Steel’s global operations.
The installation of endless casting and rolling technology will allow differentiated product capabilities to serve strategic markets. In 2020 we announced a delay in the construction of our endless casting and rolling line at Mon Valley Works, but plan to resume equipment purchases in 2021 as well as implementationwe monitor the right time to fully resume the project. With this technology the Mon Valley Works should become the principal source of ongoing energy efficiency measures, continued usesubstrate for the production of renewable energy sourcesthe Company's industry-leading XG3TM advanced high strength steel (AHSS), a market leading solution for our customers to improve fuel efficiency. The cogeneration facility, equipped with state-of-the-art emissions control systems at the Company's Clairton Plant, will convert a portion of the coke oven gas
25
generated at its Clairton Plant into electricity to power the steelmaking and other process improvements to be developed.
In February 2019, U. S. Steel is committed to helping its customers achieve their environmental goals. Our industry-leading XG3™ advanced high-strength steel enables automakers to manufacture lighter weight vehicles that meet federal Corporate Average Fuel Economy (CAFE) standards with reduced carbon emissions. As part of our innovation efforts, we continue to look at new steelmaking technologies including those that can further reduce carbon emissions as those technologies mature.
In January 2019, U. S. Steel announced the construction of a new Dynamo line at USSE. The new line, a $130 million investment, has an annual capacity of approximately 100,000 metric tons. Construction on the Dynamo line began in mid-2019 but due to challenging market conditions, has been paused. Upon its completion, the new line would enable production of sophisticated silicon grades of non-grain oriented (NGO) electrical steels to support increased demand in vehicles and generators.
Commercial Strategy
Beginning January 1, 2020, wethe Company implemented an enhanced operating model and organizational structure to accelerate the company’sits strategic transformation and better serve its customers. The realignmentnew operating model is centered around manufacturing, commercial, and technological excellence. Our former “commercial entity” structure was put into place to deepen understanding of U. S. Steel’s leadership team around more nimblebusiness ownership and efficient executive functions, notably to sharpen focus on operationalour relationships with customers and commercial excellence and promote technological innovation, will enableallowed the company to establish a more competitive cost structure with enhanced capabilities to serve customers in strategic markets.
We have successfully produced several grades of green steel using Big River Steel substrate, including our Ultra High Strength Steels (UHSS) and competitiveness and drive through-cycle cash flow generation. Execution of U. S. Steel’s strategy will position the Company with a suite of world-class assets with distinct advantages to serve current and futureXG3TM advanced high strength steel (AHSS) grades that our customers with high-tech, sustainable steel solutions. Theare increasingly demanding.
Our commercial strategy is focused on commercial differentiation,providing customer focused solutions with differentiated and value-added steel products, which includes advanced high strength steels such as our newly developed grades of GEN3 steel, coated sheets for the automotive and appliance industries, electrical steel sheets for the manufacture of motors and electrical equipment, both bare and prepainted galvanized and Galvalume® sheets for construction, heavy gauge hot rolled coils used in the production of American Petroleum Institute (API) line pipe used for energy transmission line pipe, tin mill products for the packaging industry and pipe, connections, accessories and rig site services for use in drilling for oil and gas.
We are responsive to our customers' changing needs by developing new steel products and uses for steel that meet the evolving market and regulatory demands imposed upon them. In connection with this commitment, we have research centers in Pittsburgh, Pennsylvania, Košice, Slovakia, and Houston, Texas, as well as an automotive center in Troy, Michigan. The focus of these centers is to develop new products and to collaborate with our customers to better provide innovative solutions to serve their needs.
For automotive markets, we commissioned a first of its kind GEN3 hot dipped galvanize line at our PRO-TEC Coating Company currently believes(PRO-TEC) joint venture in 2020, and have embedded application engineers at original equipment manufacturers to demonstrate how to best utilize the highly formable, cost effective material in body design to meet automobile passenger safety requirements while significantly reducing weight to meet future vehicle fuel efficiency standards.
In our tubular markets, we continue development of premium and semi-premium tubular connections designed for our customers that operate in challenging drilling environments. These connections optimize well construction activities and provide outstanding sealing capabilities for onshore and offshore oil and gas drilling in North America. An example is the USS-TALON HTQ™, which was introduced in 2020 for customers that are constructing onshore natural gas and oil wells with long laterals requiring best-in-class torque capacity and optimized well-bore clearances. Please refer to Item I. Business Strategy for further details of related strategies.
Human Capital Management
At U. S. Steel, we are focused on attracting and retaining the top talent needed to support our strategic transformation and meet our customers’ evolving needs as a sustainable steel solutions provider. The support and development of our people is foundational to achieving our Best of Both strategy. We refer to this strategic talent pillar as “Moving Up the Talent Curve.”
26
Our focus on people extends to our current and future employees. We aim to have an engaged and diverse workforce to promote new ideas and innovation, reflect the communities where we operate, and deliver exceptional customer service. We seek to build an inclusive environment where people feel free to bring their whole selves to work. To achieve the Best of Both strategy, we must have the “Best from All.” More about our focus on people and human capital management can be achievedfound in our 2019 Sustainability Report.
| Approximate Active Employees as of December 31, 2020 | |||||
| North America | 13,975 | ||||
| Slovakia | 9,375 | ||||
| Total | 23,350 | ||||
Ethics & Compliance
Our culture is based on our S.T.E.E.L. Principles: Safety First; Trust and Respect; Environmentally Friendly Activities; Ethical Behavior; and Lawful Business Conduct. We expect our employees and members of our board of directors to take personal responsibility to “do what’s right,” and our Code of Ethical Business Conduct serves as the foundation for the actions of our employees and directors. To further ensure that employees understand the Company’s expectations and all applicable rules, we provide formal ethics and compliance training to our employees and have frequent communication with information about key compliance topics, which include messages from senior management underscoring the importance of doing business with integrity. Employees also receive summaries of current events that demonstrate the need to do business lawfully that include reminders of the company’s expectations for all employees. In addition, through our annual policy certification process, employees and directors certify their ongoing compliance with our Code of Ethical Business Conduct.
Employee Health & Safety
At U. S. Steel, we have a long-standing commitment to the safety and health of the men and women who work in our facilities. Every employee deserves to return home safely at the end of every day, and we are working to eliminate all injuries and incidents. In addition, the psychological safety of all employees is important to us. We have combined physical safety and psychological safety into the construct of 360° safety. Ensuring a safe workplace also improves productivity, quality, reliability and financial performance. By making safety and health a personal responsibility, our employees are making a daily commitment to follow safe work practices, look out for the safety of co-workers and ensure safe working conditions for everyone. A “Safety First” mindset is as essential to our success as the tools and technologies we rely on to do business. This past year, we relied on our strong safety culture to ensure the health and safety of our employees during the COVID-19 pandemic, as described below.
Our objective is to attain a sustainable zero harm culture supported by centering its North American Flat-Rolled operations around three core market-leading, differentiatedleadership and technologically advanced assets:owned by an engaged and highly skilled workforce, empowered with the investmentcapabilities and resources needed to assess, reduce, and eliminate workplace risks and hazards. In support of these objectives, we have developed an enhanced Safety Management System, initiated new safety communication methods and enhanced contractor safety processes. One of our most important safety protocols is our fatality prevention audit program. These proactive assessments of the processes and protocols we have in Big River Steel (located in Osceola, Arkansas), Mon Valley Works
27
For 2020, we had a corporate DAFW rate of 0.07, which is 0.53 better than the U.S. Bureau of Labor Statistics' Iron and Steel benchmark DAFW rate of 0.60.
Inclusion & Diversity
Attracting, developing, and retaining a workforce of talented, diverse people is essential to having high-performing teams that drive results for our Company’s stakeholders. As part of our commitment to cultivating a culture of caring, we have inclusive benefits available for our U.S. non-represented workforce, including expanded parental leave, back-up dependent care, infertility coverage, gender reassignment coverage and healthcare continuation for the families of employees who suffered work-related or military service fatalities. In 2020, U. S. Steel earned a 100 percent score on the Human Rights Campaign’s annual Corporate Equality Index in recognition of our comprehensive and inclusive benefits. We also support several employee resource groups (ERGs) to enhance employee engagement, promote a culture of acceptance, foster diversity in the workplace, and raise awareness related to issues of identity and intersectionality. Our ERGs also provide leadership development, mentorship and networking opportunities for their members.
Talent Development and Retention
We believe that development and retention of talent is essential to our competitive positioningsuccess, and we seek to provide opportunities for continuous learning and development. All of our employees at a director-level and above have a formal professional development plan that is assessed at least annually. In addition, we proactively measure our attrition rates, and take targeted actions to ensure our highest potential and performing employees are incentivized to remain with the Company. Over the past five years, our regrettable voluntary turnover rate has been at or below 5 percent.
Labor Relations
Approximately 80 percent of our employees in strategic end marketsNorth America and Slovakia are covered by collective bargaining agreements. We work closely with union representatives to offer customers differentiated productsprovide safe and productive workplaces that enable our employees to deliver highly competitive long-termhigh-quality products and meet the needs of our customers. Our partnership with the United Steelworkers includes not only a commitment to safety programs, but also a common approach to combating the unfairly traded imports that threaten our industry, our company, and ultimately the jobs of our employees.
Impact of COVID-19
The spread of the coronavirus pandemic across the globe significantly impacted global markets and nearly every industry, U. S. Steel included. We quickly recognized the uncertainty and potential severity the pandemic would cause, and implemented our crisis response plan. Overseen by our Board of Directors, and led by our executive team, we implemented a comprehensive and adaptive response to the pandemic focused on protecting lives and livelihoods, preserving cash flow generation through higher earnings and lower sustainingliquidity, remaining nimble to execute our strategy and supporting our customers and communities, all in line with our foundational S.T.E.E.L. Principles. Some of the measures we implemented and continue to practice include:
•Issuing weekly communication, including preventive tips, and a dedicated website for employees and their families;
28
•Providing employees with protective equipment, masks, and sanitizing and cleaning supplies and enhanced cleaning frequency;
•Limiting outside visitors to our facilities, restricting access for non-essential vendors, suppliers and contractors;
•Actively managing physical distancing while at work, including no meetings or gatherings of greater than 10 individuals
•Permitting a majority of our employees in our administrative offices and headquarters to work from home; and
•Intensifying our focus on preserving cash and proactively raised approximately $1.7 billion of incremental capital expenditures.to support our balance sheet.
Steel Industry Background and Competition
The global steel industry is cyclical, highly competitive and has historically been characterized by overcapacity.
U. S. Steel's competitive position may be affected by, among other things, differences among U. S. Steel's and its competitors' cost structure, labor costs, environmental remediation and compliance costs, global capacity and the existence and magnitude of government subsidies provided to competitors.
U. S. Steel competes with many North American and international steel producers. Competitors include 1) integrated producers, which, like U. S. Steel, use iron ore and coke as the primary raw materials for steel production, 2) EAF producers, which primarily use steel scrap and other iron-bearing feedstocks as raw materials and 3) slab re-rollers, who purchase mostly imported, but some domestic, semi-finished products and convert them into sheet products. Global steel production increased by 55 million metric tons in 2019 to 1.869 billion metric tons. Furthermore, capacity has continued to increase, with notable changes in 2019 Chinese crude steel production of 996 million metric tons, a 8.3% increase from 2018, and estimated to be more than 76 million metric tons above the apparent crude steel demand in China (source: worldsteel). In addition, other materials, such as aluminum, plastics and composites, compete with steel in several applications.
EAF producers typically require lower capital expenditures for construction of facilities and may have lower total employment costs; however, these competitive advantages may be minimized or eliminated by the cost of scrap when scrap prices are high. Some EAF producers utilize thin slab casting technology to produce flat-rolled products and are increasingly able to compete directly with integrated producers in many flat-rolled product applications previously produced only by integrated steelmakers. Slab re-rollers do not incur the cost of melting steel, their input costs are driven by the market price of slabs.
U. S. Steel provides defined benefit pension and/or other post-employment benefits to approximately 80,000 current employees, retirees and their beneficiaries. Many of our competitors do not have comparable retiree obligations. Participation in U. S. Steel's main defined benefit pension plan was closed to new entrants on July 1, 2003 and benefit accruals for all non-represented participants were frozen effective December 31, 2015. Participation in U. S. Steel’s retiree medical and life insurance programs for United Steelworkers (USW)-represented employees were closed to employees hired or rehired (except in limited circumstances) on or after January 1, 2016. Retiree medical and life insurance benefits for non-represented employees were eliminated for those who retired after December 31, 2017.
We believe that our major North American and many European integrated steel competitors are confronted with substantially similar environmental regulatory conditions and therefore do not believe that our relative position with regard to such competitors will be materially affected by the impact of environmental laws and regulations. However, if future regulations do not recognize the fact that the integrated steel process involves a series of chemical reactions involving carbon that create carbon dioxide (CO2) emissions without linking these emissions to steel scrap as well, our competitive position relative to mini-mills will be adversely impacted. Our competitive position compared to producers in developing nations such as China, Russia, Ukraine, Turkey, Brazil and India, will be harmed unless such nations require commensurate reductions in CO2 emissions or there are border adjustment tariffs for CO2. Competing materials such as plastics may not be similarly impacted. The specific impact on each competitor will vary depending on a number of factors, including the age and location of its operating facilities and its production methods. U. S. Steel is also responsible for remediation costs related to former and present operating locations and disposal of environmentally sensitive materials. Many of our competitors, including North American producers, or their successors, that have been the subject of bankruptcy relief have no or substantially lower liabilities for such environmental remediation matters.
In 2021, additional steelmaking capacity is expected to enter the domestic steel market as competitors' growth projects come on-line throughout the year.
Business Strategy
We are executing on our customer-centric strategy to transform U. S. Steel into a world-competitive, Best of Both, steelmaker by combining the best of the integrated steelmaking model with the best of the mini mill steelmaking model. Our strategy will deliver product and process innovation to create unmatched value for our customers while enhancing our earnings profile and delivering long-term cash flow through industry cycles. By offering unparalleled product capabilities, including the green steels our customers are increasingly demanding, we can achieve world-competitive positioning in strategic, high-margin end markets, and deliver high-quality, sustainable, value-added products and innovative solutions. To get to our Best of Both future, we are investing to create distinct cost and capability advantages, enhancing our focus on operational and commercial excellence and promoting technological innovation, so we can deliver an unmatched value proposition to our customers while creating a more variable cost structure, and lowering the capital intensity of the business.
Foundational to our efforts is our belief that we must operate as a principled company committed to our S.T.E.E.L. Principles, outlined in our Code of Ethical Business Conduct. Our core value of safety - the safety of our employees, our environment, our communities and our facilities and equipment - has served us well for much of our history and our commitment to it remains as strong as the products we make every day.
24
Our strategy is informed by our critical success factors, which are the bedrock of the Best of Both strategy: (1) Move Down the Cost Curve, (2) Win in Strategic ProjectsMarkets, and Technology Investments(3) Move Up the Talent Curve.
We continuously aim to move down the Company completed the first stepcost curve. We made considerable progress on this critical success factor in acquiring2020. The successful acquisition of Big River Steel in Osceola, Arkansas, through the purchase of a 49.9% ownership interest at a purchase price of approximately $683 million in cash, with a call option to acquire the remaining 50.1% within the next four years at an agreed-upon price formula, which in years three and four is based on Big River Steel’s achievement of certain metrics that include: free cash flow, product development, safety and the completion of a proposed expansion of Big River Steel's existing manufacturing line. As part of the current ownership structure, the other Big River Steel equity owners can require U. S. Steel to purchase their 50.1% ownership interest or require U. S. Steel to sell its ownership interest after U. S. Steel's call option expires under certain circumstances.
We are focused on winning in the second half of 2020.
Core to our strategy is centered around
retain best-in-class diverse talent. Our commercial strategy is focused on providing customer focused solutions with value-added steel products, which includes advanced high strength steels such as our newly developed grades on Gen3 steel, coated sheets for the automotive and appliance industries, electrical steel sheets for the manufacture of motors and electrical equipment, both bare and prepainted galvanized and Galvalume® sheets for construction, hot rolled skelp used in the production of energy transmitting line pipe, heavy gauge-wide hot rolled coils, tin mill products for the packaging industry and pipe, connections, accessories and rig site services for use in drilling for oil and gas.
U. S. Steel will continue to evaluate potential strategic and financial flexibility to deploy cash to generate stockholder value. Our cash deployment strategy is aligned with our world-competitive, “best of both” strategy and includes: executing on strategic projects and portfolio moves; maintaining a strong balance sheet and a healthy pension plan; and delivering sustainable growth with a focus on core values such as safety and environmental stewardship. Cash deployment is also performed with a customer-centric focus on improving safety, quality, delivery and cost.
The global steel industry is cyclical, highly competitive and has historically been characterized by overcapacity.
Flat-Rolled segment includes the operating results of U. S. Steel's competitive position may be affected by, among other things, differences among U. S. Steel'sSteel’s integrated steel plants and its competitors' cost structure, labor costs, environmental remediationequity investees in North America (except for Big River Steel, which is included in Other Businesses) involved in the production of slabs, strip mill plates, sheets and compliance costs, global capacity and the existence and magnitude of government subsidies provided to competitors.
Flat-Rolled has aggregate annual raw materials for steel production 2) EAF producers, which primarily use steel scrapcapability of 17.0 million tons produced at our Gary Works, Mon Valley Works, Great Lakes Works and other iron-bearing feedstocks as raw materials and 3) slab re-rollers, who purchase mostly imported semi-finished products and convert them into sheet products. Global steel capacity has continued to increase, with notable changes in 2018 Chinese crudeGranite City Works facilities. Raw steel production was 9.3 million tons in 2020, 11.4 million tons in 2019 and 11.9 million tons in 2018. Raw steel production averaged 55 percent of 928 million metric tonnes, a 6.6% increase from 2017,capability in 2020, 67 percent of capability in 2019 and estimated to be more than 57 million metric tonnes above70 percent of capability in 2018.
European Operations
The USSE segment includes the apparent crude steel demand in China (source: worldsteel). In addition, other materials, such as aluminum, plastics and composites, compete with steel in several applications.
U. S. Steel provides defined benefit pension and/or other post-employment benefits to approximately 85,000 current employees, retirees and their beneficiaries. Many of our competitors do not have comparable retiree obligations. Participation in U. S. Steel's main defined benefit pension plan was closed to new entrants on July 1, 2003 and benefit accruals for all non-represented participants were frozen effective December 31, 2015. Participation inKošice (USSK), U. S. Steel’s retiree medical and life insurance programs for USW-represented employees were closed to employees hired or rehired (except in limited circumstances) on or after January 1, 2016. Retiree medical and life insurance benefits for non-represented employees were eliminated for those who retired after December 31, 2017.
USSE has annual raw steel production capability of 5.0 million tons. USSE’s raw steel production was 3.4 million tons in developing nations such as China, Russia, Ukraine, Turkey, Brazil2020, 3.9 million tons in 2019, and India, will be harmed unless such nations5.0 million tons in 2018. USSE’s raw steel production averaged 67 percent of capability in 2020, 78 percent of capability in 2019 and 100 percent of capability in 2018.
21
Tubular
The specific impact on each competitor will vary depending on a numberTubular segment includes the operating results of factors, including the age and location of its operatingU. S. Steel’s tubular production facilities and itsan equity investee in the United States. These operations produce and sell seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as OCTG), and standard and line pipe and mechanical tubing and primarily serve customers in the oil, gas and petrochemical markets. The start-up of the new 1.6 million ton electric arc furnace at Fairfield, Alabama in October 2020 is currently used to feed our 0.9 million ton rounds caster. As a result, the Tubular segment now has annual raw steel production methods.capability of 0.9 million tons. In 2020 raw steel production was 16 thousand tons and averaged 7 percent of capability. Tubular has total production capability of 1.9 million tons. In 2020, Tubular indefinitely idled the Lone Star Tubular Operations and Lorain Tubular Operations thereby effectively reducing on-line tubular production capacity by 790 and 380 thousand tons, respectively. U. S. Steel is also responsible for remediation costs related to former and present operating locations and disposalTubular Products, Inc. (USSTP), a wholly owned subsidiary of environmentally sensitive materials. Many of our competitors, including North American producers, or their successors, that have been the subject of bankruptcy relief have no or substantially lower liabilities for such environmental remediation matters.
U. S. Steel, continues to face import competition, muchdesign and develop a range of which is unfairly traded, supportedpremium and semi-premium connections to address the growing needs for technical solutions for our end users' well site production challenges.
For further information, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 to the Consolidated Financial Statements.
22
Steel Shipments by foreign governments,Market and fueledSegment
The following table except where noted in Footnote 1 (1) below does not include shipments to end customers by massive global steel overcapacity, currently estimated to be over 440 million metric tons per year. These imports, as well as the underlying policies/practicesjoint ventures and overcapacity, impact the Company’s operational and financial performance.other equity investees of U. S. Steel continuesSteel. Shipments of materials to lead efforts to address these challenges that threaten the Company, our workers, our stockholders, and our country’s national and economic security.
| (Thousands of Tons) | Flat-Rolled | USSE | Tubular | Total | ||||||||||||||||||||||
| Major Market – 2020 | ||||||||||||||||||||||||||
| Steel Service Centers | 1,450 | 690 | — | 2,140 | ||||||||||||||||||||||
| Further Conversion – Trade Customers | 2,063 | 202 | — | 2,265 | ||||||||||||||||||||||
– Joint Ventures (1) | 415 | — | — | 415 | ||||||||||||||||||||||
Transportation and Automotive (1) | 2,012 | 517 | — | 2,529 | ||||||||||||||||||||||
| Construction and Construction Products | 1,261 | 775 | 34 | 2,070 | ||||||||||||||||||||||
| Containers and Packaging | 913 | 435 | — | 1,348 | ||||||||||||||||||||||
| Appliances and Electrical Equipment | 497 | 194 | — | 691 | ||||||||||||||||||||||
| Oil, Gas and Petrochemicals | — | 5 | 430 | 435 | ||||||||||||||||||||||
| All Other | 100 | 223 | — | 323 | ||||||||||||||||||||||
| TOTAL | 8,711 | 3,041 | 464 | 12,216 | ||||||||||||||||||||||
| Major Market – 2019 | ||||||||||||||||||||||||||
| Steel Service Centers | 1,902 | 740 | — | 2,642 | ||||||||||||||||||||||
| Further Conversion – Trade Customers | 2,823 | 214 | — | 3,037 | ||||||||||||||||||||||
– Joint Ventures (1) | 819 | — | — | 819 | ||||||||||||||||||||||
Transportation & Automotive (1) | 2,620 | 676 | — | 3,296 | ||||||||||||||||||||||
| Construction and Construction Products | 1,076 | 1,048 | 44 | 2,168 | ||||||||||||||||||||||
| Containers and Packaging | 652 | 440 | — | 1,092 | ||||||||||||||||||||||
| Appliances and Electrical Equipment | 570 | 220 | — | 790 | ||||||||||||||||||||||
| Oil, Gas and Petrochemicals | — | — | 725 | 725 | ||||||||||||||||||||||
| All Other | 238 | 252 | — | 490 | ||||||||||||||||||||||
| TOTAL | 10,700 | 3,590 | 769 | 15,059 | ||||||||||||||||||||||
Major Market – 2018 (2) | ||||||||||||||||||||||||||
| Steel Service Centers | 1,904 | 799 | — | 2,703 | ||||||||||||||||||||||
| Further Conversion – Trade Customers | 2,273 | 287 | — | 2,560 | ||||||||||||||||||||||
– Joint Ventures (1) | 810 | — | — | 810 | ||||||||||||||||||||||
Transportation and Automotive (1) | 2,874 | 728 | — | 3,602 | ||||||||||||||||||||||
| Construction and Construction Products | 953 | 1,637 | 38 | 2,628 | ||||||||||||||||||||||
| Containers and Packaging | 768 | 439 | — | 1,207 | ||||||||||||||||||||||
| Appliances and Electrical Equipment | 599 | 261 | — | 860 | ||||||||||||||||||||||
| Oil, Gas and Petrochemicals | — | 11 | 742 | 753 | ||||||||||||||||||||||
| All Other | 329 | 295 | — | 624 | ||||||||||||||||||||||
| TOTAL | 10,510 | 4,457 | 780 | 15,747 | ||||||||||||||||||||||
(1) PRO-TEC automotive substrate shipments are included in the Transportation and Automotive category.
23
Flat-Rolled
The Flat-Rolled segment includes the operating results of all facilities within U. S. Steel’s integrated steel plants and equity investees in North America (except for Big River Steel, which is included in Other Businesses) involved in the U.S. are includedproduction of slabs, strip mill plates, sheets and tin mill products, as well as all iron ore and coke production facilities in Flat-Rolled.the United States. These facilities includeoperations primarily serve North American customers in the automotive, appliance, construction, container, transportation and service center markets.
Flat-Rolled has aggregate annual raw steel production capability of 17.0 million tons produced at our Gary Works, Mon Valley Works, Great Lakes Works Mon Valley Works and Granite City Works. Works facilities. Raw steel production was 9.3 million tons in 2020, 11.4 million tons in 2019 and 11.9 million tons in 2018. Raw steel production averaged 55 percent of capability in 2020, 67 percent of capability in 2019 and 70 percent of capability in 2018.
European Operations
The USSE segment includes the operating results of U. S. Steel Košice (USSK), U. S. Steel’s integrated steel plant and coke production facilities in Slovakia, and iron ore pellet operationsits subsidiaries. USSE conducts its business mainly in Central and many equity investeesWestern Europe and primarily serves customers in North America are also included in Flat-Rolled.the European transportation (including automotive), construction, container, appliance, electrical, service center, conversion and oil, gas and petrochemical markets. USSE produces and sells slabs, strip mill plate, sheet, tin mill products and spiral welded pipe, as well as refractory ceramic materials.
21
Tubular
The Tubular segment includes the operating results of U. S. Steel’s tubular production facilities and two tin coating lines. Principal products include hot-rolled, cold-rolledan equity investee in the United States. These operations produce and coated sheetssell seamless and tin mill products. Gary Works also produces strip mill plateelectric resistance welded (ERW) steel casing and tubing (commonly known as OCTG), and standard and line pipe and mechanical tubing and primarily serve customers in coil. In June 2019, onethe oil, gas and petrochemical markets. The start-up of the blast furnacesnew 1.6 million ton electric arc furnace at Gary Works was temporarily idled. We restartedFairfield, Alabama in October 2020 is currently used to feed our 0.9 million ton rounds caster. As a result, the idled blast furnace in December 2019.
For further information, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 to the Consolidated Financial Statements.
22
Steel Shipments by Market and Segment
The following table except where noted in Footnote 1 (1) below does not include three blast furnaces, two steelmaking vessels, a vacuum degassing unit, two slab casters, a hot strip mill, a pickling line, a tandem cold reduction mill, three annealing facilities, a temper mill, a recoilshipments to end customers by joint ventures and inspection line, two electrolytic galvanizing lines (one being the former Double Eagle Steel Coating Company's (DESCO) line) and a hot dip galvanizing line. Principal products include hot-rolled, cold-rolled and coated sheets. In June 2019, a blast furnace at Great Lakes Works was idled andother equity investees of U. S. Steel. Shipments of materials to these entities are included in the fourth quarter“Further Conversion – Joint Ventures” market classification. No single customer accounted for more than 10 percent of gross annual revenue.
| (Thousands of Tons) | Flat-Rolled | USSE | Tubular | Total | ||||||||||||||||||||||
| Major Market – 2020 | ||||||||||||||||||||||||||
| Steel Service Centers | 1,450 | 690 | — | 2,140 | ||||||||||||||||||||||
| Further Conversion – Trade Customers | 2,063 | 202 | — | 2,265 | ||||||||||||||||||||||
– Joint Ventures (1) | 415 | — | — | 415 | ||||||||||||||||||||||
Transportation and Automotive (1) | 2,012 | 517 | — | 2,529 | ||||||||||||||||||||||
| Construction and Construction Products | 1,261 | 775 | 34 | 2,070 | ||||||||||||||||||||||
| Containers and Packaging | 913 | 435 | — | 1,348 | ||||||||||||||||||||||
| Appliances and Electrical Equipment | 497 | 194 | — | 691 | ||||||||||||||||||||||
| Oil, Gas and Petrochemicals | — | 5 | 430 | 435 | ||||||||||||||||||||||
| All Other | 100 | 223 | — | 323 | ||||||||||||||||||||||
| TOTAL | 8,711 | 3,041 | 464 | 12,216 | ||||||||||||||||||||||
| Major Market – 2019 | ||||||||||||||||||||||||||
| Steel Service Centers | 1,902 | 740 | — | 2,642 | ||||||||||||||||||||||
| Further Conversion – Trade Customers | 2,823 | 214 | — | 3,037 | ||||||||||||||||||||||
– Joint Ventures (1) | 819 | — | — | 819 | ||||||||||||||||||||||
Transportation & Automotive (1) | 2,620 | 676 | — | 3,296 | ||||||||||||||||||||||
| Construction and Construction Products | 1,076 | 1,048 | 44 | 2,168 | ||||||||||||||||||||||
| Containers and Packaging | 652 | 440 | — | 1,092 | ||||||||||||||||||||||
| Appliances and Electrical Equipment | 570 | 220 | — | 790 | ||||||||||||||||||||||
| Oil, Gas and Petrochemicals | — | — | 725 | 725 | ||||||||||||||||||||||
| All Other | 238 | 252 | — | 490 | ||||||||||||||||||||||
| TOTAL | 10,700 | 3,590 | 769 | 15,059 | ||||||||||||||||||||||
Major Market – 2018 (2) | ||||||||||||||||||||||||||
| Steel Service Centers | 1,904 | 799 | — | 2,703 | ||||||||||||||||||||||
| Further Conversion – Trade Customers | 2,273 | 287 | — | 2,560 | ||||||||||||||||||||||
– Joint Ventures (1) | 810 | — | — | 810 | ||||||||||||||||||||||
Transportation and Automotive (1) | 2,874 | 728 | — | 3,602 | ||||||||||||||||||||||
| Construction and Construction Products | 953 | 1,637 | 38 | 2,628 | ||||||||||||||||||||||
| Containers and Packaging | 768 | 439 | — | 1,207 | ||||||||||||||||||||||
| Appliances and Electrical Equipment | 599 | 261 | — | 860 | ||||||||||||||||||||||
| Oil, Gas and Petrochemicals | — | 11 | 742 | 753 | ||||||||||||||||||||||
| All Other | 329 | 295 | — | 624 | ||||||||||||||||||||||
| TOTAL | 10,510 | 4,457 | 780 | 15,747 | ||||||||||||||||||||||
(1) PRO-TEC automotive substrate shipments are included in the Transportation and Automotive category.
23
Steel Industry Background and Competition
The global steel industry is cyclical, highly competitive and has historically been characterized by overcapacity.
U. S. Steel's competitive position may be affected by, among other things, differences among U. S. Steel's and its competitors' cost structure, labor costs, environmental remediation and compliance costs, global capacity and the existence and magnitude of government subsidies provided to competitors.
U. S. Steel competes with many North American and international steel producers. Competitors include 1) integrated producers, which, like U. S. Steel, use iron ore and coke as the primary raw materials for steel production, 2) EAF producers, which primarily use steel scrap and other iron-bearing feedstocks as raw materials and 3) slab re-rollers, who purchase mostly imported, but some domestic, semi-finished products and convert them into sheet products. Global steel production increased by 55 million metric tons in 2019 to 1.869 billion metric tons. Furthermore, capacity has continued to increase, with notable changes in 2019 Chinese crude steel production of 996 million metric tons, a 8.3% increase from 2018, and estimated to be more than 76 million metric tons above the apparent crude steel demand in China (source: worldsteel). In addition, other materials, such as aluminum, plastics and composites, compete with steel in several applications.
EAF producers typically require lower capital expenditures for construction of facilities and may have lower total employment costs; however, these competitive advantages may be minimized or eliminated by the cost of scrap when scrap prices are high. Some EAF producers utilize thin slab casting technology to produce flat-rolled products and are increasingly able to compete directly with integrated producers in many flat-rolled product applications previously produced only by integrated steelmakers. Slab re-rollers do not incur the cost of melting steel, their input costs are driven by the market price of slabs.
U. S. Steel provides defined benefit pension and/or other post-employment benefits to approximately 80,000 current employees, retirees and their beneficiaries. Many of our competitors do not have comparable retiree obligations. Participation in U. S. Steel's main defined benefit pension plan was closed to new entrants on July 1, 2003 and benefit accruals for all non-represented participants were frozen effective December 31, 2015. Participation in U. S. Steel’s retiree medical and life insurance programs for United Steelworkers (USW)-represented employees were closed to employees hired or rehired (except in limited circumstances) on or after January 1, 2016. Retiree medical and life insurance benefits for non-represented employees were eliminated for those who retired after December 31, 2017.
We believe that our major North American and many European integrated steel competitors are confronted with substantially similar environmental regulatory conditions and therefore do not believe that our relative position with regard to such competitors will be materially affected by the impact of environmental laws and regulations. However, if future regulations do not recognize the fact that the integrated steel process involves a series of chemical reactions involving carbon that create carbon dioxide (CO2) emissions without linking these emissions to steel scrap as well, our competitive position relative to mini-mills will be adversely impacted. Our competitive position compared to producers in developing nations such as China, Russia, Ukraine, Turkey, Brazil and India, will be harmed unless such nations require commensurate reductions in CO2 emissions or there are border adjustment tariffs for CO2. Competing materials such as plastics may not be similarly impacted. The specific impact on each competitor will vary depending on a number of factors, including the age and location of its operating facilities and its production methods. U. S. Steel is also responsible for remediation costs related to former and present operating locations and disposal of environmentally sensitive materials. Many of our competitors, including North American producers, or their successors, that have been the subject of bankruptcy relief have no or substantially lower liabilities for such environmental remediation matters.
In 2021, additional steelmaking capacity is expected to enter the domestic steel market as competitors' growth projects come on-line throughout the year.
Business Strategy
We are executing on our customer-centric strategy to transform U. S. Steel into a world-competitive, Best of Both, steelmaker by combining the best of the integrated steelmaking model with the best of the mini mill steelmaking model. Our strategy will deliver product and process innovation to create unmatched value for our customers while enhancing our earnings profile and delivering long-term cash flow through industry cycles. By offering unparalleled product capabilities, including the green steels our customers are increasingly demanding, we can achieve world-competitive positioning in strategic, high-margin end markets, and deliver high-quality, sustainable, value-added products and innovative solutions. To get to our Best of Both future, we are investing to create distinct cost and capability advantages, enhancing our focus on operational and commercial excellence and promoting technological innovation, so we can deliver an unmatched value proposition to our customers while creating a more variable cost structure, and lowering the capital intensity of the business.
Foundational to our efforts is our belief that we must operate as a principled company committed to our S.T.E.E.L. Principles, outlined in our Code of Ethical Business Conduct. Our core value of safety - the safety of our employees, our environment, our communities and our facilities and equipment - has served us well for much of our history and our commitment to it remains as strong as the products we make every day.
24
Our strategy is informed by our critical success factors, which are the bedrock of the Best of Both strategy: (1) Move Down the Cost Curve, (2) Win in Strategic Markets, and (3) Move Up the Talent Curve.
We continuously aim to move down the cost curve. We made considerable progress on this critical success factor in 2020. The successful acquisition of Big River Steel is expected to improve our cost position by making our cost structure more variable and reducing the capital intensity of the business. We also successfully completed the construction of the EAF at our Tubular Operations in Fairfield, Alabama and became self-sufficient in our rounds supply. We also made considerable progress and remain on track towards our stated goal of reducing fixed costs by $200 million.
We are focused on winning in strategic markets through a customer-focused business model with an emphasis on creating differentiated, innovative and value-added solutions that will help our customers succeed. As part of this effort, in 2020 we implemented an enhanced operating model and organizational structure to accelerate the company’s strategic transformation and better serve its customers. The realignment of U. S. Steel’s leadership team around more nimble and efficient executive functions, notably to sharpen focus on operational and commercial excellence and promote technological innovation, will enable the company to establish a more competitive cost structure with enhanced capabilities to serve customers in strategic markets.
Core to our strategy is moving up the talent curve. The success of our business is driven by the efforts of our hard-working employees. We know that we must work to identify, attract and retain best-in-class diverse talent. Our goal is to build a pipeline mapping the right people to the right value-driving roles. This includes providing the training and resources they need to succeed and fostering a culture where accountability, fairness and respect are foundational, and high performance and diversity in all its forms are valued and celebrated. This type of environment incentivizes the right behavior and allows for a best talent wins environment to help us achieve our Best of Both strategy.
U. S. Steel will continue to evaluate potential strategic and organizational opportunities, which may include the acquisition, divestiture or consolidation of assets. Given the cyclicality of our industry, we are focused on strategically maintaining and spending cash, in order to invest in areas consistent with the execution of our Best of Both strategy, such as sustainable steel technologies, and are considering various possibilities, including exiting lines of business and the sale of certain assets, that we believe would ultimately result in greater stockholder value. The Company will pursue opportunities based on its long-term strategy, and what the Board of Directors determines to be in the best interests of the Company's stockholders at the time. In addition, we are bringing Big River Steel’s focused, innovative, and entrepreneurial mindset into the way we do business. By bringing these two world-class workforces together, with a shared values-based culture, we believe we can create significant value across the enterprise.
Strategic Projects and Technology Investments
In October 2019, the former DESCO line was indefinitely idled.Company completed the first step in acquiring Big River Steel in Osceola, Arkansas through the purchase of a 49.9% ownership interest at a purchase price of approximately $700 million in cash, with a call option to acquire the remaining 50.1% within the next four years at an agreed-upon price formula. With the completion of its Phase II expansion in November 2020, Big River Steel operates two technologically advanced EAFs with approximately 3.3 million tons of steel making capacity. On December 8, 2020 the Company announced it exercised its call option to acquire the remaining equity of Big River Steel. The other electrolytic galvanizing line had previously been idled. purchase of the remaining interest in Big River Steel closed on January 15, 2021 for approximately $723 million in cash and the assumption of liabilities of approximately $50 million. The successful completion of the acquisition marked a major milestone in our Best of Both strategy. Full ownership of Big River Steel creates North America’s only Best of Both steel technology company by combining leading advanced high-strength steel intellectual property with a technologically advanced and low-greenhouse gas emissions mini mill.
In December ofMay 2019, U. S. Steel announced that it would indefinitely idleplans to construct a significant portion of Great Lakes Works. The company expects to begin idling the ironnew endless casting and steelmaking facilities on or around April 1, 2020, and the Hot Strip Mill rolling facility before the end of 2020.
The installation of endless casting and rolling technology will allow differentiated product capabilities to serve strategic markets. In 2020 we announced a delay in the construction of our endless casting and rolling line at Mon Valley Works, but plan to resume equipment purchases in 2021 as we monitor the right time to fully resume the project. With this technology the Mon Valley Works should become the principal source of substrate for the production of the Company's industry-leading XG3TM advanced high strength steel (AHSS), a market leading solution for our customers to improve fuel efficiency. The cogeneration facility, equipped with state-of-the-art emissions control systems at the Company's Clairton Plant, will convert a portion of the coke oven gas
25
generated at its Clairton Plant into electricity to power the steelmaking and finishing facilities throughout U. S. Steel's Mon Valley operations. This project, in addition to producing sustainable AHSS, is expected to improve environmental performance, energy conservation and reduce our carbon footprint associated with Mon Valley Works.
In February 2019, U. S. Steel restarted construction of the EAF steelmaking facility at its Tubular Operations in Fairfield, Alabama. The EAF is expected to structurally improve the Company's competitive position and reduce rounds cost by $90 per seamless ton as the Company becomes self-sufficient in its rounds supply. Construction of the EAF was completed in October 2020. Utilization of the EAF will be subject to overall demand in the Tubular business.
The Company expects to invest approximately $550 million, of which approximately 50 percent has already been spent, to upgrade the Gary Works hot strip mill two pickling lines,through a cold reductionseries of projects focused on expanding the line's competitive advantages. The Gary Works hot strip mill three annealing facilities,will further differentiate itself as a temperleader in heavy-gauge products in strategic markets. The Company has resumed certain capability upgrades in conjunction with planned outages after having delayed upgrades as part of the Company's comprehensive response to impacts from COVID-19. The Company will continue to evaluate the pace and timeline for completing the remaining investments in the Gary Works hot strip mill.
In January 2019, U. S. Steel announced the construction of a new Dynamo line at USSE. The new line, a $130 million investment, has an annual capacity of approximately 100,000 metric tons. Construction on the Dynamo line began in mid-2019 but due to challenging market conditions, has been paused. Upon its completion, the new line would enable production of sophisticated silicon grades of non-grain oriented (NGO) electrical steels to support increased demand in vehicles and generators.
Commercial Strategy
Beginning January 1, 2020, the Company implemented an enhanced operating model and organizational structure to accelerate its strategic transformation and better serve its customers. The new operating model is centered around manufacturing, commercial, and technological excellence. Our former “commercial entity” structure was put into place to deepen understanding of business ownership and our relationships with customers and allowed the Company to identify the technology that would differentiate our products and processes on the basis of cost and/or capabilities. The new enhanced operating model enables us to implement our Best of Both strategy faster by making us a more nimble and technologically superior customer driven company positioned to deliver the benefits of our strategy through the business cycle.
We have successfully produced several grades of green steel using Big River Steel substrate, including our Ultra High Strength Steels (UHSS) and XG3TM advanced high strength steel (AHSS) grades that our customers are increasingly demanding.
Our commercial strategy is focused on providing customer focused solutions with differentiated and value-added steel products, which includes advanced high strength steels such as our newly developed grades of GEN3 steel, coated sheets for the automotive and appliance industries, electrical steel sheets for the manufacture of motors and electrical equipment, both bare and prepainted galvanized and Galvalume® sheets for construction, heavy gauge hot rolled coils used in the production of American Petroleum Institute (API) line pipe used for energy transmission line pipe, tin mill products for the packaging industry and two hot dip galvanizing lines. The Fairless Plant operates a hot dip galvanizing line. Principalpipe, connections, accessories and rig site services for use in drilling for oil and gas.
We are responsive to our customers' changing needs by developing new steel products from Mon Valley Works include hot-rolled, cold-rolled and coated sheets,uses for steel that meet the evolving market and regulatory demands imposed upon them. In connection with this commitment, we have research centers in Pittsburgh, Pennsylvania, Košice, Slovakia, and Houston, Texas, as well as cokean automotive center in Troy, Michigan. The focus of these centers is to develop new products and coke by-products producedto collaborate with our customers to better provide innovative solutions to serve their needs.
For automotive markets, we commissioned a first of its kind GEN3 hot dipped galvanize line at our PRO-TEC Coating Company (PRO-TEC) joint venture in 2020, and have embedded application engineers at original equipment manufacturers to demonstrate how to best utilize the Clairton Plant.highly formable, cost effective material in body design to meet automobile passenger safety requirements while significantly reducing weight to meet future vehicle fuel efficiency standards.
Human Capital Management
At U. S. Steel, facilities. From timewe are focused on attracting and retaining the top talent needed to time,support our strategic transformation and meet our customers’ evolving needs as a sustainable steel solutions provider. The support and development of our people is foundational to achieving our Best of Both strategy. We refer to this strategic talent pillar as “Moving Up the Talent Curve.”
26
Our focus on people extends to our current and future employees. We aim to have an engaged and diverse workforce to promote new ideas and innovation, reflect the communities where we may swap cokeoperate, and deliver exceptional customer service. We seek to build an inclusive environment where people feel free to bring their whole selves to work. To achieve the Best of Both strategy, we must have the “Best from All.” More about our focus on people and human capital management can be found in our 2019 Sustainability Report.
| Approximate Active Employees as of December 31, 2020 | |||||
| North America | 13,975 | ||||
| Slovakia | 9,375 | ||||
| Total | 23,350 | ||||
Ethics & Compliance
Our culture is based on our S.T.E.E.L. Principles: Safety First; Trust and Respect; Environmentally Friendly Activities; Ethical Behavior; and Lawful Business Conduct. We expect our employees and members of our board of directors to take personal responsibility to “do what’s right,” and our Code of Ethical Business Conduct serves as the foundation for the actions of our employees and directors. To further ensure that employees understand the Company’s expectations and all applicable rules, we provide formal ethics and compliance training to our employees and have frequent communication with other domestic steel producers or sell oninformation about key compliance topics, which include messages from senior management underscoring the open market. Coke by-products are soldimportance of doing business with integrity. Employees also receive summaries of current events that demonstrate the need to do business lawfully that include reminders of the chemicalscompany’s expectations for all employees. In addition, through our annual policy certification process, employees and raw materials industries.
Employee Health & Safety
At U. S. Steel, ownswe have a long-standing commitment to the safety and operates a cogeneration facility that utilizes by-products from the Gateway coke plant to generate heat and power.
Our objective is to attain a sustainable zero harm culture supported by leadership and owned by an engaged and highly skilled workforce, empowered with the capabilities and resources needed to assess, reduce, and eliminate workplace risks and hazards. In support of these objectives, we have developed an enhanced Safety Management System, initiated new safety communication methods and enhanced contractor safety processes. One of our most important safety protocols is our fatality prevention audit program. These proactive assessments of the processes and protocols we have in place, and adherence to them, to avoid fatalities and severe injuries are conducted annually at the enterprise level and more frequently at each of our facilities. We assess our safety performance through a variety of lagging and leading indicators, including OSHA Days Away From Work (DAFW). This measurement allows us to evaluate the frequency of injuries sustained at our facilities requiring an employee to stay at home for more than one day. U. S. Steel has achieved record-safety performance in this measurement in the last several years, routinely achieving performance better than industry benchmarks.
27
For 2020, we had a corporate DAFW rate of 0.07, which is 0.53 better than the U.S. Bureau of Labor Statistics' Iron and Steel benchmark DAFW rate of 0.60.
Inclusion & Diversity
Attracting, developing, and retaining a workforce of talented, diverse people is essential to having high-performing teams that drive results for our Company’s stakeholders. As part of our commitment to cultivating a culture of caring, we have inclusive benefits available for our U.S. non-represented workforce, including expanded parental leave, back-up dependent care, infertility coverage, gender reassignment coverage and healthcare continuation for the families of employees who suffered work-related or military service fatalities. In 2020, U. S. Steel earned a 100 percent score on the Human Rights Campaign’s annual Corporate Equality Index in recognition of our comprehensive and inclusive benefits. We also support several employee resource groups (ERGs) to enhance employee engagement, promote a culture of acceptance, foster diversity in the workplace, and raise awareness related to issues of identity and intersectionality. Our ERGs also provide leadership development, mentorship and networking opportunities for their members.
Talent Development and Retention
We believe that development and retention of talent is essential to our success, and we seek to provide opportunities for continuous learning and development. All of our employees at a director-level and above have a formal professional development plan that is assessed at least annually. In addition, we proactively measure our attrition rates, and take targeted actions to ensure our highest potential and performing employees are incentivized to remain with the Company. Over the past five years, our regrettable voluntary turnover rate has been at or below 5 percent.
Labor Relations
Approximately 80 percent of our employees in North America and Slovakia are covered by collective bargaining agreements. We work closely with union representatives to provide safe and productive workplaces that enable our employees to deliver high-quality products and meet the needs of our customers. Our partnership with the United Steelworkers includes not only a commitment to safety programs, but also a common approach to combating the unfairly traded imports that threaten our industry, our company, and ultimately the jobs of our employees.
Impact of COVID-19
The spread of the coronavirus pandemic across the globe significantly impacted global markets and nearly every industry, U. S. Steel included. We quickly recognized the uncertainty and potential severity the pandemic would cause, and implemented our crisis response plan. Overseen by our Board of Directors, and led by our executive team, we implemented a comprehensive and adaptive response to the pandemic focused on protecting lives and livelihoods, preserving cash and liquidity, remaining nimble to execute our strategy and supporting our customers and communities, all in line with our foundational S.T.E.E.L. Principles. Some of the measures we implemented and continue to practice include:
•Issuing weekly communication, including preventive tips, and a dedicated website for employees and their families;
28
•Providing employees with protective equipment, masks, and sanitizing and cleaning supplies and enhanced cleaning frequency;
•Limiting outside visitors to our facilities, restricting access for non-essential vendors, suppliers and contractors;
•Actively managing physical distancing while at work, including no meetings or gatherings of greater than 10 individuals
•Permitting a majority of our employees in our administrative offices and headquarters to work from home; and
•Intensifying our focus on preserving cash and proactively raised approximately $1.7 billion of incremental capital to support our balance sheet.
Environmental Stewardship
U. S. Steel ownsis committed to effective environmental stewardship. We have implemented and continue to develop business practices that are environmentally effective. We believe part of being a Researchgood corporate citizen requires a dedicated focus on how our industry affects the environment. U. S. Steel's environmental expenditures totaled $278 million in 2020, $376 million in 2019 and Technology Center$350 million in 2018. Overall, environmental compliance expenditures represent approximately 2 percent of U. S. Steel’s total costs and expenses in 2020, 2019 and 2018. For further information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters.” We have taken the actions described below in furtherance of that goal.
We continue to work on the promotion of cost-effective environmental strategies through the development of appropriate air, water and waste laws and regulations at the local, state, national and international levels. We are committed to reducing our emissions and are investigating, creating and implementing innovative, best practice solutions throughout our operations to improve our environmental performance and to manage and reduce energy consumption.
In 2020 alone, U. S. Steel recycled 3.0 million tons of purchased and produced steel scrap. Because of steel’s physical properties, our products can be recycled at the end of their useful life without loss of quality, contributing to steel’s high recycling rate and affordability.
Many of our major production facilities have Environmental Management Systems that are certified to the ISO 14001 Standard. This standard, published by the International Organization for Standardization (ISO), provides the framework for the measurement and improvement of environmental impacts of the certified facility.
In 2019, we published the Clairton Operating and Environmental Report which will be published annually. While U. S. Steel agreed to publish an annual report as part of the 2019 Allegheny County Health Department Settlement Order and Agreement, we took the opportunity to enhance the report by including detailed descriptions of our operations, our safety and environmental performance and community involvement in order to provide easily accessible information for the public. The Report details our best ever battery combustion stack and fugitive emission performance at Clairton in 2019 and 2020.
By using the blast furnace and coke oven gas generated in our cokemaking and steelmaking activities to power our facilities, we avoided consuming natural gas and other fuels from 2018 to 2020 to heat more than 3.4 million households each year. In 2020, we recycled approximately 3.3 million tons of blast furnace slag and 0.4 million tons of steel slag by selling it for use as aggregate and in highway construction.
Reduction of Greenhouse Gas Emissions
In 2019, as part of our strategy to become the Best of Both in the steel industry, the Company announced its commitment to reduce greenhouse gas emissions intensity across its global footprint. The Company set a goal to reduce its global greenhouse gas emissions intensity by 20 percent, as measured by the rate of CO2 equivalents emitted per ton of finished steel shipped, by 2030 based on 2018 baseline levels. This target will apply to U. S. Steel’s global operations.
These reductions are equivalent to the amount of CO2 being generated by more than 850,000 average-sized homes each year. By creating targeted carbon reduction initiatives to accelerate our transformation toward a future of sustainable steel, we create value for all stakeholders.
U. S. Steel plans to achieve its greenhouse gas emissions intensity reduction goal through the execution of multiple initiatives. These include the use of EAF steelmaking technology at U. S. Steel’s Fairfield Works and at Big River Steel the first LEED-certified steel mill in the nation. EAF steelmaking relies on scrap recycling to produce new steel products, leveraging the ability to continuously recycle steel. Further carbon intensity reductions are expected to come from the Company’s introduction of state-of-the-art endless rolling and casting technology and construction of a cogeneration facility at its Mon Valley Works, as well as implementation of ongoing energy efficiency measures, continued use of renewable energy sources and other process improvements to be developed.
The carbon intensity reduction target reflects our continued commitment to improvement in production efficiency and the manufacture of products that are environmentally friendly. In addition to a commitment to reduce its own greenhouse gas emissions intensity, U. S. Steel is committed to helping its customers achieve their environmental goals. Our industry-leading
29
XG3™ advanced high-strength steel enables automakers to manufacture lighter weight vehicles that meet federal Corporate Average Fuel Economy (CAFE) standards with reduced carbon emissions. As part of our innovation efforts, we continue to look at new steelmaking technologies so that we can produce green steels and further reduce carbon emissions.
Capital Structure and Liquidity
Our primary financial goal is to enhance stockholder value by utilizing our capital structure, liquidity, and financial flexibility to deploy cash to generate stockholder value. Our cash deployment strategy is aligned with our world-competitive, Best of Both strategy and includes: executing on strategic projects and portfolio moves; maintaining a strong balance sheet and a healthy pension plan; and delivering sustainable growth with a focus on core values such as safety and environmental stewardship. Cash deployment is also performed with a customer-centric focus on improving safety, quality, delivery and cost.
Our liquidity supports our ability to satisfy short-term obligations, fund working capital requirements, and provides a foundation to execute key strategic priorities. We are focused on maintaining a strong balance sheet and may proactively refinance or repay our debt from time to time to protect our capital structure from unforeseen external events and re-financing risks.
In 2020, we undertook several steps to support these goals, as well as to mitigate the impact on our business of the COVID-19 pandemic, taken together with the impact of disruptions in the oil and gas industry.
•The Company issued 50 million shares of common stock (par value $1 per share) in an underwritten public offering at a price of $8.2075 per share, resulting in net proceeds of approximately $410 million.
•The Company issued $1.056 billion aggregate principal amount of 12.000% Senior Secured Notes due June 1, 2025 (2025 Senior Secured Notes). The notes were issued at a price equal to 94.665% of their face value. U. S. Steel received net proceeds from the offering of approximately $977 million after fees of approximately $23 million related to underwriting and third party expenses.
•U. S. Steel and its subsidiary, United States Steel International, Inc., as the borrowers, entered into an Export-Import Transaction Specific Loan and Security Agreement (Export-Import Credit Agreement), under which it borrowed approximately $250 million and received approximately $240 million, net of transaction fees of approximately $10 million. The Export-Import Credit Agreement provides for up to $250 million of term loans, which mature on August 30, 2021, unless sooner terminated or extended by the borrowers to July 30, 2022. The obligations under the Export-Import Credit Agreement are secured by receivables (collateral) under certain iron ore pellet export contracts. The Export-Import Credit Agreement permits voluntary prepayments and requires mandatory prepayments with net cash proceeds of dispositions of collateral.
•Closed on $97 million of environmental improvement revenue bonds, of which $63 million carry a green bond designation and will be used to partially fund the technologically advanced EAF at Fairfield Works.
We ended 2020 with $3.2 billion of total liquidity.
On January 15, we purchased the remaining interest in Big River Steel for approximately $723 million in cash and approximately $50 million in assumed liabilities. After the closing of the Big River Steel purchase, additional indebtedness of approximately $1.9 billion (excluding any potential step-up to fair value) became the financial obligation of the Company and will be included on our Consolidated Balance Sheet in future periods. Below is a summary:
•6.625% Senior Secured Notes in the aggregate principal amount of $900 million that mature on January 31, 2029 that pay interest semi-annually on January 31 and July 31 of each year;
•4.50% Arkansas Development Finance Authority Bonds in the amount of $487 million that have a final maturity of September 1, 2049 that pay interest semi-annually on each March 1 and September 1;
•4.75% Arkansas Development Finance Authority Bonds Tax Exempt Series 2020 (Green Bonds) in the amount of $265 million that have a final maturity on September 1, 2049 and pay interest semi-annually on March 1 and September 1 each year.
•Other debt including loans and leases that total approximately $200 million.
30
Facilities and Locations as of December 31, 2020
31
Flat-Rolled
The operating results of all U. S. Steel's integrated steel and sheet plants, coke and iron ore operations and ore and sheet production joint ventures are included in Flat-Rolled. Also, included within Flat-Rolled is a research and technology center located in Munhall, Pennsylvania, (near Pittsburgh) where we carryand an automotive technical center in Troy, Michigan. The research and technology center carries out a wide range of applied research, development and technical support functions.
| Flat-Rolled Operations Table | |||||||||||
| Operations, (Property Location) | Annual Production Capability | Production Facilities | Principal Products and/or Services | ||||||||
Gary Works, (Gary, Indiana) | 7.5 million tons of raw steel | four blast furnaces, six steelmaking vessels, a vacuum degassing unit, four slab casters, a hot strip mill, two pickling lines, two cold reduction mills, three temper mills, a double cold reduction line, four annealing facilities and two tin coating lines | strip mill plate in coil; hot-rolled, cold-rolled and coated sheets; and tin mill products | ||||||||
Midwest, (Portage, Indiana) | finishing facility | a pickling line, two cold reduction mills, two temper mills, a double cold reduction mill, two annealing facilities, two hot dip galvanizing lines, a tin coating line and a tin-free steel line | hot-rolled, cold-rolled and coated sheets; tin mill products; and electrical lamination sheets | ||||||||
East Chicago Tin (a), (Portage, Indiana) | finishing facility | a pickling line, a cold reduction mill, two annealing facilities, a temper mill, a tin coating line and a tin-free steel line | tin mill products | ||||||||
Great Lakes Works(b), (Ecorse, River Rouge and Dearborn, Michigan) | 3.8 million tons of raw steel | three blast furnaces, two steelmaking vessels, a vacuum degassing unit, two slab casters, a hot strip mill, a pickling line, a tandem cold reduction mill, three annealing facilities, a temper mill, a recoil and inspection line, two electrolytic galvanizing lines (one being the former Double Eagle Steel Coating Company's (DESCO) line) and a hot dip galvanizing line | hot-rolled, cold-rolled and coated sheets; and tin mill products | ||||||||
Mon Valley Works (c): Edgar Thompson, (Braddock, Pennsylvania), Irvin, (West Mifflin, Pennsylvania), Fairless, (Fairless Hills, Pennsylvania), and Clairton, (Clairton, Pennsylvania) | 2.9 million tons of raw steel and 4.3 million tons of coke | Edgar Thompson: two blast furnaces, two steelmaking vessels, a vacuum degassing unit and a slab caster. Irvin: facilities include a hot strip mill, two pickling lines, a cold reduction mill, three annealing facilities, a temper mill and two hot dip galvanizing lines. Fairless: operates a hot dip galvanizing line. Clairton: ten coke batteries. | hot-rolled, cold-rolled and coated sheets; and coke and coke by-products | ||||||||
Granite City Works (d), (Granite City, Illinois) | 2.8 million tons of raw steel | two blast furnaces, two steelmaking vessels, two slab casters, a hot strip mill, a pickling line, a tandem cold reduction mill and a hot dip galvanizing line | slabs and hot-rolled, cold-rolled and coated sheets | ||||||||
Granite City Works, (Granite City, Illinois); Gateway Energy and Coke Company LLC (Gateway) | coke supply agreement | Gateway constructed a coke plant to supply Granite City Works with coke under a 15-year supply agreement that expires on December 31, 2024. U. S. Steel owns and operates a cogeneration facility that utilizes by-products from the Gateway coke plant to generate heat and power. | not applicable | ||||||||
USS-POSCO Industries (UPI)(e), (Pittsburg, California) | finishing facility | a pickle line tandem cold reduction mill, two annealing facilities, a DUO mill, a tin coating line, a hot dip galvanizing line and a slitter line | cold-rolled and coated sheets; tin mill products | ||||||||
Fairfield Works,(Fairfield, Alabama) | finishing facility | a hot dip galvanizing line | coated sheets | ||||||||
Minnesota Ore Operations: Minntac, (Mt. Iron, Minnesota) and Keetac, (Keewatin, Minnesota) | 22.4 million tons of iron ore pellets | Minntac: mine and pelletizing plant, Keetac: mine and pelletizing plant | iron ore pellets | ||||||||
32
| Flat-Rolled Operations Table Superscript Legend | ||
(a) In the fourth quarter of 2019, East Chicago Tin was indefinitely idled. | ||
(b) The iron and steelmaking facilities and hot strip mill rolling facility at Great Lakes Works were indefinitely idled in March and June of 2020, respectively. | ||
(c) From time to time, we may swap coke with other domestic steel producers or sell on the open market. Coke by-products are sold to the chemicals and raw materials industries. | ||
(d) In March 2020, one of the blast furnaces at Granite City Works was idled. | ||
(e) In February 2020, UPI was added with the purchase of the remaining 50% ownership interest from POSCO. | ||
Joint Ventures Within Flat-Rolled
U. S. Steel participates in a number of joint ventures that are included in Flat-Rolled, most of which are conducted through subsidiaries. All of these joint ventures are accounted for under the equity method. The significant joint ventures and other investments are described below. For information regarding joint ventures and other investments, see Note 12 to the Consolidated Financial Statements.
Joint Ventures (a) Within Flat-Rolled Table | ||||||||||||||
| Joint Venture, (Property Location) | U. S. Steel's Ownership Percentage | Annual Production Capability | Production Facilities | Principal Products and/or Services | ||||||||||
Hibbing Taconite Company (Hibbing); (Hibbing, Minnesota) | 14.7% | 9 million tons of which U. S. Steel's share is 1.3 million tons | mine and pelletizing plant | iron ore pellets | ||||||||||
PRO-TEC Coating Company (PRO-TEC), (Leipsic, Ohio) | 50.0% | 2.0 million tons (b) | a continuous annealing line (CAL) and three continuous galvanizing lines (CGL) (c) | cold-rolled (d) and coated sheets | ||||||||||
Double G Coatings Company (Double G) (e); Jackson, Mississippi | 50.0% | 315 thousand tons | a hot dip galvanizing line | coated sheets | ||||||||||
Worthington Specialty Processing (Worthington), (Jackson, Canton and Taylor, Michigan) | 49.0% | 890 thousand tons | coil processing: slits, cuts to length and blanks | steel processing | ||||||||||
Chrome Deposit Corporation (CDC), (six locations near major steel plants) | 50.0% | not applicable | roll reconditioning: grinding, chrome plating and/or texturing | roll reconditioning | ||||||||||
(a) See further information about our equity investees in Note 12 to the Consolidated Financial Statements. | ||||||||||||||
(b) U. S. Steel's domestic production facilities supply PRO-TEC with cold-rolled sheets and U. S. Steel markets all of PRO-TEC's products. | ||||||||||||||
(c) In the second quarter of 2020 the third CGL line began producing production coils. | ||||||||||||||
(d) The CAL produces high-strength, lightweight steels that are an integral component in automotive manufacturing as vehicle emission and safety requirements become increasingly stringent. | ||||||||||||||
(e) Each partner supplies its own steel to Double G and markets what is processed by Double G. | ||||||||||||||
USSE
USSE operates an integrated facility in Košice, Slovakia which has annual raw steel production capability of 5.0 million tons. Thisan integrated facility has two coke batteries, four sintering strands, three blast furnaces, four steelmaking vessels, a vacuum degassing unit, two dual strand casters, a hot strip mill, two pickling lines, two cold reduction mills, four annealing facilities, a temper mill, a temper/double cold reduction mill, three hot dip galvanizing lines, two tin coating lines, a dynamo line, a color coating line and two spiral welded pipe mills. USSE also has multiple slitting, cutting and other finishing lines for flat products. Principal products include hot-rolled, cold-rolled and coated sheets, tin mill products and spiral welded pipe. USSE also has facilities for manufacturing refractory ceramic materials and has a power plant for internal steam and electricity generation. In June 2019, one of the blast furnaces at USSE was temporarily idled and currently remains idled.
| USSE Operations Table | |||||||||||
| Operations, (Property Location) | Annual Production Capability | Production Facility(s) | Principal Products and/or Services | ||||||||
U. S. Steel Košice, (Košice, Slovakia) | 5.0 million tons of raw steel | two coke batteries, four sintering strands, three blast furnaces, four steelmaking vessels, a vacuum degassing unit, two dual strand casters, a hot strip mill, two pickling lines, two cold reduction mills, four annealing facilities, a temper mill, a temper/double cold reduction mill, two hot dip galvanizing lines, two tin coating lines, a dynamo line, a color coating line and two spiral welded pipe mills and a ceramic refractory manufacturing facility | coke; slabs; strip mill plate: hot, cold and coated sheets; tin mill products; spiral welded pipe; and refractories | ||||||||
Tubular
Tubular manufactures seamless and welded OCTG, standard pipe, line pipe and mechanical tubing.
33
| Tubular Operations Table | |||||||||||
| Operations, (Property Location) | Production Capability | Production Facility(s) | Principal Products and Services | ||||||||
Fairfield Tubular Operations (a), (Fairfield, Alabama) | 0.9 million tons of raw steel (b) and 750 thousand tons of tubular | an electric arc furnace (EAF), slab caster and round caster with tubular capability to produce outer diameter (O.D.) sizes from 4.5 to 9.875 inches with quench and temper, hydrotester, threading and coupling and inspection capabilities | seamless tubular pipe | ||||||||
Lorain Tubular Operations (c), (Lorain, Ohio) | 380 thousand tons of tubular | tubular capability to produce O.D. sizes from 10.125 to 26 inches and has quench and temper, hydrotester, cutoff and inspection capabilities | seamless tubular pipe | ||||||||
Lone Star Tubular(d), (Lone Star, Texas) | #1 electric-weld pipe mill (EWPM) 400 thousand tons and #2 EWPM 380 thousand tons of tubular | tubular capability to produce O.D. sizes from 1.088 to 7.15 inches with quench and temper, hydrotester, threading and coupling and inspection capabilities | welded tubular pipe | ||||||||
Wheeling Machine Products(e), (Pine Bluff, Arkansas and Hughes Springs, Texas) | not applicable | tubular capability to manufacture couplings used to connect individual sections of oilfield casing and tubing ranging from 2.375 to 20 inches | tubular couplings | ||||||||
Offshore Operations, (Houston, Texas) | not applicable | tubular capability to thread, inspect, provide accessories and storage services and premium connections | tubular threading, inspection, accessories and storage services and premium connections | ||||||||
Tubular Processing (f), (Houston, Texas) | not applicable | tubular capability to quench and temper and provide end-finishing services for oilfield production tubing | tubular processing | ||||||||
(a) The EAF commenced operation in October 2020. | |||||||||||
(b) Based on the rounds caster capacity. | |||||||||||
(c) In April 2020, the Lorain Tubular Operations was temporarily idled for an indefinite period of time. | |||||||||||
(d) In April 2020, Lone Star Tubular Operations was temporarily idled for an indefinite period of time | |||||||||||
(e) In April 2020, the Wheeling Machine Products at Hughes Springs, Texas was temporarily idled for an indefinite period of time. | |||||||||||
(f) Tubular Processing has been temporarily idled since 2015. | |||||||||||
Joint Ventures (a) Within Tubular Table | ||||||||||||||
| Operations, (Property Location) | U. S. Steel's Ownership Percentage | Production Capability | Production Facility(s) | Principal Products and/or Services | ||||||||||
Patriot Premium Threading Services, (Midland, Texas) | 50% | not applicable | tubular capability to thread, provide accessories and premium connections | Tubular threading, accessories and premium connections | ||||||||||
(a)See further information about our equity investees in Note 12 to the Consolidated Financial Statements. | ||||||||||||||
34
Table of 750,000 tons and has historically been supplied with steel rounds from Flat-Rolled’s former Fairfield Works. Subsequent to the shutdown of the hot end at the Fairfield Works in August 2015, the facility is currently purchasing rounds from third parties. The Fairfield Tubular Operations has the capability to produce outer diameter (O.D.) sizes from 4.5 to 9.875 inches and has quench and temper, hydrotester, threading and coupling and inspection capabilities. On February 11, 2019, U. S. Steel announced plans to restart the delayed electric arc furnace (EAF) capital project located in Fairfield, Alabama. The new EAF will have an annual capacity of approximately 1.6 million tons. The EAF is expected to commence startup in the second half of 2020. The slab and rounds casters of the former Fairfield Works remain capable of operation and are now part of the Fairfield Tubular Operations. The Lorain plant consists of the #3 facility and has historically consumed steel rounds supplied by Fairfield Works and external sources. Subsequent to the shutdown of the hot end at the Fairfield Works, the Company is sourcing rounds from third parties. Lorain #3 facility has the capability to produce 380,000 tons annually in O.D. sizes from 10.125 to 26 inches and has quench and temper, hydrotester, cutoff and inspection capabilities. In March 2017, U. S. Steel made the strategic decision to permanently shutdown the Lorain No. 6 Quench & Temper Mill.Contents
Other Businesses
U. S. Steel’s Other Businesses include the operating results relating to our 49.9% ownership interest in Big River Steel and our railroad services and real estate operations.
| Other Businesses Table | ||||||||||||||
| Operations/Joint Venture, (Property Location) | U. S. Steel's Ownership Percentage | Production Capability | Production Facility(s) | Principal Products and/or Services | ||||||||||
Big River Steel (a),(Osceola, AR) | 49.9% | 3.3 million tons | two EAFs, two Ruhrstahl Heraeus degassers and slab casters; finishing facilities include a hot strip mill, a pickle line, a cold reduction mill and a galvanizing line | hot-rolled, cold-rolled and coated sheets; and electrical | ||||||||||
Transtar, LLC, (Alabama, Indiana, Michigan, Ohio, Pennsylvania and Texas) | 100% | not applicable | Gary Railway Company in Indiana, Lake Terminal Railroad Company and Lorain Northern Company in Ohio, Union Railroad Company, LLC in Pennsylvania, Fairfield Southern Company, Inc. in Alabama, Delray Connecting Railroad Company in Michigan and Texas & Northern Railway Company in Texas | railroad operations | ||||||||||
U. S. Steel's owned real estate assets held for development or managed, (Alabama, Illinois, Michigan, Minnesota and Pennsylvania) | 100% | 45,000 acres | surface rights primarily in Alabama, Illinois, Michigan, Minnesota and Pennsylvania | develop and manage real estate | ||||||||||
(a)Big River Steel was an equity investee until the Company purchased the remaining interest on January 15, 2021, see Note 5 and | ||||||||||||||
Raw Materials and Energy
As an integrated producer, U. S. Steel’s primary raw materials are iron units in the form of iron ore pellets and sinter ore, carbon units in the form of coal and coke (which is produced from coking coal) and steel scrap. As an EAF producer, our primary raw material is scrap. U. S. Steel’s raw materials supply strategy consists of acquiring and expanding captive sources of certain primary raw materials and entering into flexible supply contracts for certain other raw materials at competitive market prices which are subject to fluctuations based on market conditions at the time.
The amounts of such raw materials needed to produce a ton of steel will fluctuate based upon the specifications of the final steel products, the quality of raw materials and, to a lesser extent, differences among steel producing equipment. In broad terms, U. S. Steel consumes approximately 1.4 tons of coal to produce one ton of coke and then it consumes approximately 0.3 tons of coke, 0.3 tons of steel scrap (54(61 percent of which is internally generated) and 1.3 tons of iron ore pellets to produce one ton of raw steel. At normal operating levels, we also consume approximately 6 mmbtu’s of natural gas per ton produced. While we believe that these estimated consumption amounts are useful for planning purposes, and are presented to give a general sense of raw material and energy consumption related to steel production, substantial variations may occur.
35
Iron Ore
The iron ore facilities at Minntac and Keetac contain an estimated 782766 million short tons of recoverable reserves and our share of recoverable reserves at the Hibbing joint venture is 5 million short tons. Recoverable reserves are defined as the tons of product that can be used internally or delivered to a customer after considering mining and beneficiation or preparation losses. Minntac and Keetac’s annual capability and our share of annual capability for the Hibbing joint venture total approximately 24 million tons. Through our wholly owned operations and our share of our joint venture, we have iron ore pellet production capability that exceeds our steelmaking capability in the U.S.
We sold iron ore pellets in 2020, 2019 2018 and 20172018 to third parties. The Company has agreements to supply iron ore pellets to third-party customers over the next several years.
Substantially all of USSE’s iron ore requirements are purchased from outside sources, primarily Russian and Ukrainian mining companies. Prices are determined in long-term contracts with strategic suppliers or as spot prices negotiated monthly or quarterly. In certain prior years, USSE also received iron ore from U. S. Steel’s iron ore facilities in North America. We believe that supplies of iron ore adequate to meet USSE’s needs are available at competitive market prices.
Coking Coal
All of U. S. Steel’s coal requirements for our cokemaking facilities are purchased from outside sources. Pricing for Flat-Rolled's coking coal contracts are typically negotiated on a yearly basis, and from time to time we have entered into multi-year agreements for a portion of our coking coal requirements.
Prices for European contracts are negotiated quarterly, annually or determined as index-based prices.
We believe that supplies of coking coal adequate to meet our needs are available from outside sources at competitive market prices. The main source of coking coal for Flat-Rolled is the United States, and sources for USSE include Poland, the Czech Republic, Russia, Ukraine, Canada, Mozambique and the United States.
36
Coke
In North America, the Flat-Rolled segment operates a cokemaking facility at the Clairton Plant of Mon Valley Works. At our Granite City Works, we also have a 15-year coke supply agreement with Gateway that expires on December 31, 2024. Blast furnace injection of coal, and self-generated coke oven gas is also used to reduce coke usage.
With Flat-Rolled’s cokemaking facilities and the Gateway long-term supply agreement, it has the capability to be nearly self-sufficient with respect to its annual coke requirements at normal operating levels. Coke from time to time has been purchased from, sold to, or swapped with suppliers and other end-users to adjust for production needs and reduce transportation costs.
In Europe, the USSE segment operates cokemaking facilities at USSK. While USSE is self-sufficient for coke at normal operating levels, it periodically purchases coke from Polish and Czech coke producers to meet production needs. Volume and price are negotiated quarterly.
Steel Scrap and Other Materials
We believe that supplies of steel scrap and alloys and coating materialsthat are adequate to meet our needs to support Flat-Rolled and USSE are readily available from outside sources at competitive market prices.prices for the Flat-Rolled and USSE segments and for our future Big River Steel segment. Generally, approximately 5055 percent of our steel scrap requirements arewere internally generated through normal operations.operations for the USSE and Flat-Rolled segments.
Limestone
All of Flat-Rolled’s limestone requirements and for USSE's lime and limestone requirements are purchased from outside sources. We believe that supplies of limestone and lime adequate to meet our needs are readily available from outside sources at competitive market prices.
Zinc and Tin
We believe that supplies of zinc and tin required to fulfill the requirements for Flat-Rolled and USSE are available from outside sources at competitive market prices. For Flat-Rolled, the main sources of zinc are Canada, Peru and Mexico and the main sources of tin are Bolivia and Peru. For USSE, the main sources of zinc are Sweden, the Slovak Republic,Finland, Netherlands, Germany and Poland and the main sources of tin are Peru, Indonesia, Bolivia and Indonesia.China.
During 2019,2020, Flat-Rolled protected approximately 30%41% and 87%39% of its operation's zinc and tin purchases, respectively, with financial swap derivatives to manage exposure to zinc and tin price fluctuations. During 2019,2020, USSE protected approximately 45% ofdid not protect its operation's zinc purchases with forward physical contracts to manage exposure to zincfrom price fluctuations. Also during 2019, USSEfluctuations and protected approximately 43%25% of its operation's tin purchases with forward physical contracts and 16% of its operation's tin purchases with financial swaps to manage our exposure to tin price fluctuations. For further information, see Note 16 to the Consolidated Financial Statements.
Natural Gas
All of U. S. Steel’s natural gas requirements are purchased from outside sources.
We believe that adequate supplies to meet Flat-Rolled’s and Tubular's needs are available at competitive market prices. For 2019,2020, approximately 7481 percent of our natural gas purchases in Flat-Rolled were based on bids solicited on a monthly basis from various vendors; the remainder were made daily or with term agreements.
37
We believe that adequate natural gas supplies to meet USSE’s needs are available at competitive market prices. During 2019,2020, we routinely executed fixed-price forward physical purchase contracts for natural gas to partially manage our exposure to natural gas price increases. For 2019,2020, approximately 5254 percent of our natural gas purchases in USSE were made with fixed-price forward physical purchase contracts; the remainder were based on bids solicited on a quarterly monthly or a dailymonthly basis from various vendors.
Both Flat-Rolled and USSE use self-generated coke oven and blast furnace gas to reduce consumption of natural gas. USSE also captures and consumes converter gas from its four steelmaking vessels.
Industrial Gases
U. S. Steel purchases industrial gas in the U.S. under long-term contracts with various suppliers. USSE owns and operates its own industrial gas facilities,facility, but also may purchase industrial gases from time to time.
Commercial Sales of Product
U. S. Steel characterizes sales as contract sales if sold pursuant to an agreement with a defined volume and pricing and a duration of longer than three months, and as spot if sold without a defined volume and pricing agreement.agreement, typically three months or less. In 2019,2020, approximately 7773 percent, 6348 percent and 3660 percent of sales by Flat-Rolled, USSE and Tubular, respectively, were contract sales. Some contract pricing agreements include fixed prices while others are adjusted periodically based upon published prices of steel products or cost components.
International Trade
U. S. Steel continues to face import competition, much of which is unfairly traded, supported by foreign governments, and fueled by massive global steel overcapacity, currently estimated to be over 700 million metric tons per year—over seven times the entire U.S. steel market and over twenty-five times total U.S. steel imports. These imports, as well as the underlying policies/practices and overcapacity, impact the Company’s operational and financial performance. U. S. Steel continues to lead efforts to address these challenges that threaten the Company, our workers, our stockholders, and our country’s national and economic security.
As of the date of this filing, pursuant to a series of Presidential Proclamations issued in accordance with Section 232 of the Trade Expansion Act of 1962, U.S. imports of certain steel products are subject to a 25 percent tariff, except for imports from: (1) Argentina, Brazil, and South Korea, which are subject to restrictive quotas; (2) Canada and Mexico, which are not subject to either tariffs or quotas, but tariffs could be re-imposed on surging product groups after consultations; and (3) Australia, which is not subject to tariffs, quotas, or an anti-surge mechanism. Pursuant to a January 2020 Presidential Proclamation, the Section 232 action was expanded to cover certain downstream steel products from countries subject to the Section 232 tariffs, effective February 8, 2020.
An August 2020 Presidential Proclamation reduced the Section 232 quota for fourth quarter 2020 for semi-finished steel imports from Brazil. In August 2020, the United States and Mexico announced that Mexico would establish a steel export licensing system to monitor recent U.S. import surges of semi-finished steel, standard pipe, and mechanical tubing from Mexico through June 2021. In September 2020, the U.S. Department of Commerce (DOC) published new regulations that require steel import license applicants to report the “melt and pour” country of origin for all U.S. steel imports covered by the Section 232 action. These regulatory changes will facilitate monitoring for import surges and circumvention of tariffs/duties, quotas, product exclusions and country exemptions.
DOC is managing a process in which U.S. companies may request and/or oppose temporary product exclusions from the Section 232 tariffs and quotas. Over 214,000 exclusions have been requested for steel products. U. S. Steel opposes exclusion requests for products that are the same as, or substitutes for, products manufactured by U. S. Steel.
Multiple legal challenges to the Section 232 action continue before the U.S. Court of International Trade (CIT) and U.S. Court of Appeals for the Federal Circuit (CAFC). Several appeals of DOC exclusion denials have resulted in confidential settlements. Multiple countries have challenged the Section 232 action at the World Trade Organization (WTO), imposed retaliatory tariffs, and/or acted to safeguard their domestic steel industries from increased steel imports. In turn, the United States has challenged the retaliation at the WTO.
Since its implementation in March 2018, the Section 232 action has supported the U.S. steel industry’s and U. S. Steel’s investments in advanced steel capacity, technology, and skills, thereby strengthening U.S. national and economic security. The Company continues to actively defend the Section 232 action.
In February 2019, the European Commission (EC) imposed a definitive tariff rate quota safeguard of 25 percent on certain steel imports that exceed established quotas. In June 2020, the EC made several minor adjustments to the safeguard, which will remain in effect through June 2021. The European steel industry has asked for the opening of a review with a view to extending the safeguard measures beyond June 2021.
38
Antidumping duties (AD) and countervailing duties (CVD or antisubsidy duties) apply in addition to the Section 232 tariffs and quotas and the EC’s safeguard, and AD/CVD orders will continue beyond the Section 232 action and the EC’s safeguard. Thus, U. S. Steel continues to actively defend and maintain the 54 U.S. AD/CVD orders and 11 European Union (EU) AD/CVD orders covering U. S. Steel products in multiple proceedings before the DOC, U.S. International Trade Commission (ITC), CIT, CAFC, the EC and European courts, and the WTO.
In July and November 2020, in the first sunset review of the 2014 AD/CVD orders on oil country tubular goods (OCTG) from India, South Korea, Turkey, Ukraine, and Vietnam and the second sunset review of the 2010 AD/CVD orders on OCTG from China, respectively, the ITC voted to continue those AD/CVD orders for another five years.
In July 2020, DOC announced final affirmative determinations in self-initiated circumvention investigations of imports of corrosion-resistant steel (CORE) from Costa Rica and the United Arab Emirates made from Chinese substrate, resulting in a combined AD/CVD rate of 239 percent on such imports. DOC made a final negative circumvention determination regarding CORE imported from Guatemala in July 2020, and final circumvention determinations regarding CORE imports from Malaysia and South Africa are expected in 2021.
In November 2020, DOC self-initiated additional circumvention investigations of imports of OCTG from Brunei and the Philippines made from Chinese hot-rolled steel sheet and strip.
In July 2020, based on petitions filed by Vallourec Star, DOC initiated new AD/CVD investigations on U.S. imports of seamless steel standard, line, and pressure pipe from Czechia, South Korea, Russia, and Ukraine. Provisional measures were imposed on Czechia, South Korea and Russia in December 2020, with provisional measures expected on Ukraine in February 2021 and final duties could be imposed as early as April 2021. In May and June 2020, the EC initiated new AD/CVD investigations on EU imports of hot-rolled steel from Turkey. The EC has set provisional anti-dumping duties in range between 4.8% to 7.6% on hot-rolled coil originating from Turkey, with effect from January 8, 2021, for a period of six months. Definitive measures if adopted should apply as of July 2021.
Following the 2018 investigation under Section 301 of the Trade Act of 1974, the United States began imposing 15 and 25 percent tariffs on certain imports from China, including certain steel products. Following the U.S.-China “Phase One” trade agreement, the 15 percent tariffs declined to 7.5 in February 2020, but the 25 percent tariffs remain in effect.
The Global Forum on Steel Excess Capacity, the Organisation for Economic Co-operation and Development Steel Committee, and trilateral negotiations between the United States, EU and Japan continue to address overcapacity.
U. S. Steel will continue to execute a broad, global strategy to maximize opportunities and navigate challenges presented by imports, global steel overcapacity, and international trade law and policy developments.
Environmental Matters, Litigation and Contingencies
Some of U. S. Steel’s facilities were in operation before 1900. Although the Company believes that its environmental practices have either led the industry or at least been consistent with prevailing industry practices, hazardous materials have been and may continue to be released at current or former operating sites or delivered to sites operated by third parties.
Our U.S. facilities are subject to environmental laws applicable in the U.S., including the Clean Air Act (CAA), the Clean Water Act (CWA), the Resource Conservation and Recovery Act (RCRA) and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), as well as state and local laws and regulations.
U. S. Steel has incurred and will continue to incur substantial capital, operating, and maintenance and remediation expenditures as a result of environmental laws and regulations, related to release of hazardous materials, which in recent years have been mainly for process changes to meet CAA obligations and similar obligations in Europe.
EU Environmental Requirements and Slovak Operations
Under the EU Emissions Trading Scheme (ETS)System (EU ETS), USSK'sUSSE's final allocation of allowances for the Phase III period, which covers the years 2013 through 2020 is 48 million allowances. Based on projected total production levels, we started to purchase allowances in the third quarter of 2017 to meet the annual compliance submission in the future.submission. As of December 31, 2019,2020, we have purchased approximately 11.712.3 million European Union Allowances (EUA) totaling €132€141 million (approximately $148$173 million) to cover the estimated Phase III period shortfall of emission allowances. We estimate that the total shortfall will be approximately 12.5 million allowances for the Phase III period. The fullexact cost of complying with the EU ETS regulations will depend on future production levels and future emissions intensity levels.verified 2020 emissions.
The EU's Industrial Emissions Directive requires implementation of EU determined best available techniques (BAT) for Iron and Steel production, to reduce environmental impacts as well as compliance with BAT associated emission levels. Our most recent estimateTotal capital
39
expenditures for projects to comply with or go beyond BAT requirements iswere €138 million (approximately $155$169 million) over the 2017 to 2020actual program period. These costs were partially offset by the EU funding received and may be mitigated over the next measurement periods if USSK complies with certain financial covenants, which are assessed annually. USSK complied with these covenants as of December 31, 2019.2020. If we are unable to meet these covenants in the future, USSK might be required to provide
additional collateral (e.g. bank guarantee) to secure 50 percent of the full value of estimated expenditures. There could be increased operating costs associated with these projects, such as increased energy and maintenance costs. We are currently unable to reliably estimate what the increase in operating costs will be as many projects are in the development stage.
For further discussion of laws applicable in Slovakia and the EU and their impact on USSK, see Note 26 to the Consolidated Financial Statements, “Contingencies and Commitments, - Environmental Matters, EU Environmental Requirements.”
New and Emerging Environmental Regulations
United States and European Greenhouse Gas Emissions Regulations
Future compliance with CO2CO2 emission requirements may include substantial costs for emission allowances, restriction of production and higher prices for coking coal, natural gas and electricity generated by carbon basedcarbon-based systems. Because we cannot predict what requirements ultimately will be imposed in the U.S. and Europe, it is difficult to estimate the likely impact on U. S. Steel, but it could be substantial. On March 28, 2017, President Trump signed Executive Order 13783 instructing the United States Environmental Protection Agency (U.S. EPA) to review the Clean Power Plan. On October 16, 2017,Plan (CPP). As a result, in June 2019, the U.S. EPA proposed topublished a final rule, the “Affordable Clean Energy (ACE) Rule” that replaced the CPP. Twenty-three states, the District of Columbia, and seven municipalities are challenging the CPP repeal and ACE rule in the Clean Power Plan after reviewingU.S. Court of Appeals for the plan pursuant to President Trump’s executive order. Any repeal and/or replacementD.C. Circuit. A coalition of 21 states has intervened in the litigation in support of the Clean Power Plan is likely to be challenged by various proponents of the plan, such as environmentalU.S. EPA. Various other public interest organizations, industry groups, and certain states.Members of Congress are also participating in the litigation. On January 19, 2021, the D.C. Circuit vacated and remanded the ACE to EPA, while the CPP remains stayed. It is unclear as to how the new Biden administration will proceed with the remand. Any impacts to our operations as a result of any future greenhouse gas regulations are not estimable at this time since the matter is unsettled. In any case, to the extent expenditures associated with any greenhouse gas regulation, as with all costs, are not ultimately reflected in the prices of U. S. Steel's products and services, operating results will be reduced.
Revised rules for free allocation of CO2 emissions credits are based on reduced benchmark values which have not yet been no material changespublished and historical levels of production from 2014-2018. USSE submitted all required historical production data in U. S. Steel’s exposure2019. The final EU decision on the free allocation amount for 2021-2025 is expected in the second quarter of 2021. Allocations to European Greenhouse Gas Emissions regulations since December 31, 2018.individual installations may be adjusted annually to reflect relevant increases and decreases in production. The threshold for adjustments was set at 15 percent and will be assessed on the basis of a rolling average of two years. The average production level of 2019 and 2020 will be assessed to determine the free allocation for 2021. Preliminary production data shows that USSE missed the 15 percent threshold in 2020; therefore, the free allocation for 2021 may be decreased. Lower production in 2019 and 2020 may have an impact on the future free allocation for 2026-2030, where historical production average for years 2019-2023 are assessed.
United States - Air
The CAA imposes stringent limits on air emissions with a federally mandated operating permit program and civil and criminal enforcement sanctions. The CAA requires, among other things, the regulation of hazardous air pollutants through the development and promulgation of National Emission Standards for Hazardous Air Pollutants (NESHAP) and Maximum Achievable Control Technology (MACT) Standards. The U.S. EPA has developed various industry-specific MACT standards pursuant to this requirement. The CAA requires the U.S. EPA to promulgate regulations establishing emission standards for each category of Hazardous Air Pollutants. The U.S. EPA also must conduct risk assessments on each source category that is already subject to MACT standards and determine if additional standards are needed to reduce residual risks.
While our operations are subject to several different categories of NESHAP and MACT standards, the principal impact of these standards on U. S. Steel operations includes those that are specific to coke making, iron making, steel making and iron ore processing.
40
the rule is finalized as proposed.United States Court of Appeals for the District of Columbia Circuit. The cases were consolidated and are being held in abeyance until EPA reviews and responds to administrative petitions for review. For the Taconite Iron Ore Processing category, based on the results of the Agency’s risk review, U.S. EPA is proposingpromulgated a final rule on July 28, 2020, in which EPA determined that risks from emissions of air toxics from this source category are acceptable and that the existing standards provide an ample margin of safety. Furthermore, under the technology review, the Agency identified no cost-effective developments in controls, practices, or processes to achieve further emissions reductions. Therefore, U.S.
On March 12, 2018, the New York State Department of Environmental Conservation (DEC), along with other petitioners, submitted a CAA Section 126(b) petition to the U.S. EPA. In the petition, the DEC asserts that stationary sources from the following nine states are interfering with attainment or maintenance of the 2008 and 2015 ozone National Ambient Air Quality Standards (NAAQS) in New York: Illinois, Indiana, Kentucky, Maryland, Michigan, Ohio, Pennsylvania, Virginia, and West Virginia. DEC is requesting the U.S. EPA to require sources of nitrogen oxides in the nine states to reduce such emissions. In a final rule promulgated in the October 18, 2019, Federal Register, EPA denied the petition. On October 29, 2019, New York, New Jersey, and the City of New York petitioned the United States Court of Appeals for the District of Columbia Circuit for review of U. S.U.S. EPA’s denial of the petition. The matter remains beforeIn July 2020, the Court.Court vacated EPA’s determination and remanded it back to EPA to reconsider the 126(b) petition in a manner consistent with the Court’s opinion. At this time, since EPA’s decision after its reconsideration is unknown, the impacts of any reconsideration are indeterminable and inestimable.
The CAA also requires the U.S. EPA to develop and implement NAAQS for criteria pollutants, which include, among others, particulate matter (PM) - consisting of PM10 and PM2.5, lead, carbon monoxide, nitrogen dioxide, sulfur dioxide (SO2), and ozone.
In October 2015, the U.S. EPA lowered the NAAQS for ozone from 75 ppbparts per billion (ppb) to 70 ppb. On November 6, 2017, the U.S. EPA designated most areas in which we operate as attainment with the 2015 standard. In a separate ruling, on June 4, 2018, the U.S. EPA designated other areas in which we operate as “marginal nonattainment” with the 2015 ozone standard. On December 6, 2018, U.S. EPA published a final rule regarding implementation of the 2015 ozone standard. Because no state regulatory or permitting actions to bring the ozone nonattainment areas into attainment have yet to be proposed or developed for U. S. Steel facilities, the operational and financial impact of the ozone NAAQS cannot be reasonably estimated at this time.
On December 14, 2012, the U.S. EPA lowered the annual standard for PM2.5PM2.5 from 15 micrograms per cubic meter (ug/m3) to 12 ug/m3, and retained the PM2.5PM2.5 24-hour and PM10PM10 NAAQS rules. In December 2014, the U.S. EPA designated some areas in which U. S. Steel operates as nonattainment with the 2012 annual PM2.5PM2.5 standard. On April 6, 2018, the U.S. EPA published a notice that Pennsylvania, California and Idaho failed to submit a SIPState Implementation Plan (SIP) to demonstrate attainment with the 2012 fine particulate standard by the deadline established by the CAA. As a result of the notice, Pennsylvania, a state in which we operate, iswas required to submit a SIP to the U.S. EPA no later than November 7, 2019 to avoid sanctions. On April 29, 2019, the ACHD published a draft SIP for the Allegheny County nonattainment area which demonstrates that all of Allegheny County will meet its reasonable further progress requirements and be in attainment with the 2012 PM2.5PM2.5 annual and 24-hour NAAQS by December 31, 2021 with the existing controls that are in place. On September 12, 2019, the Allegheny County Board of Health unanimously approved the draft SIP. The draft SIP was then sent to the Pennsylvania Department of Environmental Protection (PADEP). PADEP submitted the SIP to U.S. EPA for approval on November 1, 2019. To date, U.S. EPA has not taken action on PADEP’s submittal.
On January 26, 2021, ACHD announced that for the first time in history all eight air regulations applicable to coke plants in Allegheny County. While ACHD currently has some of the most stringent air regulations in the country governing coke plants, which apply to U. S. Steel’s coke plant in Clairton, Pennsylvania (the only remaining coke plantquality monitors in Allegheny County met the federal air quality standards including particulate matter (PM2.5 and one of two remaining in Pennsylvania), the draft regulations would reducePM10).
On November 20, 2020, ACHD proposed a reduction to the current allowable emissions from coke plant operations, andincluding the hydrogen sulfide content of coke oven gas, that would be more stringent than the Federal Best Available Control Technology and Lowest Achievable
Emission Rate requirements. In various meetings with ACHD, U. S. Steel has raised significant objections, in particular, that ACHD has not demonstrated that continuous compliance with the draft rule is economically and technologically feasible. While U. S. Steel continues to meet with ACHD regarding the draft rule, U. S. Steel believes that any rule promulgated by ACHD must comply with its statutory authority. If the draft rule or similar rule is adopted, the financial and operational impacts to U. S. Steel could be material. To assist in developing rules objectively and with adequate technical justification, the June 27, 2019, Settlement Agreement, establishes procedures that would be used when developing a new rule. For further details on the June 27, 2019 Settlement Agreement with ACHD see "Item 1.3. Legal Proceedings, - Environmental Proceedings, - Mon Valley Works."
Environmental Remediation
For further discussion of relevant environmental matters, including environmental remediation obligations, see "Item 3. Legal Proceedings, - Environmental Proceedings."
41
Property, Plant and Equipment Additions
For property, plant and equipment additions, including finance leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Cash FlowsLiquidity and Liquidity – Cash Flows”Capital Resources” and Note 13 to the Consolidated Financial Statements.
Available Information
U. S. Steel’s Internet address is www.ussteel.com. We post our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our proxy statement and our interactive data files to our website free of charge as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission (SEC). We also post all press releases and earnings releases to our website.
All other filings with the SEC are available via a direct link on the U. S. Steel website to the SEC’s website, www.sec.gov.
Also available on the U. S. Steel website are U. S. Steel’s Corporate Governance Principles, Code of Ethical Business Conduct and the charters of the Audit Committee, the Compensation & Organization Committee and the Corporate Governance & Sustainability Committee of the Board of Directors. These documents and the Annual Report on Form 10-K and proxy statement are also available in print to any stockholder who requests them. Such requests should be sent to the Office of the Corporate Secretary, United States Steel Corporation, 600 Grant Street, Suite 1500,1844, Pittsburgh, Pennsylvania, 15219-2800 (telephone: 412-433-1121).
U. S. Steel does not incorporate into this document the contents of any website or the documents referred to in the immediately preceding paragraphs.
Other Information
Information on net sales, depreciation, capital expenditures, earnings (loss) before interest and income taxes and assets by reportable segment and for Other Businesses and on net sales and assets by geographic area are set forth in Note 4 to the Consolidated Financial Statements.
For significant operating data for U. S. Steel for each of the last five years, see “Five-Year Operating Summary (Unaudited)” within this document.
42
Item 1A. RISK FACTORS
Our Investments in New Technologies May Not Be Fully Successful
Execution of our strategy depends, in part, on the success of a number of investments we have made and plan to make in new technologies. All of our investments are expected to deliver an enhanced “bestBest of both” BothSM business model that delivers cost and/or capability differentiation for our stakeholders. Our intent to eventually acquire 100%Best of Both strategy is centered around adding EAF capabilities, including through the acquisition of Big River Steel, like our other investments in state-of-the-art sustainable steel technologies including, but not limited to, theconstructing an endless casting and rolling line at Mon Valley Works and marketing new advanced high strength steel XG3 products, which are completed at our PRO-TEC joint venture, is a significant element of our strategy. If our investment in Big River Steel fails to provide the benefits we expect or our financial condition is constrained, we may choose not to exercise our option to acquire its remaining outstanding ownership interests. In addition, if Big River Steel does not achieve the expected financial performance, we still may be required to acquire the remaining ownership interests at a discounted purchase price.venture. Additionally, likeas with any significant construction project, we may be subject to changing market conditions and demand for our completed projects, delays and cost overruns, work stoppages, labor shortages, engineering issues, weather interferences, changes required by governmental authorities, delays or the inability to acquire required permits or licenses, the ability to finance the projects or disruption of existing operations, any of which could have an adverse impact on our operational and financial results. Furthermore, new product development or modification is costly, involves significant research, development, time and expense and may not necessarily result in the successful commercialization of any new products, or new technologies may not perform as intended or expected. Unsuccessful execution of these strategic projects or underperformance of any of these assets could adversely affect our business, results of operations and financial condition.
We may encounter difficulties integrating Big River Steel into our existing operations.
In January 2021, we closed on the acquisition of Big River Steel, which is a cornerstone of our Best of Both strategy. Growth and transformation, including through acquisitions, involve risk. We have devoted significant management attention and resources to integrating the business and operations of Big River Steel, but we may encounter difficulties during the integration process, including the following:
•the possibility that the full benefits anticipated to result from the Big River Steel acquisition may not be realized or may not be realized in the time period that we anticipate;
•higher than anticipated costs incurred in connection with the integration of the business and operations of Big River Steel;
•differences in operating technologies, cultures, and management philosophies that may delay successful integration;
•the ability to retain key employees;
•delays in the integration of management teams, strategies, operations, products, and services;
•the ability to create and implement consistent business standards, controls, processes, procedures and controls to those of our operations;
•challenges of integrating systems, technologies, networks, and other assets of Big River Steel in a manner that minimizes any adverse impact or disruptions to customers, suppliers, employees, and other constituencies; and
•unknown or underestimated liabilities and unforeseen increased expenses or delays associated with the integration beyond current estimates.
The successful integration of a new business also depends on our ability to manage the new business, realize forecasted synergies and full value from the combined business. Our business, results of operations, financial condition and cash flows could be materially adversely affected if we are unable to successfully integrate Big River Steel.
Benefits from our Best of Both stockholder value creation strategy and asset revitalization program may be limited or may not be fully realized.
U. S. Steel is pursuing a stockholder value creation strategy focused on delivering an enhanced Best of Both business model that delivers cost and/or capability differentiation for our customers. This includes investing in new assets and technologies to leverage the advantages of integrated and mini mill capabilities. This strategy builds on our asset revitalization program, launched in 2017, which covers investments in our existing assets, and involves investments beyond routine capital and maintenance spending. Asset revitalization projects have delivered, and are expected to deliver, both operational and commercial benefits, but such benefits may be limited to the assets that are revitalized. Business conditions, our ability to implement such initiatives, and factors beyond our control may limit the benefits associated with certain identified projects and limit the economic benefits of our stockholder value creation strategy or asset revitalization program. Our goal remains to deliver high-quality, value-added products on time every time and to collaborate with our customers to develop innovative solutions that address their most challenging needs.
We participate in joint ventures, which may not be successful.
We participate in a number of joint ventures and we may enter into additional joint ventures or other similar arrangements in the future. Our joint venture partners, as well as any future partners, may have interests that are different from ours which could result in conflicting views as to the conduct of the business of the joint venture. In the event that we have a disagreement with a joint venture partner as to the resolution of a particular issue, or as to the management or conduct of the business of the joint venture in general, we may not be able to resolve such disagreement in our favor or terminate such joint venture. In addition, our
43
joint venture partners may, as a result of financial or other difficulties or because of other reasons, be unable or unwilling to fulfill their obligations under the joint venture, such as contributing capital to expansion or maintenance projects or approving dividends or other distributions or payments to us. Any significant downturn or deterioration in the business, financial condition or results of operations of a joint venture could adversely affect our results of operations in a particular period or lead to circumstances where capital contributions or other outputs of cash to the joint venture are required. There can be no assurance that our joint ventures will be beneficial to us.
We may not fully realize the expected monetary benefits from our iron ore assets. A component of our strategy includes monetizing our excess iron ore assets.
Stelco Inc. holds an option (Option) to acquire an undivided 25 percent interest in a to-be-formed entity that will own the Company’s current iron ore mine located in Mt. Iron, Minnesota. There is a possibility that Stelco may not exercise its Option in the anticipated timeframe or at all. If the proposed joint venture with Stelco is not successful, fails to provide the benefits we expect, or is not created at all, we may in the future have more iron ore than we need to support the business. Additionally, the existence of the Option may deter future potential opportunities to monetize the iron ore assets.
Operational Risk Factors
The outbreak of COVID-19 has had, and could continue to have, an adverse impact on the Company’s results of operations, financial condition and cash flows.
The global pandemic resulting from the novel coronavirus designated as COVID-19 has had a significant impact on economies, businesses and individuals around the world. Efforts by governments around the world to contain the virus have involved, among other things, border closings and other significant travel restrictions; mandatory stay-at-home and work-from-home orders in numerous countries, including the United States; mandatory business closures; public gathering limitations; and prolonged quarantines. These efforts and other governmental, business and individual responses to the COVID-19 pandemic have led to significant disruptions to commerce, lower consumer demand for goods and services and general uncertainty regarding the near-term and long-term impact of the COVID-19 virus on the domestic and international economy and on public health. These developments and other consequences of the outbreak have and could continue to materially adversely impact the Company's results of operations, financial condition and cash flows.
The U.S. Department of Homeland Security guidance has identified U. S. Steel's business as a critical infrastructure industry, essential to the economic prosperity, security and continuity of the United States. Similarly, in Slovakia, U. S. Steel Košice was identified by the government as a strategic and critical company, essential to economic prosperity, and continues to operate.
The duration, severity, speed and scope of the COVID-19 pandemic remains highly uncertain and the extent to which COVID-19 will affect our operations depends on future developments, such as potential surges of the outbreak and the speed of the development, distribution and effectiveness of vaccine and treatment options, which cannot be predicted at this time. Although we have continued to operate, we experienced a significant reduction in demand at the on set of the pandemic. Since the second quarter, demand has continued to accelerate, especially in key markets like automotive, appliance and construction.
We also may experience disruptions to our operations resulting from changes in government policy or guidance; quarantines of employees, customers and suppliers in areas affected by the outbreak; and closures of businesses or manufacturing facilities that are critical to our business or our supply chain.
The COVID-19 pandemic could also adversely affect our liquidity and ability to access the capital markets. The Company’s credit ratings were downgraded earlier this year by three credit ratings agencies, all citing, among other things, the uncertainty in duration and impact of the COVID-19 outbreak on our business. Uncertainty regarding the duration of the COVID-19 pandemic may, for example, adversely impact our ability to raise additional capital, or require additional capital, or require additional reductions in capital expenditures that are otherwise needed, to support working capital or continuation of our Best of Both strategy. Additionally, government stimulus programs may not be available to the Company, its customers, or its suppliers, or may prove to be ineffective. Furthermore, in the event that the impact from the COVID-19 outbreak causes us to be unable to satisfy any of our financial covenants under the agreements governing our outstanding indebtedness, the availability of credit facilities may become limited, or we may be required to renegotiate such agreements on less favorable terms. If we are unable to access additional credit at the levels we require, or the cost of credit is greater than expected, it could materially adversely affect our operating results.
COVID-19 could negatively affect our internal controls over financial reporting as a portion of our workforce is required to work from home and therefore new processes, procedures, and controls could be required to respond to changes in our business environment.
The Company may be susceptible to increased litigation related to, among other things, the financial impacts of the pandemic on its business, its ability to meet contractual obligations due to the pandemic, employment practices or policies adopted during the health crisis, or litigation related to individuals contracting COVID-19 as result of alleged exposures on Company premises.
44
In addition, the COVID-19 outbreak has significantly increased economic and demand uncertainty. The current outbreak and continued spread of COVID-19 has caused a global recession, which has had a further material adverse impact on our results of operations, financial condition and cash flows. The full extent to which the COVID-19 outbreak will affect our operations, and the steel industry generally, remains highly uncertain and will ultimately depend on future developments which cannot be predicted at this time, including, but not limited to, the duration, severity, speed and scope of the outbreak, the length of time required for demand to return and normal economic and operating conditions to resume. The impact of the COVID-19 outbreak may also have the effect of exacerbating many of the other risks described herein.
Our operational footprint, unplanned equipment outages and other unforeseen disruptions may adversely impact our results of operations.
U. S. Steel has adjusted its operating configuration in response to market conditions, including the COVID-19 pandemic, oil and gas industry disruption, global overcapacity and unfairly traded imports, by idling and restarting production at certain facilities. Due to our operational footprint, the Company may not be able to respond in an efficient manner to fully realize the benefits from changing market conditions that are favorable to integrated steel producers.producers or most efficiently mitigate the negative impacts of such changes.
Our steel production depends on the operation of critical structures and pieces of equipment, such as blast furnaces, electric arc furnaces, steel shops, casters, hot strip mills and various structures and operations, including information technology systems, that support them. While we are implementing initiatives focused on proactive maintenance of key machinery and equipment at our production facilities, we may experience prolonged periods of reduced production and increased maintenance and repair costs due to equipment failures at our facilities or those of our key suppliers.
It is also possible that operations may be disrupted due to other unforeseen circumstances such as power outages, explosions, fires, floods, pandemics, terrorism, accidents, severe weather conditions, and changes in U.S., European Union and other foreign tariffs, free trade agreements, trade regulations, laws, and policies. We are also exposed to similar risks involving major customers and suppliers such as force majeure events of raw materials suppliers that have occurred and may occur in the future. Availability of raw materials and delivery of products to customers could be affected by logistical disruptions, such as shortages of barges, ocean vessels, rail cars or trucks, or unavailability of rail lines or of the locks on the Great Lakes or other bodies of water. To the extent that lost production could not be compensated for at unaffected facilities and depending on the length of the outage, our sales and our unit production costs could be adversely affected.
U. S. Steel continues to incur certain costs when production capacity is idled, increased costs to resume production at idled facilities, or costs to idle facilities.
Our decisions concerning which facilities to operate and at what levels are made based upon our customers’ orders for products as well as the capabilities and cost performance of our locations. During periods of depressed market conditions, we may concentrate production operations at several plant locations and not operate others in response to customer demand, and as a result we will incur idle facility [and carrying] costs.
When we restart idled facilities, we incur certain costs to replenish raw material inventories, prepare the previously idled facilities for operation, perform the required repair and maintenance activities and prepare employees to return to work safely and resume production responsibilities. The amount of any such costs can be material, depending on
a variety of factors, such as the period of time during which the facilities remained idle, necessary repairs and available employees, and is difficult to project.
U. S. Steel has been and continues to be adversely affected by unfairly traded imports and global overcapacity, which may cause downward pricing pressure, lost sales and revenue, market share, decreased production, investment, and profitability.
Currently, global steel production capacity significantly exceeds global steel demand, which adversely affects U.S. and global steel prices. Global overcapacity continues to result in high levels of dumped and subsidized steel imports into the markets we serve. Domestic and international trade laws provide mechanisms to address the injury caused by such imports to domestic industries. Excessive imports of steel products into the U.S. has resulted and may continue to result in downward pricing pressure and lost sales and revenue, which adversely impacts our business, results of operations, financial condition and cash flows. Additional planned capacity in the U.S. could increase this overcapacity and further negatively impact U.S. steel prices.
Though U. S. Steel currently benefits from 54 U.S. antidumping and countervailing duty (AD/CVD) orders and 11 European Union (EU) AD/CVD orders, petitions for trade relief are not always successful or effective. When received, such relief is generally subject to periodic reviews and challenges, which can result in revocation of the AD/CVD order or reduction of the AD/CVD duties. There can be no assurance that any relief will be obtained or continued in the future or that such relief will adequately combat unfairly traded imports.
The current Section 232 national security tariffs and quotas on steel imports into the U.S. also provide U. S. Steel and other domestic steel producers relief from imports. Likewise, the EU’s retaliatory 25 percent tariffs on certain U.S. steel imports and safeguard measures on steel provide USSE and other European steel producers some degree of relief from imports. The scope
45
and duration of the Section 232 tariffs and quotas, the outcome of outstanding product exclusion requests before the U.S. Department of Commerce,DOC and the EU retaliatory and safeguard relief is not known.
Faced with significant imports into the U.S. and overcapacity in various markets, we will continue to evaluate potential strategic and organizational opportunities, which may include exiting lines of business and the sale of certain assets, temporary shutdowns or closures of facilities.
We face risks relating to changes in U.S. and foreign tariffs, trade agreements, laws, and policies
Through a series of Presidential Proclamations pursuant to Section 232 of the Trade Expansion Act of 1962, U.S. imports of certain steel products are subject to a 25 percent tariff, except for imports from: (1) Argentina, Brazil, and Korea, which are subject to restrictive quotas; (2) Canada and Mexico, which are currently not subject to either tariffs or quotas, but tariffs could be re-imposed on surging product groups after consultations; and (3) Australia, which is not subject to tariffs, quotas or an anti-surge mechanism. The Section 232 national security tariffs and quotas on steel imports currently provide U. S. Steel and other domestic steel producers critical relief from imports. With no scheduled end date, the scope and duration of the Section 232 relief is not known. Further, the U.S. government may negotiate alternatives to the Section 232 tariffs for certain countries. The U.S. Department of CommerceDOC continues to administer its Section 232 product exclusion process. The Section 232 action on aluminum and steel imports, potential Section 232 action on other products, and recent and potential additional U.S. import tariffs imposed under Section 301 of the Trade Act of 1974 have resulted in the possibility of tariffs being applied to materials and/or items we purchase from subject countries or regions as part of our manufacturing process, and may result in additional, retaliatory action by foreign governments on U.S. exports of a range of products, including products produced by our customers. In February 2019, the European Commission imposed a definitive safeguard on global steel imports in the form of tariff rate quotas (TRQs; 25 percent tariffs on steel imports that exceed the quota) effective through June 2021. All of the above factors present a degree of uncertainty to our financial and operational performance, our customers, and overall economic conditions, all of which could impact steel demand and our performance.
The steel industry, as well as the industries of our customers and suppliers upon whom we are reliant, is highly cyclical, which may have an adverse effect on our results of operations.
Steel consumption is highly cyclical and generally follows economic and industrial conditions both worldwide and in regional markets. Price fluctuations are impacted by the timing, magnitude and duration of these cycles, and are difficult to predict. This volatility makes it difficult to balance the procurement of raw materials and energy with global steel prices, our steel production and customer product demand. U. S. Steel has implemented strategic initiatives to produce more stable and consistent results, even during periods of economic and market downturns, but this may not be enough to mitigate the effect that the volatility inherent in the steel industry has on our results of operations.
Additionally, our business is reliant on certain other industries that are cyclical in nature. We sell to the automotive, service center, converter, energy and appliance and construction-related industries. Some of these industries exhibit a great deal of sensitivity to general economic conditions and may also face meaningful fluctuations in demand based on a number of factors outside of our control, including regulatory factors, economic conditions, and raw material and energy costs. As a result, downturns or volatility in any of the markets we serve could adversely affect our financial position, results of operations and cash flows.
We face increased competition from alternative materials and risks concerning innovation, new technologies, products and increasing customer requirements.
As a result of increasingly stringent regulatory requirements, designers, engineers and industrial manufacturers, especially those in the automotive industry, are increasing their use of lighter weight and alternative materials, such as aluminum, composites, plastics, and carbon fiber. Use of such materials could reduce the demand for steel products, which may reduce our profitability and cash flow.
Additionally, technologies such as direct iron reduction, EAF production, oxygen-coal injection and experimental technologies such as molten oxide electrolysis and hydrogen flash smelting may be more cost effective than our current production methods. However, we may not have sufficient capital to invest in such technologies and may incur difficulties adapting and fully integrating these technologies into our existing operations. We may also encounter production restrictions, or not realize the cost benefit from such capital intensive technology adaptations to our current production processes. Customers, such as those in the automotive industry, are demanding stronger and lighter products. Tubular customers are increasingly requesting pipe producers to supply connections and other ancillary parts as well as inspection and other services. We may not be successful in meeting these technological challenges.
Limited availability, or volatility in prices of raw materials, scrap and energy may constrain operating levels and reduce profit margins.
U. S. Steel and other steel producers have periodically faced problems obtaining sufficient raw materials and energy in a timely manner due to delays, defaults, severe weather conditions, or force majeure events, shortages or transportation problems (such
46
as shortages of barges, ore vessels, rail cars or trucks, or disruption of rail lines, waterways, or natural gas transmission lines), resulting in production curtailments. As a result, we may be exposed to risks concerning pricing and availability of raw materials and energy resources from third parties as well as logistics constraints moving our own raw materials and scrap to our plants. USSE purchases substantially all of its iron ore and coking coal requirements from outside sources. USSE is also dependent upon availability of natural gas produced in Russia and transported through Ukraine. Any curtailments or escalated costs may further reduce profit margins.
U. S. Steel has agreed, and may continue to agree, to purchase raw materials and energy at prices that have been, and may be, above future market prices or in greater volumes than required in the future. Additionally, any future decreases in iron ore, scrap, natural gas, electricity and oil prices may place downward pressure on steel prices. If steel prices decline, our profit margins on indexed contracts and spot business could be reduced.
Changes in the global economic environment and prolonged periods of slow economic growth could have an adverse effect on our industry and business, as well as those of our customers and suppliers.
Overall economic conditions in the U.S. and globally, including Europe, such as the disruption caused by the COVID-19 pandemic, significantly impact our business. Periods of economic downturn or continued uncertainty including the significant decline of market conditions in Europe, could result in difficulty increasing or maintaining our level of sales or profitability and we may experience an adverse effect on our business, results of operations, financial condition and cash flows.
Our U.S. operations are subject to economic conditions, including credit and capital market conditions, and political factors in the U.S., which if changed could negatively affect our results of operations, cash flows and liquidity. Political factors include, but are not limited to, taxation, inflation, increased regulation, limitations on exports of energy and raw materials, and trade remedies. Actions taken by the U.S. government could affect our results of operations, cash flows and liquidity.
USSE is subject to economic conditions and political factors associated with the EU, Slovakia and neighboring countries, and the euro currency. Changes in any of these economic conditions or political factors could negatively affect our results of operations, cash flows and liquidity. Political factors include, but are not limited to, taxation, nationalization, inflation, government instability, civil unrest, increased regulation and quotas, tariffs and other protectionist measures.
Our Flat-Rolled and Tubular segments may also be particularly impacted by unfavorable market conditions in the oil and gas industries. DeclinesThe oil and gas industry, which is one of our significant end markets, has been experiencing a significant amount of disruption and has been experiencing oversupply at a time of declining demand, resulting in a decline in profitability. Our Tubular operations support the oil prices, and gas industry, and therefore the correlating reductionindustry's decline has led to a significant decline in drilling activity, as well as high levels of inventory in the supply chain, may reduce demand for our Tubular products. Continued low demand for Tubular products will make it difficult to fully utilize our new EAF which produces tubular products and could have adverse impacts onrounds for our results of operations and cash flows.Fairfield, Alabama pipe mill (Fairfield EAF). Lower utilization rates will make it difficult to realize the $90/ton cost savings we anticipated for the seamless pipe from the Fairfield EAF.
Additionally, we are also exposed to risks associated with the business success and creditworthiness of our suppliers and customers. If our customers or suppliers are negatively impacted by a slowdown in economic markets, we may face the reduction, delay or cancellation of customer orders, delays or interruptions of the supply of raw materials, and bankruptcy of customers or suppliers. The occurrence of any of these events may adversely affect our business, results of operations, financial condition and cash flows.
Shortages of skilled labor, increased labor costs, or our failure to attract and retain other highly qualified personnel in the future could disrupt our operations and adversely affect our financial results.
We depend on skilled labor for the manufacture of our products. Our continued success depends on the active participation of our key employees. Some of our facilities are located in areas where demand for skilled labor often exceeds supply. Shortages of some types of skilled labor, such as electricians and qualified maintenance technicians, could restrict our ability to maintain or increase production rates, lead to production inefficiencies and increase our labor costs. Our shift to the "bestBest of both"Both strategy would also require a set of job skills that is different from our prior needs. The competitive nature of the labor markets in which we operate, the cyclical nature of the steel industry and the resulting employment needs increase our risk of not being able to recruit, train and retain the employees we require at efficient costs and on reasonable terms, particularly when the economy expands, production rates are high or competition for such skilled labor increases. Many companies, including U. S. Steel, have had employee lay-offs as a result of reduced business activities in an industry downturn. The loss of our key people or our inability to attract new key employees could adversely affect our operations. Additionally, layoffs or other adverse actions could result in an adverse relationship with our workforce or third party labor providers. If we are unable to recruit, train and retain adequate numbers of qualified employees and third party labor providers on a timely basis or at a reasonable cost or on reasonable terms, our business and results of operations could be adversely affected.
Our 2018 Labor Agreements with the USW contain provisions that may impact certain business activities.
Our 2018 Labor Agreements with the USW contain provisions that grant the USW a limited right to bid on the Company’s sale of a facility (or sale of a controlling interest in an entity owning a facility) covered by the 2018 Labor Agreements, excluding public equity offerings and/or the transfer of assets between U. S. Steel and its wholly owned subsidiaries. These agreements also
47
require a minimum level of capital expenditures (subject to approval of the Board of Directors) to maintain the competitive status of the covered facilities, and place certain limited restrictions on our ability to replace product produced at a covered facility with product produced at other than Company facilities or affiliates or U.S. or Canadian facilities with employee protections similar to the protections found in the 2018 Labor Agreements when the Company is operating covered facilities below capacity. TheseThe provisions in the 2018 Labor Agreements, as well as current or future proposed legislation or regulations, could favorably or unfavorably impact certain business activities including pricing, operating costs, margins, and/or our competitiveness in the marketplace.
A failure of our information technology infrastructure and cybersecurity threats may adversely affect our business operations.
Despite efforts to protect confidential business information, personal data of employees and contractors, and the control systems of manufacturing plants, U. S. Steel systems and those of our third-party service providers have been and may be subject to cyber-attacks or system breaches. System breaches can lead to theft, unauthorized disclosure, modification or destruction of proprietary business data, personally identifiable information (PII), or other sensitive information, and to defective products, production downtime and damage to production assets, with a resulting impact to our reputation, competitiveness and operations. We have experienced cybersecurity attacks that have resulted in unauthorized persons gaining access to our information technology systems and networks, and we could in the future experience similar attacks. To date, no cybersecurity attack has had a material impact on our financial condition, results of operations or liquidity.
While the Company continually works to safeguard our systems and mitigate potential risks, there can be no assurance that such actions will be sufficient to prevent cyber-attacks or security breaches or mitigate all potential risks to our systems, networks and data. The potential consequences of a material cybersecurity attack include reputational damage, investigations and/or adverse proceedings with government regulators or enforcement agencies, litigation with third parties, disruption to our systems, unauthorized release of confidential, personally
identifiable, or otherwise protected information, corruption of data, diminution in the value of our investment in research, development and engineering, and increased cybersecurity protection and remediation costs, which in turn could adversely affect our competitiveness, results of operations and financial condition. The amount of insurance coverage we maintain may be inadequate to cover claims or liabilities resulting from a cybersecurity attack.
We depend on third parties for transportation services, and increases in costs or the availability of transportation may adversely affect our business and operations.
Our business depends on the transportation of a large number of products, both domestically and internationally. We rely primarily on third parties for transportation of the products we manufacture as well as delivery of our raw materials. Any increase in the cost of the transportation of our raw materials or products, as a result of increases in fuel or labor costs, higher demand for logistics services, consolidation in the transportation industry or otherwise, may adversely affect our results of operations as we may not be able to pass such cost increases on to our customers.
If any of these providers were to fail to deliver raw materials to us in a timely manner, we may be unable to manufacture and deliver our products in response to customer demand. In addition, if any of these third parties were to cease operations or cease doing business with us, we may be unable to replace them at a reasonable cost.
In addition, such failure of a third-party transportation provider could harm our reputation, negatively affect our customer relationships and have a material adverse effect on our financial position and results of operations.
Financial Risk Factors
Our business requires substantial expenditures for debt service obligations, capital investments, operating leases and maintenance that we may be unable to fund.
We have approximately $3.6$5.1 billion of total debt (see Note 17 to the Consolidated Financial Statements), including $600$500 million of outstanding borrowings under our Fifth Amended and Restated Credit Agreement and $393$368 million of outstanding borrowings under our USSK Credit Agreement. After the closing of the Big River Steel purchase on January 15, 2021, additional indebtedness of approximately $1.9 billion will be included on our Consolidated Balance Sheet (See Note 28 to the Consolidated Financial Statements). If our cash flows and capital resources are insufficient to fund our debt service obligations, we may face substantial liquidity problems and may be forced to reduce or delay investments and capital expenditures, terminate strategic projects, or to dispose of material assets or operations or issue additional debt or equity. We may not be able to take such actions, if necessary, on commercially reasonable terms or at all. Our inability to
generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results or operations and may place us at a competitive disadvantage with competitors who may have less indebtedness and other obligations or greater access to financing.
Our ability to service or refinance our debt or fund investments and capital expenditures required to maintain or expand our business operations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We
48
may not be able to maintain a level of cash flows from operating activities sufficient to permit us to satisfy our liquidity needs. In addition, the availability under our Fifth Amended and Restated Credit Agreement may be reduced if we have insufficient collateral, or if we do not meet a customary fixed charge coverage test. Availability under the USSK Credit Agreement could be limited if USSK does not meet certain financial covenants. Likewise, availability under Big River Steel LLC's asset-based revolving credit facility (the "BRS ABL Facility") could be limited if Big River Steel LLC and its subsidiaries do not meet certain financial covenants. Furthermore, the agreements governing the BRS ABL Facility and other outstanding indebtedness of Big River Steel LLC and its subsidiaries limit their ability, subject to certain exceptions, to pay dividends or distributions or make other restricted payments, such that we may not be able to access the cash generated by these recently acquired subsidiaries to fund our other expenditures. Our ability to meet such covenants or other restrictions can be affected by events beyond our control. If a default were to occur, the lenders could elect to declare all amounts then outstanding to be immediately due and payable and terminate all commitments to extend further credit. See the Liquidity section in "Item 7. Management's Discussion and Analysis"Analysis of Financial Condition and Results of Operations" and Note 17 to the Consolidated Financial Statements for further details.
We may not be able to generate sufficient cash to service all of our debt, and may be forced to take other actions to satisfy our obligations under our debt, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control, such as the disruption caused by the COVID-19 pandemic and the disruption in the oil and gas industry. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our debt.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures, terminate strategic projects or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our debt. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The Credit Facility Agreement governing the Fifth Amended and Restated Credit Agreement, the documents governing the USSK Credit Facilities, the documents governing the Export-Import Credit Agreement and the indentures governing our existing senior unsecured notes and our 2025 Senior Secured Notes may restrict our ability to dispose of assets and may also restrict our ability to raise debt or equity capital to be used to repay other debt when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our debt on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations.
If we cannot make scheduled payments on our debt, we will be in default and holders of our senior unsecured notes and our 2025 Senior Secured Notes could declare all outstanding principal and interest to be due and payable, the lenders under the Fifth Amended and Restated Credit Agreement, the USSK Credit Facilities, the Export-Import Credit Agreement and the Export Credit Facility could terminate their commitments to loan money, accelerate full repayment of any or all amounts outstanding (which may result in the cross acceleration of certain of our other debt obligations) and the lenders could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation. All of these events would materially and adversely affect our financial position and results of operations.
Based on the most recent four quarters as of December 31, 2020, we have not met the fixed charge negative covenant test under our Credit Facility Agreement, and accordingly, the amount available to the Company under this facility was reduced by $200 million. In addition, since the value of our inventory and trade accounts receivable less specified reserves calculated in accordance with the Credit Facility Agreement do not support the full amount of the facility at December 31, 2020, the amount available to the Company under this facility was further reduced by $351 million. As of December 31, 2020, the availability under the Credit Facility Agreement was $944 million.
Our business and execution of our strategic priorities require us to raise capital which could be difficult if we face depressed market conditions, lower earnings or credit rating downgrades by ratings agencies.
Executing on our strategic priorities will require us to raise additional capital, which we have sought and may seek through debt financing or the public or private sale of debt or equity securities, or a combination of the foregoing. We cannot guarantee that we will be able to secure sources of financing at a particular time or on particular or favorable terms. Additionally, we may seek to raise funds through the divestiture or monetization of certain non-core assets. We cannot be assured that we will be able to find an attractive or acceptable partner for such transactions, or if we do, that we will be able to reach agreement on favorable or mutually satisfactory terms.
Ratings agencies could downgrade our ratings either due to factors specific to our business, a prolonged cyclical downturn in the steel industry, macroeconomic trends such as global or regional recessions and trends in credit and capital markets more generally. Our credit ratings were downgraded in 2020 by three credit ratings agencies, all citing among other things, the uncertainty in duration and impact of the COVID-19 outbreak on our business. Recently, Moody's withdrew Big River Steel's
49
corporate family rating given our acquisition of the remaining interest in Big River Steel, and S&P lowered Big River Steel's credit rating to be in line with our corporate rating. Ratings agencies also may lower, suspend or withdraw ratings on the outstanding securities of U. S. Steel or Big River Steel. For example, Moody's recently downgraded the rating of our 2025 Senior Secured Notes to reflect the addition of Big River Steel's secured debt in our consolidated capital structure, and S&P recently lowered its ratings on Big River Steel's senior secured debt. Any lowering, suspension or withdrawal of such ratings may have an adverse effect on the market prices of such securities.
Any decline in our operating results or downgrades in our credit ratings may make raising capital or entering into any business transaction more difficult, lead to reductions in the availability of credit or increased cost of credit, adversely affect the terms of future borrowings, and may limit our ability to take advantage of potential business opportunities.opportunities, and lead to reductions in the availability of credit.
We have significant retiree health care, retiree life insurance and pension plan costs, which may negatively affect our results of operations and cash flows.
We maintain retiree health care and life insurance and defined benefit pension plans covering many of our domestic employees and former employees upon their retirement. Some of these benefit plans are not fully funded, and thus will require cash funding in future years. Minimum contributions to domestic qualified pension plans (other than contributions to the Steelworkers Pension Trust (SPT) described below) are regulated under the Employee Retirement Income Security Act of 1974 (ERISA) and the Pension Protection Act of 2006 (PPA).
The level of cash funding for our defined benefit pension plans in future years depends upon various factors, including voluntary contributions that we may make, future pension plan asset performance, actual interest rates under the law, and the impactsimpact of business acquisitions or divestitures, union negotiated benefit changes and future government regulations, many of which are not within our control. In addition, assets held by the trusts for our pension plan and our trust for retiree health care and life insurance benefits are subject to the risks, uncertainties and variability of the financial markets. Future funding requirements could also be materially affected by differences between expected and actual returns on plan assets, actuarial data and assumptions relating to plan participants, the discount rate used to measure the pension obligations and changes to regulatory funding requirements. See "Item 7. Management's Discussion and Analysis"Analysis of Financial Condition and Results of Operations" and Note 18 to the Consolidated Financial Statements for a discussion of assumptions and further information associated with these benefit plans.
U. S. Steel contributes to a domestic multiemployer defined benefit pension plan, the SPT, for USW-represented employees formerly employed by National Steel and represented employees hired after May 2003. We have legal requirements for future funding of this plan should the SPT become significantly underfunded or we decide to withdraw from the plan. Either of these scenarios may negatively impact our future cash flows. The 2018 Labor Agreements increased the contribution rate for most steelworker employees. Collectively bargained company contributions to the plan could increase further as a result of future changes agreed to by the Company and the USW.
The accounting treatment of equity method investments and other long-lived assets could result in future asset impairments, which would reduce our earnings.
We periodically test our equity method investments and other long-lived assets to determine whether their estimated fair value is less than their value recorded on our balance sheet. The results of this testing for potential impairment may be adversely affected by uncertain market conditions for the global steel industry and general economic conditions. If we determine that the fair value of any of these assets is less than the value recorded on our balance sheet, and, in the case of equity method investments the decline is other than temporary, we would likely incur a non-cash impairment loss that would negatively impact our results of operations. There can be no assurances that continued market dynamics or other factors may not result in future impairment charges.
We are subject to foreign currency risks, which may negatively impact our profitability and cash flows.
The financial condition and results of operations of USSE are reported in euros and then translated into U.S. dollars at the applicable exchange rate for inclusion in our financial statements. The appreciation of the U.S. dollar against the euro negatively affects our Consolidated Results of Operations. International cash requirements have been and in the future may be funded by intercompany loans, which may create intercompany monetary assets and liabilities in currencies other than the functional currencies of the entities involved, which can have a non-cash impact on income when they are remeasured at the end of each period.
In addition, foreign producers, including foreign producers of subsidized or unfairly traded steel with foreign currency denominated costs may gain additional competitive advantages or target our home markets if the U.S. dollar or euro exchange rates strengthen relative to those producers' currencies. Volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies could have a significant impact on our reported financial results and condition.
50
Financial regulatory frameworks introduced by U.S. and EU regulators may limit our financial flexibility or increase our costs.
We use swaps, forward contracts and similar agreements to mitigate our exposure to volatility, which entails a variety of risks. The Commodity Future Trading Commission’s Dodd Frank and the EU’s European Market Infrastructure Regulation and other government agencies' regulatory frameworks can limit the Company’s ability to hedge interest rate, foreign exchange (FX), or commodity pricing exposures, which could expose us to increased economic risk. These frameworks may introduce additional compliance costs or liquidity requirements. Some counterparties may cease hedging as a result of increased regulatory cost burdens, which in turn may reduce U. S. Steel’s ability to hedge its interest rate, FX, or commodity exposures.
We are a party to various legal proceedings, the resolution of which could negatively affect our profitability and cash flows in a particular period.
We are involved at any given time in various litigation matters, including administrative and regulatory proceedings, governmental investigations, environmental matters, and commercial disputes. Our profitability and cash flows in a particular period could be negatively affected by an adverse ruling or settlement in any legal proceeding or investigation that is pending against us or filed against us in the future.investigation. While we believe that we have taken appropriate actions to mitigate and reduce these risks, due to the nature of our operations, these risks will continue to exist and additional legal proceedings or investigations may arise from time to time.
Additionally, we may be subject to product liability claims that may have an adverse effect on our financial position, results of operations and cash flows. Events such as well failures, line pipe leaks, blowouts, bursts, fires and product recalls could result in claims that our products or services were defective and caused death, personal injury, property damage or environmental pollution. The insurance we maintain may not be adequate, available to protect us in the event of a claim, or its coverage may be limited, canceled or otherwise terminated, or the amount of our insurance may be less than the related impact on our enterprise value after a loss. We establish reserves based on our assessment of contingencies, including contingencies for claims asserted against us in connection with litigation, arbitrations and environmental issues. Adverse developments in litigation, arbitrations, environmental issues or other legal proceedings may affect our assessment and estimates of the loss contingency recorded as a reserve and require us to make payments in excess of our reserves, which could negatively affect our operations, financial results and cash flows. See "Item 3. Legal Proceedings" and Note 26 to the Consolidated Financial Statements for further details.
Regulatory Risk Factors
Compliance with existing and new environmental regulations, environmental permitting and approval requirements may result in delays or other adverse impacts on planned projects, our results of operations and cash flows.
Steel producers in the U.S., along with their customers and suppliers, are subject to numerous federal, state and local laws and regulations relating to the protection of the environment. These laws and regulations concern the generation, storage, transportation, disposal, emission or discharge of pollutants, contaminants and hazardous substances into the environment, the reporting of such matters, and the general protection of public health and safety, natural resources, wildlife and the environment. Steel producers in the EU are subject to similar laws. These laws and regulations continue to evolve and are becoming increasingly stringent. The ultimate impact of complying with such laws and regulations is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision. Additionally, compliance with certain of these laws and regulations, such as the CAA and similar state and local requirements, governing SO2 and otherair emissions, could result in substantially increased capital requirements and operating costs.costs and could change the equipment or facilities we operate. Compliance with current or future regulations could entail substantial costs for emission based systems and could have a negative impact on our results of operations and cash flows. Failure to comply with the requirements may result in administrative, civil and criminal penalties, revocation of permits to conduct business or construct certain facilities, substantial fines or sanctions, enforcement actions (including orders limiting our operations or requiring corrective measures), natural resource damages claims, cleanup and closure costs, and third-party claims for property damage and personal injury as a result of violations of, or liabilities under, environmental laws, regulations, codes and common law. The amount and timing of environmental expenditures is difficult to predict, and, in some cases, liability may be imposed without regard to contribution or to whether we knew of, or caused, the release of hazardous substances.
In addition, the Company must obtain, maintain and comply with numerous permits, leases, approvals, consents and certificates from various governmental authorities in connection with the construction and operation of new production facilities or modifications to existing facilities.facilities. In connection with such activities, the Company may need to make significant capital and operating expenditures to detect, repair and/or control air emissions, to control water discharges or to perform certain corrective actions to meet the conditions of the permits issued pursuant to applicable environmental laws and regulations.
There can be no assurance that future approvals, licenses and permits will be granted or that we will be able to maintain and renew the approvals, licenses and permits we currently hold. Failure to do so could have a material adverse effect on our results of operations and cash flows. Furthermore, compliance with the environmental permitting and approval requirements may be costly and time consuming and could result in delays or other adverse impacts on planned projects, our results of operations and cash flows.
51
We have significant environmental remediation costs that negatively affect our results of operations and cash flows.
Some of U. S. Steel's current and former facilities were in operation before 1900. Hazardous materials associated with those facilities have been and may continue to be released at current or former operating sites or delivered to sites operated by third parties.
U. S. Steel is involved in numerous remediation projects at currently operating facilities, facilities that have been closed or sold to unrelated parties and other sites where material generated by U. S. Steel was deposited. In addition, there are numerous other former operating or disposal sites that could become the subject of remediation, which may negatively affect our results of operations and cash flows.
Increasing pressure to reduce greenhouse gas (GHG) emissions from steelmaking operations to comply with EUnew regulations as well as societalstakeholder expectations could increase costs to manufacture future materials or reduce the amount of materials being manufactured.
Iron and steel producers around the world are facing mounting pressure to reduce greenhouse gas emissions from operations. The majority of greenhouse gas emissions from the production of iron and steel are caused by the combustion of fossil fuels, the use of electrical energy, and the use of coal, lime, and iron ore as feedstock. The two main production processes are the integrated route of blast furnace ironmaking in combination with basic oxygen furnace steelmaking (BOF) and the alternative route of electric arc furnace steelmaking. Both routes generate greenhouse gas emissions with the latter process, involving the electric arc melting of a majority of steel scrap, generating less than half that, or less, of the traditional integrated steelmaking process. Federal, state and local governmental agencies within the United States may introduce regulatory changes in response to the potential impacts of climate change, including the introduction of carbon emissions limitations or trading mechanisms. Any such regulation regarding climate change and GHG emissions could impose significant costs on our operations and on the operations of our customers and suppliers, including increased energy, capital equipment, emissions controls, environmental monitoring and reporting and other costs in order to comply with current or future laws or regulations concerning climate change and GHG emissions. Any adopted future climate change and GHG regulations could negatively impact our ability, and that of our customers and suppliers, to compete with companies situated in areas not subject to or not complying with such limitations. Inconsistency of regulations may also change the attractiveness of the locations of some of the Company's assets and investments. In addition, changes in certain environmental regulations, including those that may impose output limitations or higher costs associated with climate change or greenhouse gas emissions, could substantially increase the cost of manufacturing and raw materials to us and other steel producers.
Additionally, the European Union has established aggressive CO2 reduction targets of 40% by 2030, against a 1990 baseline, and full carbon neutrality by 2050. As part of the European Green Deal the Commission proposed in September 2020 to raise the 2030 reduction target to at least 55% compared to 1990. The new target has still to be endorsed by the European Parliament. An emission trading system (ETS) was established to encourage compliance with set emissions reduction targets. These aggressive targets require drastic measures within the steel industry to comply. The price of CO2 emission allowances is currently at 2433 euro per metric ton and forecasts call for potential price increase to 40 euro per metric ton. The transition to EAF technology, as well as incremental gains in energy reduction, use of renewable energy and continued asset and process improvements (including EAF steelmaking), are expected to reduce our GHG footprint. However, the development of breakthrough technologies areis likely required to continue the path of low to no carbon footprint in the steel industry. Implementation of new technologies will most likely require significant amounts of capital and an abundant source of low costlow-cost hydrogen and/or green power, most likely leading to an increase in the cost of future steelmaking. In addition, the cost of emission allowances is forecast to increase, along with the number of allowances decreasing in the next several years.
New and changing data privacy laws and cross-border transfer requirements could have a negative impact on our business and operations.
Our business depends on the processing and transfer of data between our affiliated entities, to and from our business partners, and with third-party service providers, which may be subject to data privacy laws and cross-border transfer restrictions. In North America and Europe, new legislation and changes to the requirements or applicability of existing laws, as well as evolving standards and judicial and regulatory interpretations of such laws, may impact U. S. Steel’s ability to effectively process and transfer data both within the United States and across borders in support of our business operations and/or keep pace with specific requirements regarding safeguarding and handling personal information. While U. S. Steel takes steps to comply with these legal requirements, non-compliance could lead to possible administrative, civil, or criminal liability, as well as reputational harm to the Company and its employees. For example, the European Union’s General Data Protection Regulation (GDPR), which went into effect in May 2018, created a range of new compliance obligations for subject companies and increases financial penalties for non-compliance. The costs of compliance with privacy laws such as the GDPR and the potential for fines and penalties in the event of a breach may have a negative impact on our business and operations.
52
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
U. S. Steel and its predecessors have owned their properties for many years with no material adverse title claims asserted. In the case of Great Lakes Works, Granite City Works, the Midwest Plant and Keetac iron ore operations, U. S. Steel or its subsidiaries are the beneficiaries of bankruptcy laws and orders providing that properties are held free and clear of past liens and liabilities. In addition, U. S. Steel or its predecessors obtained title insurance, local counsel opinions or similar protections when significant properties were initially acquired or since acquisition.
At the Midwest Plant in Indiana, U. S. Steel has a supply agreement for various utility services with a company that owns a cogeneration facility located on U. S. Steel property. The Midwest Plant agreement expires in 2028.
U. S. Steel leases its headquarters office space in Pittsburgh, Pennsylvania.
For property, plant and equipment additions, including finance leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, – Financial Condition, Cash FlowsLiquidity and Liquidity – Cash Flows”Capital Resources” and Note 13 to the Consolidated Financial Statements.
Item 3. LEGAL PROCEEDINGS
General Litigation
On January 22, 2021 NLMK Pennsylvania, LLC and NLMK Indiana, LLC (NLMK) filed a Complaint in the Court of Common Pleas of Allegheny County, Pennsylvania against the Company. The Complaint alleges that the Company made misrepresentations to the U. S. Department of Commerce regarding NLMK’s requests to be excluded from tariffs assessed on steel slabs imported into the United States pursuant to the March 2018 Section 232 Presidential Order imposing tariffs. NLMK claims over $100 million in compensatory and other damages. The Company is reviewing the Complaint and intends to vigorously defend the matter.
On April 11, 2017, there was a process waste waterwaste-water release at our Midwest Plant (Midwest) in Portage, Indiana, that impacted a water outfall that discharges to Burns Waterway near Lake Michigan. U. S. Steel identified the source of the release and made the necessary repairs. We determined that all repairs were safely working as intended and, on April 14, 2017, resumed operations in a controlled, phased and highly monitored approach with extensive input from participating government agencies. The Company has since implemented substantial operational, process and notification improvements at Midwest. The Company has been presented with cost reimbursements, loss of use and penalty requests from the involved governmental agencies. In January of 2018, The Surfrider Foundation and the City of Chicago initiated suits in the Northern District of Indiana alleging Clean Water Act (CWA) and Permitpermit violations at Midwest. On April 2, 2018, the U.S. EPA and the State of Indiana initiated a separate action against the Company and lodged a Consent Decree negotiated between U. S. Steel and the relevant governmental agencies consisting of all material terms to resolve the CWA and National Pollutant Discharge Elimination System (NPDES) violations at the Midwest Plant. A public comment period for the Consent Decree ensued. The suits that the Surfrider Foundation and the City of Chicago filed are currently stayed. The Surfrider Foundation and the City of Chicago also filed motions, which were granted, to intervene in the Consent Decree case. The United States Department of Justice (DOJ) filed a revised Consent Decree and a motion with the Courtcourt to enter the Consent Decree as final on November 20, 2019. Surfrider Foundation, City of Chicago and other non-governmental organizations filed objections to the revised Consent Decree. The DOJ and U. S. Steel made filings in support of the revised Consent Decree.
On November 30, 2018, the Minnesota Pollution Control Agency (MPCA) issued a new Water Discharge Permit for the Minntac Tailings Basin waters. The Permitpermit contains new sulfate limitations applicable to water in the Tailings Basin and groundwater flowing from U. S. Steel’s property. The MPCA also acted on the same date, denying the Company’s requests for variances from ground and surface water standards and request for a contested case hearing. U. S. Steel filed appeals with the Minnesota Court of Appeals challenging the actions taken by the MPCA. Separate appeals were filed by a Minnesota Native American Tribe (Fond du Lac Band) and a nonprofit environmental group (Water Legacy).
All cases were consolidated. On December 9, 2019, the courtCourt issued a favorable ruling to U. S. Steel, removing the sulfate limitations for the Tailings Basin and groundwater. The opposing parties filed appeals with the Minnesota Supreme Court on January 8, 2020 which is currently being briefed.were accepted by that Court. On February 10, 2021 the Minnesota Supreme Court reversed the Court of Appeals’ decision regarding sulfate limitations and remanded the case for further proceedings, including a determination on the Company’s requests for variances.
On October 2, 2017, an Amended Shareholder Class Action Complaint was filed in Federalthe United States District Court infor the Western District of Pennsylvania consolidating previously-filed actions. Separately, five related shareholder derivative lawsuits were filed in State and Federal courts in Pittsburgh, Pennsylvania and the Delaware Court of Chancery. The underlying consolidated class action lawsuit alleges that U. S. Steel, certain current and former officers, an upper level manager of the Company and the financial underwriters who participated in the August 2016 secondary public offering of the Company's common stock (collectively, Defendants) violated federal securities laws in making false statements and/or failing to discover and disclose material information regarding the financial condition of the Company. The lawsuit claims that this conduct caused a
53
prospective class of plaintiffs to sustain damages during the period from January 27, 2016 to April 25, 2017 as a result of the prospective class purchasing the Company's common stock at artificially inflated prices and/or suffering losses when the price of the common stock dropped. The derivative lawsuits generally make the same allegations against the same officers and also allege that certain current and former members of the Board of Directors failed to exercise appropriate control and oversight over the Company and were unjustly compensated. The plaintiffs seek to recover losses that were allegedly sustained. The class action Defendants moved to dismiss plaintiffs’ claims. On September 29, 2018 the Court ruled on those motions granting them in part and denying them in part. On March 18, 2019, the plaintiffs withdrew the claims against the Defendants related to the 2016 secondary offering. As a result, the underwriters are no longer parties to the case. The Company and the individual defendants are vigorously defending the remaining claims. On December 31, 2019, the Court granted Plaintiffs’ motion to certify the proceeding as a class action. The Company is pursuing anCompany's appeal of that decision.
decision has been denied by the Third Circuit Court of Appeals and the class has been notified. Discovery is proceeding.
Asbestos Litigation
| Period ended | Opening Number of Claims | Claims Dismissed, Settled and Resolved (a) | New Claims | Closing Number of Claims | ||||
| December 31, 2017 | 3,340 | 275 | 250 | 3,315 | ||||
| December 31, 2018 | 3,315 | 1,285 | 290 | 2,320 | ||||
| December 31, 2019 | 2,320 | 195 | 265 | 2,390 | ||||
ENVIRONMENTAL PROCEEDINGS
The following is a summary of the proceedings of U. S. Steel that were pending or contemplated as of December 31, 2019,2020, under federal and state environmental laws.laws, and which U. S. Steel reasonably believes may result in monetary sanctions of at least $1 million (the threshold chosen by U. S. Steel as permitted by Item 103 of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended). Information about specific sites where U. S. Steel is or has been engaged in significant clean up or remediation activities is also summarized below. Except as described herein, it is not possible to accurately predict the ultimate outcome of these matters.
CERCLA Remediation Sites
Claims under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) have been raised with respect to the cleanup of various waste disposal and other sites. Under CERCLA, potentially responsible parties (PRPs) for a site include current owners and operators, past owners and operators at the time of disposal, persons who arranged for disposal of a hazardous substance at a site, and persons who transported a hazardous substance to a site. CERCLA imposes strict and joint and several liabilities. Because of various factors, including the
ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques, and the amount of damages and cleanup costs and the time period during which such costs may be incurred, we are unable to reasonably estimate U. S. Steel’s ultimate liabilities under CERCLA.
As of December 31, 2019,2020, U. S. Steel has received information requests or been identified as a PRP at a total of sevenfive CERCLA sites, three of which have liabilities that have not been resolved. Based on currently available information, which is in many cases preliminary and incomplete, management believes that U. S. Steel’s liability for CERCLA cleanup and remediation costs at the other fourtwo sites will be between $100,000 and $1 million and $5 million for threeone of the sites, and over $5 million for one site as described below.
Duluth Works
The former U. S. Steel Duluth Works site was placed on the National Priorities List under CERCLA in 1983 and on the State of Minnesota’s Superfund list in 1984. Liability for environmental remediation at the site is governed by a Response Order by Consent executed with the MPCA in 1985 and a Record of Decision signed by MPCA in 1989. U. S. Steel has partnered with the Great Lakes National Program Office (GLNPO) of U.S. EPA Region 5 to address contaminated sediments in the St. Louis River Estuary and several other Operable Units that could impact the Estuary if not addressed. An amendment to the Project Agreement between U. S. Steel and GLNPO was executed during the second quarter of 2018 to recognize the costs associated with implementing the proposed remedial plan at the site.
Resource Conservation Recovery Act (RCRA) and Other Remediation Sites
U. S. Steel may be liable for remediation costs under other environmental statutes, both federal and state, or where private parties are seeking to impose liability on U. S. Steel for remediation costs through discussions or litigation. There are 18nine such sites where remediation is being sought involving amounts in excess of $100,000.$1 million. Based on currently available information, which is in many cases preliminary and incomplete, management believes that liability for cleanup and remediation costs in connection with eight sites have potential costs between $100,000 and $1 million per site, fivefour sites may involve remediation costs between $1 million and $5 million per site and five sites are estimated to or could have, costs for remediation, investigation, restoration or compensation in excess of $5 million per site.
54
For more information on the status of remediation activities at U. S. Steel’s significant sites, see the discussions related to each site below.
Gary Works
On October 23, 1998, the U.S. EPA issued a final Administrative Order on Consent (Order) addressing Corrective Action for Solid Waste Management Units (SWMU) throughout Gary Works. This Order requires U. S. Steel to perform a RCRA Facility Investigation (RFI), a Corrective Measures Study (CMS) and Corrective Measure Implementation. Evaluations are underway at six groundwater areas on the east side of the facilityfacility. An Interim Stabilization Measure work plan has been approved by U.S. EPA for one of the six areas and it is likely that corrective measures will be required, but it is not possible at this time to define a scope or estimate costs for what may be required bycontractor has initiated installation of the U.S. EPA.remedial system. Until the remaining Phase I work and Phase II field investigations are completed, it is not possible to assess what additional expenditures will be necessary for Corrective Action projects at Gary Works. In total, the accrued liability for Corrective Action projects is approximately $25 million as of December 31, 2019,2020, based on our current estimate of known remaining costs. Significant additional costs associated with the six groundwater areas at this site are possible and are referenced in Note 26 to the Consolidated Financial Statements “Contingencies and Commitments - Environmental Matters - Remediation Projects - Projects with Ongoing Study and Scope Development.”.
Geneva Works
At U. S. Steel’s former Geneva Works, liability for environmental remediation, including the closure of three hazardous waste impoundments and facility-wide corrective action, has been allocated between U. S. Steel and the current property owner pursuant to an agreement and a permit issued by the Utah Department of Environmental Quality
(UDEQ). Having completed the investigation on a majority of the remaining areas identified in the permit, U. S. Steel has determined the most effective means to address the remaining impacted material is to manage those materials in a previously approved on-site Corrective Action Management Unit (CAMU). U. S. Steel awarded a contract for the implementation of the CAMU project during the fourth quarter of 2018. Construction, waste stabilization and placement along with closure of the CAMU are scheduled to be completewere substantially completed in the fourth quarter of 2020. U. S. Steel has an accrued liability of approximately $48$21 million as of December 31, 2019,2020, for our estimated share of the remaining costs of remediation.remediation at the site.
USS-POSCO Industries (UPI)
In April 1993, U. S. Steel entered into a consent order with2017, the U.S. EPA pursuantContra Costa Health Services Hazardous Materials Programs (County Health Services) conducted inspections of UPI’s facility, which resulted in the identification of several alleged environmental violations. Thereafter, UPI was able to RCRA, under which U. S. Steel would perform Interim Measures (IM), an RFI and CMS at our Fairless Plant. A Phase I RFI Final Report was submitted in September of 1997. With U.S EPA’s agreement, in lieu of conducting subsequent phasesresolve many of the RFIissues to the satisfaction of County Health Services, but UPI also encountered some delays and disagreements pertaining to certain alleged violations. In 2018, County Health Services referred the matter to the Contra Costa District Attorney’s Office. In October 2019, UPI and the CMS, U. S. Steel has been working throughDistrict Attorney’s Office agreed to a tentative settlement whereby UPI would pay $2.4 million in civil penalties in installments over 24 months. The tentative settlement also calls for UPI to spend $1 million on environmental compliance at its facility (expenditures that benefit UPI). In addition, the Pennsylvania Departmenttentative settlement includes a $1 million suspended penalty that would be due if UPI were to fall out of Environmental Protection Act 2 Program to characterize and remediate facility parcels for redevelopment. While work continues on these items, there has been no material changecompliance during the compliance period. The parties are currently in the statusprocess of negotiating and documenting the details of the project during the twelve months ended December 31, 2019. As of December 31, 2019, the accrued liability to maintain the interim measures, and clear properties through the Act 2 process is approximately $44,000. Significant additional costs associated with this site are possible and are referenced in Note 26 to the Consolidated Financial Statements “Contingencies and Commitments - Environmental Matters - Remediation Projects - Projects with Ongoing Study and Scope Development.”settlement.
Cherryvale (KS) Zinc
In April 2003, U. S. Steel and Salomon Smith Barney Holdings, Inc. (SSB) entered into a Consent Order with the Kansas Department of Health & Environment (KDHE) concerning a former zinc smelting operation in Cherryvale, Kansas. Remediation of the site proper was essentially completed in 2007. The Consent Order was amended on May 3, 2013, to require investigation (but not remediation) of potential contamination beyond the boundary of the former zinc smelting operation. On November 22, 2016, KDHE approved a State Cooperative Final Agency Decision Statement that identified the remedy selected to address potential contamination beyond the boundary of the former zinc smelting site. The Removal Action Design Plan was approved during the second quarter of 2018. The Waste Deposition Area design and the Interim Risk Management Plan (which includes institutional controls) were approved by KDHE during the fourth quarter of 2018. An amended consent order for remediation was signed in May 2019 and a remediation contract was executed in June 2019. Remediation work is now underway and is projected to continue through 2022. U. S. Steel has an accrued liability of approximately $10$7 million as of December 31, 2019,2020, for our estimated share of the cost of remediation.
55
Air Related Matters
Great Lakes Works
In June 2010, the U.S. EPA significantly lowered the primary (NAAQS) for SO2 from 140 ppb on a 24-hour basis to an hourly standard of 75 ppb. Based upon the 2009-2011 ambient air monitoring data, the U.S. EPA designated the area in which Great Lakes Works is located as nonattainment with the 2010 SO2 NAAQS.
As a result, pursuant to the CAA, the Michigan Department of Environment, Great Lakes and Energy (EGLE) was required to submit a SIP to the U.S. EPA that demonstrates that the entire nonattainment area (and not just the monitor) would be in attainment by October 2018 by using conservative air dispersion modeling. To develop the SIP, U. S. Steel
met with EGLE on multiple occasions and had offered reduction plans to EGLE but the parties could not agree to a plan. EGLE, instead promulgated Rule 430 which was solely directed at U. S. Steel. The Company challenged Rule 430 before the Michigan Court of Claims who by Order dated October 4, 2017, granted the Company’s motion for summary disposition voiding Rule 430 finding that it violated rule-making provisions of the Michigan Administrative Procedures Act and Michigan Constitution. Since Rule 430 has been invalidated and EGLE's SIP has not been approved, the U.S. EPA has indicated that it would promulgate a Federal Implementation Plan (FIP) pursuant to its obligations and authority under the CAA. Because development of the FIP is in the early stages, the impacts of the nonattainment designation to the Company are not estimable at this time.
Granite City Works
In October 2015, Granite City Works received a Violation Notice from IEPAIllinois Environmental Protection Agency (IEPA) in which the IEPA alleges that U. S. Steel violated the emission limits for nitrogen oxides (NOx) and volatile organic compounds from the Basic Oxygen Furnace Electrostatic Precipitator Stack. In addition, the IEPA alleges that U. S. Steel exceeded its natural gas usage limit at its CoGeneration Boiler. U. S. Steel responded to the notice and is currently discussing resolution of the matter with IEPA.
Although discussions with IEPA regarding the foregoing alleged violations are ongoing and the resolution of these matters is uncertain at this time, it is not anticipated that the result of those discussions will be material to U. S. Steel.
Minnesota Ore Operations
On February 6, 2013, the U.S. EPA published a FIP that applies to taconite facilities in Minnesota. The FIP establishes and requires emission limits and the use of low NOx reduction technology on indurating furnaces as Best Available Retrofit Technology (BART). While U. S. Steel installed low NOx burners on three furnaces at Minntac and is currently obligated to install low NOx burners on the two other furnaces at Minntac pursuant to existing agreements and permits, the rule would require the installation of a low NOx burner on the one furnace at Keetac for which U. S. Steel did not have an otherwise existing obligation. U. S. Steel estimates expenditures associated with the installation of low NOx burners of as much as $25 million to $30 million. In 2013, U. S. Steel filed a petition for administrative reconsideration to the U.S. EPA and a petition for judicial review of the 2013 FIP and denial of the Minnesota SIP to the Eighth Circuit. In April 2016, the U.S. EPA promulgated a revised FIP with the same substantive requirements for U. S. Steel. In June 2016, U. S. Steel filed a petition for administrative reconsideration of the 2016 FIP to the U.S. EPA and a petition for judicial review of the 2016 FIP before the Eighth Circuit Court of Appeals. While the proceedings regarding the petition for judicial review of the 2013 FIP remained stayed, oral arguments regarding the petition for judicial review of the 2016 FIP were heard by the Eighth Circuit Court of Appeals on November 15, 2017. Thus, both petitions for judicial review remain with the Eighth Circuit. On December 4, 2017, the U.S. EPA published a notification in the Federal Register in which the U.S. EPA denied U. S. Steel’s administrative petitions for reconsideration and stay of the 2013 FIP and 2016 FIP. On February 1, 2018, U. S. Steel filed a petition for judicial review of the U.S. EPA’s denial of the administrative petitions for reconsideration to the Eighth Circuit Court of Appeals. The U.S. EPA and U. S. Steel reached a settlement regarding the five indurating lines at Minntac. Notice of a 30-day comment period of the settlement agreement was published in the September 11, 2019, Federal Register. The comment period expired on October 11, 2019. U. S. Steel will work with the U.S. EPA to address any comments. U. S. Steel and the U.S. EPA continue to negotiate resolution for Keetac.
56
Mon Valley Works
On November 9, 2017, the U.S. EPA Region III and the Allegheny County Health Department (ACHD) jointly issued a Notice of Violation (NOV) regarding the Company’s Edgar Thomson facility in Braddock, PA. In addition, on November 20, 2017, ACHD issued a separate, but related NOV to the Company regarding the Edgar Thomson facility. In the NOVs, based upon their inspections and review of documents collected throughout the last two years, the agencies allege that the Company has violated the CAA by exceeding the allowable visible emission standards from certain operations during isolated events. In addition, the agencies allege that the Company has violated certain maintenance,
reporting, and recordkeeping requirements. U. S. Steel met with U.S. EPA Region III and ACHD several times. ACHD, the U.S. EPA Region III and U. S. Steel continue to negotiate a potential resolution of the matter.
On December 24, 2018, U. S. Steel's Clairton Plant experienced a fire, affecting portions of the facility involved in desulfurization of the coke oven gas generated during the coking process. With the desulfurization process out of operation as a result of the fire, U. S. Steel was not able to certify compliance with Clairton Plant’s Title V permit levels for sulfur emissions. U. S. Steel promptly notified ACHD, which has regulatory jurisdiction for the Title V permit, and updated the ACHD regularly on our efforts to mitigate any potential environmental impacts until the desulfurization process was returned to normal operations. Of the approximately 2,400 hours between the date of the fire and April 4, 2019, when the Company resumed desulfurization, there were ten intermittent hours where average SO2 emissions exceeded the hourly NAAQS for SO2 at the Allegheny County regional air quality monitors located in Liberty and North Braddock boroughs which are near U. S. Steel's Mon Valley Works facilities. On February 13, 2019, PennEnvironment and Clean Air Council, both environmental, non-governmental organizations, sent U. S. Steel a 60-day notice of intent to sue letter pursuant to the CAA. The letter allegesalleged Title V permit violations at the Clairton, Irvin, and Edgar Thomson facilities as a result of the December 24, 2018 Clairton Plant fire. The 60-day notice letter also alleged that the violations caused adverse public health and welfare impacts to the communities surrounding the Clairton, Irvin, and Edgar Thomson facilities. PennEnvironment and Clean Air Council subsequently filed a Complaint in Federal Court in the Western District of Pennsylvania on April 29, 2019 to which U. S. Steel has responded. On May 3, 2019, ACHD filed a motion to intervene in the lawsuit which was granted by the Court. On June 25, 2019, ACHD filed its Complaint in Intervention, seeking injunctive relief and civil penalties regarding the alleged Permitpermit violations following the December 24, 2018 fire. The parties are currently engaged in discovery.
On February 7, 2020, the Indiana Department of Environmental Management (IDEM) issued an Amended Notice of Violation and Proposed Agreed Order related to its May 2,alleged NPDES permit water discharge violations at our Midwest Plant in Portage, Indiana during the period of November 2018 through December 2019 notice of intentunrelated to sue U. S. Steel, on August 26, 2019 the Environmental Integrity Project, the Breathe Project and Clean Air Council, environmental, non-governmental organizations, filed a complaintviolations resolved in the Western District Court of Pennsylvania alleging that the Company did not report releases of reportable quantities of hydrogen sulfide, benzene,Consent Decree. The Proposed Agreed Order seeks corrective actions, a civil penalty, and coke oven emissions from the Clairton, Edgar Thomson and Irvin facilities as would be required under CERCLA because of the fire. The Company will vigorously defend against these claims.
Item 4. MINE SAFETY DISCLOSURE
The information concerning mine safety violations and other regulatory matters required by Section 150 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Form 10-K.10-K
57
INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of U. S. Steel and their ages as of February 1, 2020,2021, are as follows:
| Name | Age | Executive Officer Since | ||||||||||||
| Christine S. Breves | 64 | Senior Vice President & Chief Financial Officer | April 27, 2017 | |||||||||||
| James E. Bruno | 55 | Senior Vice President - European Solutions and President - USSK | December 1, 2014 | |||||||||||
| Scott D. Buckiso | 53 | Senior Vice President and Chief Manufacturing Officer North American Flat-Rolled | May 31, 2015 | |||||||||||
| David B. Burritt | 65 | President & Chief Executive Officer | September 1, 2013 | |||||||||||
| Richard L. Fruehauf | 53 | Senior Vice President - Strategic Planning and Chief Strategy and Development Officer | March 1, 2019 | |||||||||||
| Manpreet S. Grewal | 41 | Vice President & Controller | March 30, 2020 | |||||||||||
| Duane D. Holloway | 48 | Senior Vice President, General Counsel and Chief Ethics & Compliance Officer | April 16, 2018 | |||||||||||
| 53 | Senior Vice President and Chief Commercial | |||||||||||||
| A. Barry Melnkovic | 63 | Senior Vice President and Chief Human Resources Officer | March 1, 2018 | |||||||||||
Messrs. Buckiso, Burritt Bruno and MatthewsBruno and Ms. Breves have held responsible management or professional positions with U. S. Steel or its subsidiaries for more than the past five years. Ms. Fast joinedPrior to joining U. S. Steel in 20072020 Mr. Jaycox served as manager - external reporting, andVice President, Transformation at Sysco Corporation where during his seven-year tenure, he progressed through rolesa series of increasing responsibility before being named assistant corporateexecutive responsibilities including transformation, sales development and support, and revenue management. Prior to joining U. S. Steel in 2020 Mr. Grewal served as vice president, business finance, controller, in December 2014. She was named Acting Controller and the Company’s principalchief accounting officer on April 1, 2019.at Covanta since February 2017. Prior to Covanta, Mr. Grewal spent fourteen years at Johnson Controls Incorporated (formerly Tyco International) in increasingly responsible roles, including internal audit, accounting, controllership, and financial planning and analysis. Mr. Fruehauf joined U. S. Steel in September 2014 as assistant general counsel - commercial and progressed through roles of increasing responsibility in the legal department, ultimately being named Interim General Counsel in December 2017. He was named vice president - strategic planning and corporate developmentbefore moving to lead Strategy in April 2018 and advanced to senior vice president in March 2019. Effective January 1, 2020, he has been appointed senior vice president - strategic planning and chief strategy & development officer.2018. Prior to joining U. S. Steel in 2018, Mr. Holloway served as executive vice president and general counsel at Ascena Retail Group Inc., the largest women’s specialty retail and fashion company in the U.S. During his time at Ascena, Mr. Holloway served as global chief legal, compliance, sustainability and diversity officer. Prior to his work at Ascena, Mr. Holloway served as vice president and deputy general counsel for CoreLogic Inc., the leading global residential property information, analytics and data-enabled solutions provider. Prior to joining CoreLogic, Mr. Holloway spent nine years at Caesars Entertainment Corp., where he progressed through increasingly responsible roles in the legal department before being named senior vice president and chief counsel, operations and litigation. Prior to joining U. S. Steel in 2017, Mr. Melnkovic served as executive vice president and chief human capital officer, labor relations, diversity and lean enterprise solutions for National Railroad Passenger Corporation / Amtrak. Prior to joining Amtrak, Mr. Melnkovic served as the top human resources leader at Lilly Industries, Motor Coach Industries and Holland America Line. He also held senior corporate leadership and officer roles at Owens Corning, including vice president - human resources, vice president - talent management and organizational effectiveness, and interim chief operating officer for one
58
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock Information
The principal market on which United States Steel Corporation (U. S. Steel) common stock is traded is the New York Stock Exchange, where the common stock trades under trading symbol "X". U. S. Steel common stock is also traded on the Chicago Stock Exchange under the symbol "X".
As of February 10, 2020,8, 2021, there were 12,04811,605 registered holders of U. S. Steel common stock.
The Board of Directors currently intends to declare and pay dividends on shares of U. S. Steel common stock based on the financial condition and results of operations of U. S. Steel out of legally available funds and in accordance with the requirements set forth by applicable law. Quarterly dividends were declared by U. S. Steel in 20192020 and 20182019 in the amount of $0.05 per share. In December 2019 the Company announced a change in its dividend policy, that it intends to reduce its quarterly dividend to $0.01 per share beginning in 2020.and $0.05 per share, respectively.
Stockholder Return Performance
The graph below compares the yearly change in cumulative total stockholder return of our common stock with the cumulative total return of the Standard & Poor’s (S&P’s)&P) 500 Stock Index and the S&P 600 Steel Index.
Comparison of Cumulative Total Return
on $100 Invested in U. S. Steel Stock on December 31, 20142015
vs
S&P 500 and S&P 600 Steel Index(a)
For information on securities authorized for issuance under our equity compensation plans, see "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."
Unregistered Sales of Equity Securities
59
Item 6. SELECTED FINANCIAL DATA
Omitted at the Company's option.
60
Dollars in millions (except per share data)(a) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Statement of Operations Data: | ||||||||||||||||||||
| Net sales | $ | 12,937 | $ | 14,178 | $ | 12,250 | $ | 10,261 | $ | 11,574 | ||||||||||
(Loss) earnings before interest and income taxes (b) | (230 | ) | 1,124 | 669 | (201 | ) | (1,142 | ) | ||||||||||||
| (Loss) net earnings attributable to United States Steel Corporation | (630 | ) | 1,115 | 387 | (440 | ) | (1,642 | ) | ||||||||||||
| Per Common Share Data: | ||||||||||||||||||||
(Loss) net earnings attributable to United States Steel Corporation(c) | ||||||||||||||||||||
| – basic | (3.67 | ) | 6.31 | 2.21 | $ | (2.81 | ) | $ | (11.24 | ) | ||||||||||
| – diluted | (3.67 | ) | 6.25 | 2.19 | (2.81 | ) | (11.24 | ) | ||||||||||||
| Dividends per share declared and paid | 0.20 | 0.20 | 0.20 | 0.20 | 0.20 | |||||||||||||||
| Balance Sheet Data – December 31: | ||||||||||||||||||||
Total assets (d) | $ | 11,608 | $ | 10,982 | $ | 9,862 | $ | 9,160 | $ | 9,167 | ||||||||||
| Capitalization: | ||||||||||||||||||||
Debt (d) | $ | 3,641 | $ | 2,381 | $ | 2,703 | $ | 3,031 | $ | 3,138 | ||||||||||
| United States Steel Corporation stockholders’ equity | $ | 4,092 | 4,202 | 3,320 | 2,274 | 2,436 | ||||||||||||||
| Total capitalization | $ | 7,733 | $ | 6,583 | $ | 6,023 | $ | 5,305 | $ | 5,574 | ||||||||||
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes that appear elsewhere in this document. Please refer to Item 7 of our 20182019 Form 10-K for further discussion and analysis of our 20172018 financial condition and results of operations.
Overview
According to World Steel Association’s latest published statistics, U. S. Steel was the twenty-sixthtwenty-seventh largest steel producer in the world in 2018.2019. Also in 20182019 according to World Steel Association’s latest published statistics, U. S. Steel was the third largest steel producer in the United States. U. S. Steel has a broad and diverse mix of products and customers. We use iron ore, coal, coke, steel scrap, zinc, tin, and other metallic additions to produce a wide range of flat-rolled and tubular steel products, concentrating on value-added steel products for customers with demanding technical applications in the transportation, appliance, container, industrial machinery, construction and oil, gas, and petrochemical industries. In addition to our facilities in the United States, U. S. Steel has significant operations in Eastern Europe through U. S. Steel Košice (USSK), located in Slovakia.
We are proud to report the following accomplishments achieved in 2019:2020:
•Set a safety performance record with a 20192020 Days Away from Work rate of 0.10,0.07, which is seveneight times better than the industry average reported by the U.S. Bureau of Labor Statistics.
•Articulating and executing on the transformative 'bestBest of both" BothSM strategy, including acquiring a 49.9% interest in Big River Steel with anexercise of the option to acquire the remaining 50.1% within four years and beginning processinterest in Big River Steel. The acquisition closed on January 15, 2021.
•Commissioned the new 1.6 million ton electric arc furnace (EAF) at Fairfield, Alabama in October 2020 that is currently used to feed our 0.9 million ton rounds caster.
•Completed construction of constructing a world-class endless casting and rollingthe continuous galvanizing line at Mon Valley Works.our PRO-TEC joint venture, which will provide superior finishing capabilities for our differentiated line of advanced high strength steels.
•Trialed 11 U. S. Steel grades of steel at Big River Steel, with its low carbon emissions intensity production process, in furtherance of our commitment to support our sustainability goals and those of our customers.
•Awarded a perfect "100" score by the Human Rights Campaign Corporate Equality Index for the second straight year.
•Positive operating cash flow of $682$138 million in 2019.
•Achieved record low 24-day cash conversion cycle time, demonstrating intense focus on cash efficiency.
•Successfully raised approximately $1.1$1.7 billion in incremental capital throughincluding debt offerings and an increasestock issuances.
•Received approximately $163 million and $94 million in net proceeds from the sale of a non-core real estate asset in Fairless, Pennsylvania and the Stelco option to purchase a 25 percent interest in our U.S. credit facility by $500 million, providing for future financial flexibility.Minntac mine in Mt. Iron, Minnesota, respectively.
Our disciplined and balanced capital strategy has positioned our balance sheet to support investments in our business. We continue to take steps to improve and secure our long-term position as an industry leader by reducing our vulnerabilities during down cycles, accentuating our advantages in up cycles, and enabling the creation of value - and the related rewards - for all U. S. Steel stakeholders through business cycles.
We aim to achieve our vision by successfully executing on our world-competitive, “bestBest of both”Both strategy. By bringing together the best of the integrated steelmaking model with the best of the mini mill steelmaking model, we will transform our business to drive long-term cash flow through industry cycles. We aim to offer an unparalleled product platform to serve customers, achieve world-competitive positioning in strategic, high-margin end markets, and deliver high-quality, value-added products and innovative solutions that address our customers' most challenging steel needs. To become a “bestBest of both” Bothcompany, we are enhancing our focus on operational and commercial excellence and promoting technological innovation, so we can establish a more competitive cost structure and enhance our capabilities … two key drivers for our strategy.
U. S. Steel's results in 2020 were significantly impacted by market challenges in each of the Company's three reportable segments: North American Flat-Rolled (Flat-Rolled), U. S. Steel Europe (USSE) and Tubular Products (Tubular). In Flat-Rolled, results improved in the second half of the year due to the resumption of more typical operations from consumers of steel in North America that had been completely or partially shut down due to the coronavirus (COVID-19) pandemic. As regions unevenly re-
61
opened from pandemic related temporary idlings, demand levels increased, though demand remains at below typical levels. While steel prices did increase toward the end of the year, continued low spot prices impacted operating results for most of the year. Flat-Rolled results were largely impacted by the reset of calendar year fixed contract prices, as well as lost shipments due to customer operating restrictions and lower demand as a result of the COVID-19 pandemic. As a result of the sharp decline in North American steel demand, driving raw steel capacity utilization rates sharply lower to almost 50%, there was also significant spot price erosion that followed. USSE continued to experience margin compression due to modestly recovered but still weak performance of the manufacturing sector combined with continued high levels of imports and high raw materials costs. In Tubular, the continued disruption in the oil and gas industry, as well as pandemic-related impacts, reduced demand for oil and gas and severely impacted energy prices, creating significant reductions of drilling activity in the U.S. See Item 1. Business, Human Capital Management and Item 1. Business, Capital Structure and Liquidity for further details regarding our human and financial response to the COVID-19 pandemic, respectively.
Critical Accounting Estimates
Management’s discussion and analysis of U. S. Steel’s financial condition and results of operations is based upon U. S. Steel’s financial statements, which have been prepared in accordance with accounting standards generally accepted in the United States (U.S. GAAP). The preparation of these financial statements requires 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 amount of revenues and expenses during the year. Management regularly evaluates these estimates, including those related to employee benefits liabilities and assets held in trust relating to such liabilities; the carrying value of property, plant and equipment; intangible assets; valuation allowances for receivables, inventories and deferred income tax assets; liabilities for deferred income taxes; potential tax deficiencies; environmental obligations; potential litigation claims and settlements and put and call option assets and liabilities. Management’s estimates are based on historical experience, current business and market conditions, and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from current expectations under different assumptions or conditions.
Management believes that the following are the more significant judgments and estimates used in the preparation of the financial statements.
Inventories – Inventories are carried at the lower of cost or market for last-in, first-out (LIFO) inventories and lower of cost and net realizable value for first-in, first-out (FIFO) method inventories. LIFO is the predominant method of inventory costing for inventories in the United States and FIFO is the predominant method used in Europe. The LIFO method of inventory costing was used on 7559 percent and 7475 percent of consolidated inventories at December 31, 20192020 and 2018,2019, respectively. Since the LIFO inventory valuation methodology is an annual calculation, interim estimates of the annual LIFO valuation are required. We recognize the effects of the LIFO inventory valuation method on an interim basis by estimating the year end inventory amounts. The projections of annual LIFO inventory amounts are updated quarterly. Changes in U.S. GAAP rules or tax law, such as the elimination of the LIFO method of accounting for inventories, could negatively affect our profitability and cash flow.
Equity method investments – Investments in entities over which U. S. Steel has significant influence are accounted for using the equity method of accounting and are carried at U. S. Steel’s share of net assets plus loans, advances and our share of earnings less distributions. Differences in the basis of the investment and the underlying net asset value of the investee, if any, are amortized into earnings over the remaining useful life of the associated assets.
Income from investees includes U. S. Steel’s share of income from equity method investments, which is generally recorded a month in arrears, except for significant and unusual items which are recorded in the period of occurrence.arrears. Gains or losses from changes in ownership of unconsolidated investees are recognized in the period of change. Intercompany profits and losses on transactions with equity investees have been eliminated in consolidation subject to lower of cost or market inventory adjustments.
U. S. Steel evaluates impairment of its equity method investments whenever circumstances indicate that a decline in value below carrying value is other than temporary. Under these circumstances, we would adjust the investment down to its estimated fair value, which then becomes its new carrying value.
Financial Instruments – U. S. Steel's purchase of a 49.9% equity ownership interest in Big River Steel on October 31, 2019 included certain call and put options. U. S. Steel marksmarked these options to fair value each reporting period using a Monte Carlo simulation which is considered a Level 3 valuation technique. Level 3 valuation techniques include inputs to the valuation methodology that are considered unobservable and significant to the fair value measurement. When the U. S. Steel call option was exercised, the options were legally extinguished and a contingent forward purchase commitment was recorded for the value of the unsettled commitment to purchase the remaining interest in Big River Steel. The contingent forward purchase commitment was removed with the close of the Big River Steel purchase which occurred on January 15, 2021. See Note 5 and Note 20 to the Consolidated Financial Statements for further details.
Pensions and Other Benefits – The recording of net periodic benefit costs for defined benefit pensions and Other Benefits is based on, among other things, assumptions of the expected annual return on plan assets, discount rate, mortality, escalation or other changes in retiree health care costs and plan participation levels. Changes in the assumptions or differences between
62
actual and expected changes in the present value of liabilities or assets of U. S. Steel’s plans could cause net periodic benefit costs to increase or decrease materially from year to year as discussed below.
U. S. Steel’s investment strategy for its U.S. pension plan assets provides for a diversified mix of high quality bonds, public equities and selected smaller investments in private equities, private credit, timber and mineral interests. For its U.S. pension plan, U. S. Steel has a target allocation for plan assets of 45 percent in corporate bonds, government bonds and
mortgage and asset-backed securities. The balance is primarily invested in equity securities, timber, private equity and real estate partnerships. U. S. Steel believes that returns on equities over the long term will be higher than returns from fixed-income securities as actual historical returns from U. S. Steel’s trusts have shown. Returns on bonds tend to offset some of the short-term volatility of stocks. Both equity and fixed-income investments are made across a broad range of industries and companies (both domestic and foreign) to provide protection against the impact of volatility in any single industry as well as company specific developments. U. S. Steel will use a 6.506.90 percent assumed rate of return on assets for the development of net periodic cost for the main defined benefit pension plan in 2020.2021. The 20202021 assumed rate of return was determined by taking into account the intended asset mix and some moderation of the historical premiums that fixed-income and equity investments have yielded above government bonds. Actual returns since the inception of the plans have exceeded this 6.50the 6.90 percent rate and while recent annual returns have been volatile, it is U. S. Steel’s expectation that rates will achieve this level in future periods.
The UPI investment strategy for its pension plan is to minimize the volatility of the value of pension assets relative to obligations and to ensure assets are sufficient to pay plan benefits. To achieve this strategy, UPI has a liability driven allocation of 60 percent in fixed income with the balance primarily invested in return seeking U.S. and global equity. UPI will use a 5.35 percent assumed rate of return on assets for the development of net periodic cost for the UPI defined benefit pension plan in 2021.
For its Other Benefits plan assets, U. S. Steel employs a liability driven investment strategy. The plan assets are allocated to match the plan cash flows with maturing investments. To achieve this strategy, U. S. Steel has a target allocation for plan assets of 90 percent in high quality bonds with thebonds. The balance is primarily invested in equity securities, timber, private equity, private credit and real estate partnerships. U. S. Steel will use a 4.25 percent assumed rate of return on assets for the development of net periodic cost for its Other Benefits plans. The 20202021 assumed rate of return has been conservatively set, taking into accountincludes consideration of the intended asset mix.
The expected long-term rate of return on plan assets is applied to the market value of assets as of the beginning of the period less expected benefit payments and considering any planned contributions.
To determine the discount rate used to measure our pension and Other Benefit obligations for U.S. plans we utilize a bond matching approach to select specific bonds that would satisfy our projected benefit payments. At December 31, 2019,2020, the weighted average discount rate used for our pension and Other Benefit obligations was determined to be 3.352.72 percent and 3.432.80 percent, respectively, compared to the weighted average discount rate used of 4.413.35 percent and 4.473.43 percent, respectively, at December 31, 2018.2019. The discount rate reflects the current rate at which we estimate the pension and Other Benefits liabilities could be effectively settled at the measurement date.
U. S. Steel reviews its actual historical rate experience and expectations of future health care cost trends to determine the escalation of per capita health care costs under U. S. Steel’s benefit plans. Approximately three quarters of our costs for the domestic United Steelworkers (USW) participants’ retiree health benefits in the Company’s main domestic benefit plan are limited to a per capita dollar maximum calculation based on 2006 base year actual costs incurred under the main U. S. Steel benefit plan for USW participants (cost cap). The full effect of the cost cap is expected to be realized around 2028. After 2028, the Company’s costs for a majority of USW retirees and their dependents are expected to remain fixed and as a result, the cost impact of health care escalation for the Company is projected to be limited for this group (See Note 18 to the Consolidated Financial Statements). For measurement of its domestic retiree medical plans where health care cost escalation is applicable, U. S. Steel has assumed an initial escalation rate of 6.50 percent for 2020.2021. This rate is assumed to decrease gradually to an ultimate rate of 4.50 percent in 20282029 and remain at that level thereafter.
Net periodic pension benefit cost, including multiemployer plans, is expected to total approximately $141$87 million in 20202021 compared to $179$145 million in 2019.2020. Excluding settlement and special termination losses totaling $11 million in 2019,2020, the decrease in expectednet periodic pension expensebenefit cost in 20202021 is primarily due the 2019to 2020 asset performance, and a change in mortality assumptions, partially offset by the decrease in discount rates. Total Other BenefitsNet periodic other benefit income in 20202021 is expected to be approximately $29$(72) million, compared to $57$(23) million of expense in 2019.2020. The expected improvement in the 2020 Other Benefit expense (income)2021 net periodic other benefit income is primarily due to the expiration of a prior service cost from the 2008 labor agreementbases and projected decreases in future healthcare costs and assumed participant enrollments.costs.
63
The tables below project the incremental effect of a hypothetical one percentage point change in significant assumptions used in determining the funded status and expensenet periodic benefit cost for pension and Other Benefits:other benefits:
| At December 31, 2020 | ||||||||||||||
| Hypothetical Rate Change | ||||||||||||||
| (In millions) | 1% | (1)% | ||||||||||||
| Discount rates and interest rates | ||||||||||||||
| Incremental change in: | ||||||||||||||
| Pension and other benefits obligations, increase/(decrease) | $ | (719) | $ | 861 | ||||||||||
| Fixed income assets, (increase)/decrease | 481 | (582) | ||||||||||||
| Net impact on funded status, increase/(decrease) | $ | 238 | $ | (279) | ||||||||||
| At December 31, 2019 | ||||||||
| Hypothetical Rate Change | ||||||||
| (In millions) | 1% | (1)% | ||||||
| Discount rates and Interest rates | ||||||||
| Incremental change in: | ||||||||
| Pension & other benefits obligations, increase/(decrease) | $ | (671 | ) | $ | 799 | |||
| Fixed Income Assets, (increase)/decrease | 433 | (524 | ) | |||||
| Net impact on funded status, increase/(decrease) | $ | 238 | $ | (275 | ) | |||
The fixed income asset sensitivity shown above excludes other fixed income return components (e.g. changes in credit spreads, bond coupon and active management excess returns), and growth asset returns. Fixed income sensitivity reflects the asset allocation and investment policy effective December 31, 2019.2020. Other factors that impact net funded status (e.g., contributions) are not reflected.
Discount rates and the expected long-term return on assets have a material impact on net periodic pension and other benefit expense.costs. The table below estimates the impact to expensenet periodic pension costs of a hypothetical one percentage point change in rates:
| Hypothetical Rate Increase (Decrease) | ||||||||||||||
| (In millions) | 1% | (1)% | ||||||||||||
| Expected return on plan assets | ||||||||||||||
| Incremental (decrease) increase in: | ||||||||||||||
| Net periodic pension and other benefits costs for 2020 | $ | (71) | $ | 71 | ||||||||||
| Discount rates | ||||||||||||||
| Incremental (decrease) increase in: | ||||||||||||||
| Net periodic pension & other benefits costs for 2020 | $ | (16) | $ | 14 | ||||||||||
Hypothetical Rate Increase (Decrease) | ||||||||
| (In millions) | 1% | (1)% | ||||||
| Expected return on plan assets | ||||||||
| Incremental (decrease) increase in: | ||||||||
| Net periodic pension & other benefits costs for 2020 | $ | (68 | ) | $ | 68 | |||
| Discount rates | ||||||||
| Incremental (decrease) increase in: | ||||||||
| Net periodic pension & other benefits costs for 2020 | $ | (16 | ) | $ | 17 | |||
Changes in the assumptions for expected annual return on plan assets and the discount rate used for accounting purposes do not impact the funding calculations used to derive minimum funding requirements for the pension plan. However, the discount rate required for minimum funding purposes is also based on corporate bond related indices and as such, the same general sensitivity concepts as above can be applied to increases or decreases to the funding obligations of the plans assuming the same hypothetical rate changes. (See Note 18 to the Consolidated Financial Statements for a discussion regarding legislation enacted in November of 2015 that impacts the discount rate used for funding purposes.) For further cash flow discussion see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, – Financial Condition, Cash FlowsLiquidity and Liquidity – Liquidity.Capital Resources.”
Long-lived assets – U. S. Steel evaluates long-lived assets, primarily property, plant and equipment for impairment whenever changes in circumstances indicate that the carrying amounts of those productive assets exceed their recoverable amount as determined by the asset group's projected undiscounted cash flows. We evaluate the impairment of long-lived assets at the asset group level. Our primary asset groups are Flat-Rolled, welded tubular, seamless tubular and U. S. Steel Europe (USSE).
For the period ended March 31, 2020, the steep decline in oil prices that resulted from market oversupply and declining demand was considered a triggering event for the welded tubular and seamless tubular asset groups. A quantitative analysis was completed for both asset groups and a $263 million impairment, consisting of an impairment of $196 million for property, plant and equipment and $67 million for intangible assets was recorded for the welded tubular asset group while no impairment was indicated for the seamless tubular asset group. There were no other triggering events that required an impairment evaluation of our long-lived asset groups during the year-ended December 31, 2020.
During 2019, steel market challenges in the U.S. and Europe, the idling of certain Flat-Rolled facilities and recent losses in the welded tubular asset group were considered triggering events for the Flat-Rolled, USSE and welded tubular asset groups. U. S. Steel completed a quantitative analysis of its long-lived assets for these asset groups and determined that the assets were not impaired. The percentage excess of estimated future cash flows over the net assets was greater than 30 percent for our welded tubular asset group. The key assumptions used to estimate the recoverable amounts for the welded tubular asset group were estimates of future commercial prices, commercial program management and efficiency improvements over the 12-year remaining useful life of the primary welded tubular assets. The percentage excess of estimated future cash flows over the net assets was greater than 75 percent for both the Flat-Rolled and USSE asset groups.
Taxes - U. S. Steel records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely
64
than not that some portion, or all, of a deferred tax asset will not be realized. Each quarter U. S. Steel analyzes the likelihood that our deferred tax assets will be realized.
At December 31, 2020, after weighing all the positive and negative evidence, U. S. Steel determined that it was still more likely than not that the net domestic deferred tax asset (excluding a portion of a deferred tax liability with an indefinite life) may not be realized. As a result, U. S. Steel recorded a $229 million non-cash charge to tax expense. In the future, if we determine that it is more likely than not that we will be able to realize all or a portion of our deferred tax assets, the valuation allowance will be reduced, and we will record a benefit to earnings. See Note 11 to the Consolidated Financial Statements for further details.
At December 31, 2019, after weighing all the positive and negative evidence, U. S. Steel determined that it was more likely than not that the net domestic deferred tax asset (excluding a portion of a deferred tax liability related to an asset with an indefinite life, as well as a deferred tax asset related to refundable AMT credits) may not be realized. As a result, U. S. Steel recorded a $334 million non-cash charge to tax expense. In the future, if we determine that it is more likely than not that we will be able realize all or a portion of our deferred tax assets, the valuation allowance will be reduced, and we will record a benefit to earnings. See Note 11 to the Consolidated Financial Statements for further details.
At the end of both 20192020 and 2018,2019, U. S. Steel did not have any undistributed foreign earnings and profits for which U.S. deferred taxes have not been provided.
U. S. Steel records liabilities for uncertain tax positions. These liabilities are based on management’s judgment of the risk of loss for items that have been or may be challenged by taxing authorities. If U. S. Steel determines that tax-related items would not be considered uncertain tax positions or that items previously not considered to be potential uncertain tax positions could be considered potential uncertain tax positions (as a result of an audit, court case, tax ruling or other authoritative tax position), an adjustment to the liability would be recorded through income in the period such determination was made.
Environmental remediation – U. S. Steel has been identified as a potentially responsible party (PRP) at sevenfive sites under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) as of December 31, 2019.2020. Of these, there are three sites where information requests have been received or there are other indications that U. S. Steel may be a PRP under CERCLA, but where sufficient information is not presently available to confirm the existence of liability or to make a reasonable estimate with respect to any potential liabilities. There are also 18nine additional sites where U. S. Steel may be liable for remediation costs in excess of $100,000$1 million under other environmental statutes, both federal and state, or where private parties are seeking to impose liability on U. S. Steel for remediation costs through discussions or litigation. At many of these sites, U. S. Steel is one of a number of parties involved and the total cost of remediation, as well as U. S. Steel’s share, is frequently dependent upon the outcome of ongoing investigations and remedial studies. U. S. Steel accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as remediation obligations arise, charges in excess of those previously accrued may be required.
U. S. Steel's accrual for environmental liabilities for U.S. and international facilities as of December 31, 2020 and 2019 and 2018 was $186$146 million and $187$186 million, respectively. These amounts exclude liabilities related to asset retirement obligations, disclosed in Note 19 to the Consolidated Financial Statements.
U. S. Steel is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Consolidated Financial Statements.
For discussion of relevant environmental items, see “Part I. Item 3. Legal Proceedings—Environmental Proceedings.”��
Segments
U. S. Steel has three reportable segments: North American Flat-Rolled (Flat-Rolled), U. S. Steel Europe (USSE) and Tubular Products (Tubular). The results of our 49.9% ownership interest in Big River Steel and our railroad and real estate businesses that do not constitute reportable segments are combined and disclosed in the Other Businesses category. Beginning in 2021, we will report the results of Big River Steel in a separate “Mini Mill” segment.
The Flat-Rolled segment includes the operating results of U. S. Steel’s integrated steel plants and equity investees in North America (except for Big River Steel, which is included in Other Businesses) involved in the production of slabs, strip mill plates, sheets and tin mill products, as well as all iron ore and coke production facilities in the United States. These operations primarily serve North American customers in the service center, conversion, transportation (including automotive), construction, container, and appliance and electrical markets.
The USSE segment includes the operating results of U. S. Steel Košice (USSK), U. S. Steel’s integrated steel plant and coke production facilities in Slovakia, and its subsidiaries. USSE conducts its business mainly in Central and Western Europe and primarily serves customers in the European transportation (including automotive), construction, container appliance, electrical, service center, conversion and oil, gas and petrochemical markets. USSE produces and sells slabs, strip mill plate, sheet, tin mill products and spiral welded pipe, as well as refractory ceramic materials.
The Tubular segment includes the operating results of U. S. Steel’s tubular production facilities and an equity investee in the United States. These operations produce and sell seamless and electric resistance welded (ERW) steel casing and tubing (commonly
65
(commonly known as oil country tubular goods or OCTG), standard and line pipe and mechanical tubing and primarily serve customers in the oil, gas and petrochemical markets.
For further information, see Note 4 to the Consolidated Financial Statements.
Net Sales
Net Sales by Segment
| (Dollars in millions, excluding intersegment sales) | 2020 | 2019 | 2018 | |||||||||||||||||
| Flat-Rolled | $ | 7,071 | $ | 9,279 | $ | 9,681 | ||||||||||||||
| USSE | 1,967 | 2,417 | 3,205 | |||||||||||||||||
| Tubular | 639 | 1,188 | 1,231 | |||||||||||||||||
| Total sales from reportable segments | 9,677 | 12,884 | 14,117 | |||||||||||||||||
| Other Businesses | 64 | 53 | 61 | |||||||||||||||||
| Net sales | $ | 9,741 | $ | 12,937 | $ | 14,178 | ||||||||||||||
| (Dollars in millions, excluding intersegment sales) | 2019 | 2018 | 2017 | |||||||||
| Flat-Rolled | $ | 9,279 | $ | 9,681 | $ | 8,297 | ||||||
| USSE | 2,417 | 3,205 | 2,949 | |||||||||
| Tubular | 1,188 | 1,231 | 944 | |||||||||
| Total sales from reportable segments | 12,884 | 14,117 | 12,190 | |||||||||
| Other Businesses | 53 | 61 | 60 | |||||||||
| Net sales | $ | 12,937 | $ | 14,178 | $ | 12,250 | ||||||
Management’s analysis of the percentage change in net sales for U. S. Steel’s reportable business segments is set forth in the following tables:
Year Ended December 31, 20192020 versus Year December 31, 20182019
Steel Products(a) | ||||||||||||||||||||||||||||||||||||||
| Volume | Price | Mix | FX(b) | Other(c) | Net Change | |||||||||||||||||||||||||||||||||
| Flat-Rolled | (16) | % | (7) | % | 3 | % | — | % | (4) | % | (24) | % | ||||||||||||||||||||||||||
| USSE | (15) | % | (6) | % | 1 | % | 1 | % | — | % | (19) | % | ||||||||||||||||||||||||||
| Tubular | (39) | % | (7) | % | — | % | — | % | — | % | (46) | % | ||||||||||||||||||||||||||
(a)Excludes intersegment sales
(c)Primarily sales of raw materials and coke making by-products
Steel Products(a) | ||||||||||||||||||
| Volume | Price | Mix | FX(b) | Coke, Pellets & Other(c) | Net Change | |||||||||||||
| Flat-Rolled | 1 | % | (5 | )% | (1 | )% | — | % | 1 | % | (4 | )% | ||||||
| USSE | (19 | )% | (3 | )% | 3 | % | (5 | )% | (1 | )% | (25 | )% | ||||||
| Tubular | (1 | )% | (1 | )% | (1 | )% | — | % | — | % | (3 | )% | ||||||
•For the Flat-Rolled segment primarily reflects lower average realized prices (decrease of $58 per ton) and a less favorable product mix. In 2019 to adjust production to declining customer demand a blast furnace at Gary Works was temporally idled (subsequently restarted in December 2019) and a blast furnace at Great Lakes Works was temporarily idled (subsequently to be indefinitely idled in early 2020 along with remainder of the iron and steel making facilities at Great Lake Works).
•For the USSE segment the decrease in sales resulted from decreased shipments (decrease of 549 thousand net tons) across most products and lower average realized prices (decrease of $41$26 per net ton) in most product categories due to increased import competition, flat to declining demand and the weakening of the Euro versus the U.S. dollar.across all products.
66
Operating Expenses
Union profit-sharing costs
| Year Ended December 31, | ||||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||
| Allocated to segment results | $ | — | $ | 12 | ||||||||||
| Year Ended December 31, | ||||||||
| (Dollars in millions) | 2019 | 2018 | ||||||
| Allocated to segment results | $ | 12 | $ | 92 | ||||
Profit-based amounts are calculated and paid on a quarterly basis as a percentage of consolidated earnings (loss) before interest and income taxes based on 7.5 percent of profit between $10 and $50 per ton and 15 percent of profit above $50 per ton.
The amounts above represent profit-sharing amounts paid to active USW-represented employees and are included in cost of sales on the Consolidated Statement of Operations.
Pension and other benefit costs (other than service cost) are reflected within net interest and other financial costs and the service cost component is reflected within cost of sales in the Consolidated Statements of Operations.
Defined benefit and multiemployer pension plan costs included in cost of sales totaled $127 million in 2020 and $121 million in 2019 and $109 million in 2018.2019.
Other benefit expenseservice cost included in cost of sales totaled $12 million in 2020 and $13 million in 2019 and $17 million in 2018.2019.
Costs related to defined contribution plans totaled $22 million in 2020 and $48 million in 2019. The decrease from 2019 and $44 million in 2018.primarily resulted from the temporary suspension of the Company's contributions for salaried defined contribution plans that occurred within 2020.
Selling, general and administrative expenses
Selling, general and administrative expenses were $274 million in 2020 and $289 million in 2019 and $336 million in 2018.2019. The decrease from 20182019 to 20192020 is primarily related to decreased variable compensation.from the suspension of the Company's defined contribution plans for a portion of 2020.
Operating configuration adjustments
Over the past three years, the Company has adjusted its operating configuration in response to changing market conditions including global overcapacity, unfair trade practices and increases in domestic demand as a result of tariffs on imports by indefinitely and temporarily idling and then re-starting production at certain of its facilities. U. S. Steel will continue to adjust its operating configuration in order to maximize its strategy of combining the "bestBest of both"Both leading integrated and mini mill technology.
In October 2020 U. S. Steel started its newly constructed, technologically advanced EAF steelmaking facility at its Fairfield, Alabama, operations.
In 2020, we took actions to adjust our footprint by temporarily idling certain operations for an indefinite period to better align production with customer demand and respond to the impacts from the COVID-19 pandemic. The operations that remained idle as of December 31, 2020 included:
•Blast Furnace A at Granite City Works
•Lone Star Tubular Operations
•Lorain Tubular Operations
•Wheeling Machine Products coupling production facility at Hughes Springs, Texas
As of December 31, 2020 the approximate carrying value of the idled fixed assets for facilities noted above was: Granite City Works Blast Furnace A, $65 million; Lone Star Tubular Operations, $5 million; and Lorain Tubular Operations, $70 million.
In December 2019, U. S. Steel announced that it would indefinitely idle a significant portion of Great Lakes Works. The Company expects to beginbegan idling the iron and steelmaking facilities on or around April 1,in March 2020 and the hot strip mill rolling facility before the end ofin June 2020. The carrying value of the Great Lakes Works facilities that we intend towere indefinitely idleidled was approximately $385$330 million as of December 31, 2019.2020.
67
In December 2019, the Company completed the indefinite idling of its East Chicago Tin (ECT) operations within its Flat-Rolled segment. ECT was indefinitely idled primarily due to increased tin import levels in the U.S. Additionally, U. S. Steel indefinitely idled its finishing facility in Dearborn, Michigan (which operates an electrolytic galvanizing line), during the fourth quarter of 2019. The carrying value of these facilities was approximately $20$15 million as of December 31, 2019.
Depreciation, depletion and amortization
Depreciation, depletion and amortization expenses were $643 million in 2020 and $616 million in 2019 and $521 million in 2018.2019. The increases from 20182019 to 20192020 are primarily due to increased capital spending in recent years.
Earnings from investees
Restructuring and Other Charges
During 2019, U. S. Steel2020, the Company recorded restructuring and other charges of $275$138 million, which consists of charges of $25 million at USSK for headcount reductions and plant exit costs, $227$66 million for the indefinite idling of ECT, our finishing facility in Dearborn, Michigan, and the intended indefinite idling of a significant portion of Great Lakes Works, and $23our Keetac mining operations which was restarted in the fourth quarter, $25 million for the indefinite idling of Lorain Tubular Operations and Lone Star Tubular Operations, and $15 million and $32 million for employee benefit costs related to Company-wide headcount reductions.reductions and headcount reductions under a voluntary early retirement program (VERP) offered at USSK, respectively.
Charges for restructuring and ongoing cost reduction initiatives are recorded in the period U. S. Steel commits to a restructuring or cost reduction plan, or executes specific actions contemplated by the plan and all criteria for liability recognition have been met. Charges related to restructuring and cost reductions are reported in restructuring and other charges in the Consolidated Statements of Operations.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
| (Dollars in Millions) | 2019 | 2018 | (Dollars in Millions) | 2020 | 2019 | |||||||||||||||||
| Flat-Rolled | $ | 196 | $ | 883 | Flat-Rolled | $ | (596) | $ | 196 | |||||||||||||
| USSE | (57 | ) | 359 | USSE | 9 | (57) | ||||||||||||||||
| Tubular | (67 | ) | (58 | ) | Tubular | (179) | (67) | |||||||||||||||
| Total earnings (loss) from reportable segments | 72 | 1,184 | Total earnings (loss) from reportable segments | (766) | 72 | |||||||||||||||||
| Other Businesses | 23 | 55 | Other Businesses | $ | (39) | 23 | ||||||||||||||||
| Segment earnings (loss) before interest and income taxes | 95 | 1,239 | Segment earnings (loss) before interest and income taxes | (805) | 95 | |||||||||||||||||
| Other items not allocated to segments: | Other items not allocated to segments: | |||||||||||||||||||||
| Asset impairment charges | Asset impairment charges | (263) | — | |||||||||||||||||||
Restructuring and other charges (b) | Restructuring and other charges (b) | (138) | (275) | |||||||||||||||||||
| Tubular inventory impairment | Tubular inventory impairment | (24) | — | |||||||||||||||||||
| Big River Steel debt extinguishment charges | Big River Steel debt extinguishment charges | (18) | — | |||||||||||||||||||
| Big River Steel transaction and other related costs | Big River Steel transaction and other related costs | (3) | — | |||||||||||||||||||
| Fairless property sale | Fairless property sale | 145 | — | |||||||||||||||||||
| Gain on previously held investment in UPI | Gain on previously held investment in UPI | 25 | — | |||||||||||||||||||
| December 24, 2018 Clairton coke making facility fire | (50 | ) | — | December 24, 2018 Clairton coke making facility fire | 6 | (50) | ||||||||||||||||
Restructuring and other charges (b) | (275 | ) | — | |||||||||||||||||||
| USW labor agreement signing bonus and related costs | — | (81 | ) | |||||||||||||||||||
| Granite City Works restart and related costs | — | (80 | ) | |||||||||||||||||||
| Granite City Works temporary idling charges | — | 8 | ||||||||||||||||||||
| Gain on equity investee transactions (Note 12) | — | 38 | ||||||||||||||||||||
| Total (loss) earnings before interest and income taxes | $ | (230 | ) | $ | 1,124 | Total (loss) earnings before interest and income taxes | $ | (1,075) | $ | (230) | ||||||||||||
(a) See Note 4 to the Consolidated Financial Statements for reconciliations and other disclosures required by Accounting Standards Codification Topic 280.
(b) Included in restructuring and other charges on the Consolidated Statements of Operations. See Note 25 to the Consolidated Financial Statements.
Gross Margin by Segment
| Year Ended December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Flat-Rolled | 1 | % | 8 | % | ||||||||||
| USSE | 7 | % | 3 | % | ||||||||||
| Tubular | (20) | % | (1) | % | ||||||||||
68
| Year Ended December 31, | ||||||
| 2019 | 2018 | |||||
| Flat-Rolled | 8 | % | 15 | % | ||
| USSE | 3 | % | 15 | % | ||
| Tubular | (1 | )% | 1 | % | ||
Segment results for Flat-Rolled
The Flat-Rolled segment had a loss of $596 million for the year ended December 31, 2020 compared to earnings of $196 million for the year ended December 31, 20192019. The decrease in Flat-Rolled results for 2020 compared to 2019 was primarily due to:
•lower average realized prices (approximately $565 million)
•decreased shipments, including substrate to our Tubular segment (approximately $310 million)
•decreased mining sales (approximately $140 million)
•increased other costs (approximately $30 million),
these changes were partially offset by:
•lower energy costs (approximately $100 million)
•lower raw material costs (approximately $95 million)
•decreased operating costs (approximately $60 million)
Gross margin for 2020 as compared to 2019 decreased primarily as a result of lower sales volume and average realized prices.
69
Segment results for USSE
The USSE segment had earnings of $883$9 million for the year ended December 31, 2018. The decrease in Flat-Rolled results for 20192020 compared to 2018 resulted primarily from lower average realized prices (approximately $570 million), increased spending on operating and maintenance costs (approximately $110 million), higher raw material costs (approximately $65 million) and increased other operating costs, primarily depreciation (approximately $90 million). These charges were partially offset by decreased other costs which was primarily related to decreased variable compensation (approximately $135 million) and lower energy costs (approximately $15 million).
•lower raw material costs (approximately $110 million)
•decreased shipmentsoperating costs (approximately $130$75 million),
•lower energy costs (approximately $20 million)
•favorable currency impacts (approximately $10 million)
•lower other costs (approximately $10 million)
these changes were partially offset by:
•lower average realized prices (approximately $100$160 million), higher raw material costs (approximately $115 million), the weakening of the euro versus the U.S. dollar (approximately $70 million), higher energy costs ($35 million). These charges were partially offset by lower spending for operating and maintenance (approximately $10 million) and other costs (approximately $25 million).
Gross margin decreasedincreased from 20192020 as compared to 20182019 primarily due toas a result of lower average realizedoperating costs and raw material prices.
70
Segment results for Tubular
The Tubular segment had a loss of $179 million for the year ended December 31, 2020 compared to a loss of $67 million for the year ended December 31, 20192019. The decrease in Tubular results in 2020 as compared to 2019 was primarily due to:
•lower average realized prices (approximately $80 million)
•decreased shipments, including volume inefficiencies (approximately $70 million)
•increased operating costs (approximately $5 million)
•higher energy costs (approximately $5 million),
these changes were partially offset by:
•lower raw material cost (approximately $25 million)
•decreased other costs (approximately $25 million)
Gross margin for 2020 as compared to 2019 decreased primarily due to lower sales volume and average realized prices.
Results for Other Businesses
Other Businesses had a loss of $58$39 million for the year ended December 31, 2018. The decrease in Tubular results in 2019 as2020 compared to 2018 was primarily due to lower average realized prices (approximately $15 million), decreased shipments (approximately $15 million), increased spending on operating costs (approximately $35 million) and increased costs associated with the continued execution of Tubular's commercial and technology strategy (approximately $25 million). Theses charges were partially offset by lower substrate and rounds costs (approximately $80 million).
Items not allocated to segments:
•We incurredrecorded asset impairment chargesof $50$263 million for costs associated with the December 24, 2018 Clairton coke making facility fire.impairment of property, plant and equipment and intangible asset within our welded tubular asset group.
•We recorded $275 million of restructuring and other charges of $138 million for the intended indefinite idling of a significant portion of Great Lakes Works the indefinite idling of ECT and our finishing facility in Dearborn, Michigan, within the Flat-Rolled segment, the labor productivity strategy within the USSE segmentKeetac mining operations, Lorain Tubular Operations, Lone Star Tubular Operations and company-widefor employee benefit costs related to Company-wide headcount reductions.reductions and a VERP offered at USSK.
71
•We recorded a tubular inventory impairment charge of $81$24 million for write-downs to inventory related to the indefinite idlings at Lone Star Tubular Operations and Lorain Tubular Operations.
•United Steelworkers labor agreement signing bonus and related costsBig River Steel debt extinguishment charges of $18 million were recognized in 2018 associated with(Loss) earnings from investees for the 2018 Labor Agreements with the United Steelworkers.refinancing of debt at Big River Steel.
•We recorded $80Big River Steel transaction and other related costs of $3 million for related to the Big River Steel acquisition.
•Granite City Works restart and related costsWe recorded a Fairless property sale gain of $145 million on the sale of our non-core real estate asset, the Keystone Industrial Port Complex, in Fairless Hills, Pennsylvania.
•We recorded a $25 million gain on previously held investment in 2018UPI as a resultdescribed in Note 5 to the Consolidated Financial Statements.
•We had recoveries of $6 million for costs associated with the restart of the "A" and "B" blast furnaces.December 24, 2018 Clairton coke making facility fire.
Net Interest and Other Financial Costs
| Year Ended December 31, | ||||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||
| Interest income | $ | (7) | $ | (17) | ||||||||||
| Interest expense | 280 | 142 | ||||||||||||
| Net periodic benefit (income) cost (other than service cost) | (25) | 91 | ||||||||||||
| Other financial (gains) costs | (16) | 6 | ||||||||||||
| Net interest and other financial costs | $ | 232 | $ | 222 | ||||||||||
| Year Ended December 31, | ||||||||
| (Dollars in millions) | 2019 | 2018 | ||||||
| Interest income | $ | (17 | ) | $ | (23 | ) | ||
| Interest expense | 142 | 168 | ||||||
| Net periodic benefit cost (other than service cost) | 91 | 69 | ||||||
| Loss on debt extinguishment | — | 98 | ||||||
| Other financial costs | 6 | — | ||||||
| Net interest and other financial costs | $ | 222 | $ | 312 | ||||
The net periodic benefit (income) cost (other than service cost) components of pension and other benefit costs are a component of net interestreflected in the table above, and other financial costs. The increasedecreased in 2020 as compared to 2019 pension and Other Benefit expense was primarily due to lower asset returnsbetter than expected for 20182019 asset performance, lower amortization of prior service costs, lower future healthcare costs, and a lower asset return assumption usedreduced participation in 2019, partially offset by the natural maturation of theour retiree health plans.
For additional information on U. S. Steel’s foreign currency exchange activity see Note 16 to the Consolidated Financial Statements and Item 7A. "Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency Exchange Rate Risk.”
Income Taxes
The income tax expensebenefit for the year ended December 31, 20192020 was $178$142 million compared to an income tax expense of $178 million in 2019. In general, the amount of tax expense or benefit from continuing operations is determined without regard to the tax effect of other categories of income or loss, such as other comprehensive income. However, an exception to this rule applies when there is a loss from continuing operations and income from other categories. In 2020, the tax benefit includes a benefit of $303$138 million in 2018.related to this accounting exception. The tax provisionbenefit in 20192020 also includes expense of $13 million for an updated estimate to tax reserves related to an unrecognized tax benefit. Due to the full valuation allowance on our domestic deferred tax assets, the tax benefit in 2020 does not reflect any additional tax benefit for domestic pretax losses. In 2019, the tax provision reflects a benefit for percentage depletion in excess of cost depletion from iron ore that we produce and consume or sell.
The Company regularly evaluates the U.S. asneed for a valuation allowance was recorded againstfor its deferred income tax benefits by assessing whether it is more likely than not it will realize these benefits in future periods. In assessing the net domestic deferred tax asset (excludingneed for a portion of deferred tax liability related to an asset with an indefinite life, as well as a deferred tax asset related to refundable Alternative Minimum Tax (AMT) credits). Included invaluation allowance, the 2018 tax benefit is a benefit of $374 millionCompany considers all available evidence, both positive and negative, related to the reversallikelihood of realization of its deferred income tax benefits, and based on the weight of that evidence, determines whether a portionvaluation allowance is required.
During the fourth quarter of 2020, management reviewed the Company’s current and forecasted operating results, current economic market conditions impacting the steel industry, and tax planning strategies. As of December 31, 2020, the Company concluded that it is more likely than not the Company will be able to realize its foreign deferred income tax benefits in future periods. Management will continue to assess the need for a valuation allowance and given the cyclical nature of the valuation allowance recorded againststeel industry, the Company’s net domestic deferred tax asset, as well ascontinued high level of steel imports, and future demand for steel and steel related products, may reach a benefitdifferent conclusion in future periods. As of $38 million related to the reversal of the valuation allowance for current year activity.
For further information on income taxes see Note 11 to the Consolidated Financial Statements.
Net earnings/(loss) attributable to U. S. Steel
Net loss attributable to U. S. Steel in 20192020 was $(630)$1,165 million compared to net earningsloss of $1,115$630 million in 2018.2019. The changes primarily reflected the factors discussed above.
72
Net cash provided by operating activities was $138 million in 2020 compared to $682 million in 2019 compared to $938 million in 2018.2019. The decrease in 20192020 compared to 20182019 was primarily due to decreased operating results, partially offset by changes in working capital. Changes in working capital can vary significantly depending on factors such as the timing of inventory production and purchases, which is affected by the length of our business cycles as well as our captive raw materials position, customer payments of accounts receivable and payments to vendors in the regular course of business.
Our keycash conversion cycle decreased 13 days in the fourth quarter of 2020 from the fourth quarter of 2019 as shown below:
| Cash Conversion Cycle | 2020 | 2019 | ||||||||||||||||||||||||
| $ millions | Days | $ millions | Days | |||||||||||||||||||||||
Accounts receivable, net (a) | $ | 994 | 38 | $ | 1,177 | 42 | ||||||||||||||||||||
+ Inventories (b) | $ | 1,402 | 54 | $ | 1,785 | 64 | ||||||||||||||||||||
- Accounts Payable and Other Accrued Liabilities (c) | $ | 1,861 | 68 | $ | 1,970 | 69 | ||||||||||||||||||||
= Cash Conversion Cycle (d) | 24 | 37 | ||||||||||||||||||||||||
(a) Calculated as Average Accounts Receivable, net divided by total Net Sales multiplied by the number of days in the period.
(b) Calculated as Average Inventory divided by total Cost of Sales multiplied by the number of days in the period.
(c) Calculated as Average Accounts Payable and Other Accrued Liabilities less bank checks outstanding and other current liabilities divided by total Cost of Sales multiplied by the number of days in the period.
(d) Calculated as Accounts Receivable Days plus Inventory Days less Accounts Payable Days.
The cash conversion cycle is a non-generally accepted accounting principles (non-GAAP) financial measure. We believe the cash conversion cycle is a useful measure in providing investors with information regarding our cash management performance and is a widely accepted measure of working capital components include accounts receivable and inventory.management efficiency. The accounts receivable and inventory turnover ratios for the years ended December 31, 2019 and 2018 arecash conversion cycle should not be considered in isolation or as follows:an alternative to other GAAP metrics as an indicator of performance.
| Year Ended December 31, | ||||||
| 2019 | 2018 | |||||
| Accounts Receivable Turnover | 9.1 | 9.3 | ||||
| Inventory Turnover | 6.2 | 6.4 | ||||
The last-in, first-out (LIFO) inventory method is the predominant method of inventory costing in the United States. At December 31, 20192020 and 2018,2019, the LIFO method accounted for 7559 percent and 7475 percent of total inventory values, respectively. In the U.S., management monitors the inventory realizability by comparing the LIFO cost of inventory with the replacement cost of inventory. To the extent the replacement cost (i.e., market value) of inventory is lower than the LIFO cost of inventory, management will write the inventory down. As of December 31, 20192020 and 2018,2019, the replacement cost of the inventory was higher by approximately $735$848 million and $1,038$735 million, respectively.
| Cash Conversion Cycle | 2019 | 2018 | ||||||||||
| $ millions | Days | $ millions | Days | |||||||||
Accounts receivable, net (a) | $ | 1,177 | 42 | $ | 1,659 | 42 | ||||||
+ Inventories (b) | $ | 1,785 | 64 | $ | 2,092 | 58 | ||||||
- Accounts Payable and Other Accrued Liabilities (c) | $ | 1,970 | 69 | $ | 2,477 | 72 | ||||||
= Cash Conversion Cycle (d) | 37 | 28 | ||||||||||
Net cash provided by operating activities for 20192020 and 20182019 reflects employee benefits payments as shown in the following table.
| Year Ended December 31, | ||||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||
| Other employee benefits payments not funded by trusts | $ | 46 | $ | 45 | ||||||||||
| Payments to a multiemployer pension plan | 76 | 77 | ||||||||||||
| Pension related payments not funded by trusts | 7 | 8 | ||||||||||||
| Reductions in cash flows from operating activities | $ | 129 | $ | 130 | ||||||||||
73
| Year Ended December 31, | ||||||||
| (Dollars in millions) | 2019 | 2018 | ||||||
| Other employee benefits payments not funded by trusts | $ | 45 | $ | 48 | ||||
| Payments to a multiemployer pension plan | 77 | 60 | ||||||
| Pension related payments not funded by trusts | 8 | 20 | ||||||
| Reductions in cash flows from operating activities | $ | 130 | $ | 128 | ||||
Capital expenditures in 20192020 were $1.252$0.725 billion compared to $1.001$1.252 billion in 2018.2019.
Total capital expenditures for 20192020 were $1.252 billion.$725 million. Flat-Rolled capital expenditures were $943$484 million and included spending for the Mon Valley No. 3 Blast Furnace outage, Mon Valley Endless Casting and Rolling, Gary Hot Strip Mill upgrades, Great Lakes B2Gary #4 Blast Furnace, Midwest Tin Cold Mill upgrades,Gary Chrome Treatment, Mining Equipment, and various other infrastructure, environmental and strategic projects. USSE capital expenditures of $79 million consisted of spending for completion of the BAT program, BF 2 Stove, long-lead time manufacturing for the new Dynamo line, and various other infrastructure and environmental projects. Tubular capital expenditures were $145$159 million and included spending for the Fairfield Electric Arc Furnace (EAF) project, Offshore Operations threading line and swage extension and various other strategic capital projects. USSE capital expenditures of $153 million consisted of spending for improved Sinter Strand Emission control, improved Ore Bridges Emission control, the new Dynamo line, and various other infrastructure and environmental projects.
Capital expenditures for 20202021 are expected to total approximately $875$675 million and remain focused largely on strategic, infrastructure and environmental projects, as well as continued reinvestment in our equipment to improve our operating reliability and efficiency, and product quality and cost by focusing on investments in our Flat-Rolled segment.
U. S. Steel’s contractual commitments to acquire property, plant and equipment at December 31, 2019,2020, totaled $880$583 million.
Liquidity
The following table summarizes U. S. Steel’s liquidity as of December 31, 2019:2020:
| (Dollars in millions) | |||||
| Cash and cash equivalents | $ | 1,985 | |||
| Amount available under $2.0 Billion Credit Facility | 944 | ||||
| Amounts available under USSK credit facilities | 224 | ||||
| Total estimated liquidity | $ | 3,153 | |||
| (Dollars in millions) | |||
| Cash and cash equivalents | $ | 749 | |
| Amount available under $2.0 Billion Credit Facility | 1,380 | ||
| Amounts available under USSK credit facilities | 155 | ||
| Total estimated liquidity | $ | 2,284 | |
As of December 31, 2019, $2552020, $271 million of the total cash and cash equivalents was held by our foreign subsidiaries. Substantially all of the liquidity attributable to our foreign subsidiaries can be accessed without the imposition of income taxes as a result of the
74
election effective December 31, 2013 to liquidate for U.S. income tax purposes a foreign subsidiary that holds most of our international operations.
We may from time to time seek to retire or repurchase our outstanding long-term debt through open market purchases, privately negotiated transactions, exchange transactions, redemptions or otherwise. Such purchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, and other factors and may be commenced or suspended at any time. The amounts involved may be material. See Note 17 to the Consolidated Financial Statements for further details regarding U. S. Steel's debt.
We use surety bonds, trusts and letters of credit to provide financial assurance for certain transactions and business activities. The use of some forms of financial assurance and cash collateral have a negative impact on liquidity. U. S. Steel has committed $164$222 million of liquidity sources for financial assurance purposes as of December 31, 2019.2020. Increases in certain of these commitments which use collateral are reflected inwithin cash, cash equivalents and restricted cash on the Consolidated Statement of Cash Flows.
As of December 31, 2020, Stelco had made installment payments totaling $100 million under the Option Agreement which are recorded in noncontrolling interest net of transaction fees in the Consolidated Balance Sheet. See Note 20 to the Consolidated Financial Statements for further details.
We finished 2020 with $1.985 billion of cash and cash equivalents and $3.153 billion of total liquidity. On January 15, 2021 we closed on the purchase of the remaining equity in Big River Steel for approximately $723 million in cash and the assumption of liabilities of approximately $50 million. Available cash is left on deposit with financial institutions or invested in highly liquid securities with parties we believe to be creditworthy. U. S. Steel management believes that our liquidity will be adequate to fund our requirements based on our current assumptions with respect to our results of operations and financial condition, including the continued impact of the COVID-19 pandemic and the ongoing disruption in the oil and gas industry.
The following credit facility activity has occurred in January and early February of 2021:
•On January 15, 2021, a payment of €50 million (approximately $61 million) was made under the USSK Credit Agreement.
•On January 22, 2021, our Big River Steel subsidiary borrowed $50 million under its credit facility.
•On January 29, 2021, a payment of $100 million was made under the Credit Facility Agreement.
•On February 10, 2021, notice was given that we intend to make an additional payment on February 16, 2021 of $250 million under the Credit Facility Agreement.
See Note 17 to the Consolidated Financial Statements for a description of U. S. Steel debt as of December 31, 2020, including the terms and descriptions of our outstanding Senior Secured Notes and Senior Notes.
After the closing of the Big River Steel purchase on January 15, 2021, additional indebtedness of approximately $1.9 billion (excluding any potential step-up to fair value) became the financial obligation of the Company and will be included on our Consolidated Balance Sheet in future periods. Below is a summary:
•6.625% Senior Secured Notes in the aggregate principal amount of $900 million that mature on January 31, 2029 that pay interest semi-annually on January 31 and July 31 of each year;
•4.50% Arkansas Development Finance Authority Bonds in the amount of $487 million that have a final maturity of September 1, 2049 that pay interest semi-annually on each March 1 and September 1;
•4.75% Arkansas Development Finance Authority Bonds Tax Exempt Series 2020 (Green Bonds) in the amount of $265 million that have a final maturity on September 1, 2049 and pay interest semi-annually on March 1 and September 1 each year;
•Other long-term indebtedness that includes a building mortgage and finance leases that total approximately $200 million.
We expect that our estimated liquidity requirements will consist primarily of our 2021 planned strategic and sustaining capital expenditures, interest expense, and operating costs and employee benefits for our operations after taking into account the footprint actions and cost reductions at our plants and headquarters described above. Our available liquidity at December 31, 2020 consists principally of our cash and cash equivalents and available borrowings under the Credit Facility Agreement and the USSK Credit Facilities. Management continues to evaluate market conditions in our industry and our global liquidity position, and may consider additional actions to further strengthen our balance sheet and optimize liquidity, which may include drawing on available capacity under the Credit Facility Agreement and/or the USSK Credit Facilities, or reducing outstanding borrowings under those facilities from time to time if deemed appropriate by management.
In October 2020, the Company entered into a supply chain finance (SCF) agreement with a third party administrator with an initial term of one year to allow participating suppliers, at their sole discretion, to make offers to sell payment obligations of the
75
Company prior to their scheduled due dates at a discounted price to a participating financial institution. The third party administrator entered into a separate one year agreement with the Export Import Bank of the United States (Ex-Im Guarantee) that guarantees 95 percent of the supplier payment obligations sold for up to $200 million. No guarantees are provided by the Company or any of its subsidiaries under the SCF program. The Company’s goal is to capture overall supplier savings and improve working capital efficiency and the agreements facilitate the suppliers’ ability to sell payment obligations, while providing them with greater working capital flexibility. The Company has no economic interest in the sale of the suppliers’ receivables and no direct financial relationship with the financial institution concerning these services. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to sell amounts under the arrangements. The underlying costs from suppliers that elected to participate in the SCF program are generally recorded in cost of sales in the Company’s Consolidated Statement of Operations. Amounts due to suppliers who participate in the SCF program are reflected in accounts payable and accrued expenses on the Company’s Consolidated Balance Sheet and payments on the obligations by our suppliers are included in cash used in operating activities in the Consolidated Statement of Cash Flows. As of December 31, 2020, accounts payable and accrued expenses included approximately $34 million of outstanding payment obligations which suppliers elected to sell to participating financial institutions. Access to supply chain financing could be curtailed in the future if the terms of the Ex-Im Guarantee are modified or if our credit ratings are downgraded. If access to supply chain financing is curtailed, working capital could be negatively impacted which may necessitate further long-term borrowings.
At December 31, 2019,2020, in the event of a change in control of U. S. Steel: (a) debt obligations totaling $3,093$4,317 million as of December 31, 20192020 may be declared due and payable; (b) the Credit Facility Agreement and the USSK credit facilities may be terminated and any amounts outstanding declared due and payable; and (c) U. S. Steel may be required to either repurchase the leased Fairfield slab caster for $19 million or provide a cash collateralized letter of credit to secure the remaining obligation.payable.
The maximum guarantees of the indebtedness of unconsolidated entities of U. S. Steel totaled $4$7 million at December 31, 2019.2020. If any default related to the guaranteed indebtedness occurs, U. S. Steel has access to its interest in the assets of the investees to reduce its potential losses under the guarantees.
The following table summarizes U. S. Steel’s contractual obligations at December 31, 2019,2020, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Payments Due by Period | |||||||||||||||||||||||||||||||||||
| Contractual Obligations | Total | 2021 | 2022 through 2023 | 2024 through 2025 | Beyond 2025 | ||||||||||||||||||||||||||||||
Debt (including interest) and finance leases(a) | $ | 7,564 | $ | 524 | $ | 1,047 | $ | 2,913 | $ | 3,080 | |||||||||||||||||||||||||
Operating leases(b) | 265 | 73 | 96 | 57 | 39 | ||||||||||||||||||||||||||||||
Contractual purchase commitments(c) | 5,781 | 3,415 | 1,351 | 313 | 702 | ||||||||||||||||||||||||||||||
Capital commitments(d) | 583 | 442 | 141 | — | — | ||||||||||||||||||||||||||||||
Environmental commitments(d) | 146 | 43 | — | — | 103 | (e) | |||||||||||||||||||||||||||||
Steelworkers Pension Trust(f) | 381 | 73 | 151 | 157 | — | ||||||||||||||||||||||||||||||
Pensions(g) | — | — | — | — | — | ||||||||||||||||||||||||||||||
Other benefits(h) | 219 | 47 | 89 | 83 | — | ||||||||||||||||||||||||||||||
| Total contractual obligations | $ | 14,939 | $ | 4,617 | $ | 2,875 | $ | 3,523 | $ | 3,924 | |||||||||||||||||||||||||
(a)See Note 17 to the Consolidated Financial Statements.
(b)See Note 24 to the Consolidated Financial Statements. Amounts exclude subleases.
(c)Reflects estimated contractual purchase commitments under purchase orders and “take or pay” arrangements. “Take or pay” arrangements are primarily for purchases of gases and certain energy and utility services. Additionally, includes coke and steam purchase commitments related to a coke supply agreement with Gateway Energy & Coke Company LLC (See Note 26 to the Consolidated Financial Statements).
(d)See Note 26 to the Consolidated Financial Statements.
(e)Timing of potential cash flows is not reasonably determinable.
(f)While it is difficult to make a prediction of cash requirements beyond the term of the 2018 Labor Agreements with the USW, which expire on September 1, 2022, projected amounts shown through 2025 assume the contribution rate per hour included in the 2018 Labor Agreements.
(g)Projections are estimates of the minimum required contributions to the main domestic defined benefit pension plan which have been estimated assuming future asset performance consistent with our expected long-term earnings rate assumption, no voluntary contributions during the periods, and that the current low interest rate environment persists. Projections include the impacts of the November 2015 pension stabilization legislation, which further extended a revised interest rate formula to be used in calculating minimum required annual contributions. The legislation also increased the contribution rate of future Pension Benefit Guarantee Corporation (PBGC) premiums. Under these assumptions, there are no minimum required contributions to be paid.
(h)The amounts reflect corporate cash outlays for expected benefit payments to be paid by the Company. (See Note 18 to the Consolidated Financial Statements). The accuracy of this forecast of future cash flows depends on future medical health care escalation rates and restrictions related to our trusts for retiree healthcare and life insurance (VEBA) that impact the timing of the use of trust assets. Projected amounts have been reduced to reflect withdrawals from the USW VEBA trust available under its agreements with the USW. Due to these factors, it is not possible to reliably estimate cash requirements beyond five years and actual amounts experienced may differ significantly from those shown.
76
| (Dollars in millions) | |||||||||||||||||||||
| Payments Due by Period | |||||||||||||||||||||
| Contractual Obligations | Total | 2020 | 2021 through 2022 | 2023 through 2024 | Beyond 2024 | ||||||||||||||||
Long-term debt (including interest) and finance leases(a) | $ | 5,751 | $ | 226 | $ | 450 | $ | 1,463 | $ | 3,612 | |||||||||||
Operating leases(b) | 289 | 74 | 104 | 60 | 51 | ||||||||||||||||
Contractual purchase commitments(c) | 4,197 | 2,400 | 741 | 445 | 611 | ||||||||||||||||
Capital commitments(d) | 880 | 663 | 217 | — | — | ||||||||||||||||
Environmental commitments(d) | 186 | 53 | — | — | 133 | (e) | |||||||||||||||
Steelworkers Pension Trust(f) | 430 | 79 | 172 | 179 | — | ||||||||||||||||
Pensions(g) | 264 | — | — | 101 | 163 | ||||||||||||||||
Other benefits(h) | 228 | 48 | 93 | 87 | — | ||||||||||||||||
| Total contractual obligations | $ | 12,225 | $ | 3,543 | $ | 1,777 | $ | 2,335 | $ | 4,570 | |||||||||||
Contingent lease payments have been excluded from the above table. Contingent lease payments relate to operating lease agreements that include a floating rental charge, which is associated to a variable component. Future contingent lease payments are not determinable to any degree of certainty. U. S. Steel’s annual incurred contingent lease expense is disclosed in Note 24 to the Consolidated Financial Statements. Additionally, recorded liabilities related to deferred income taxes and other liabilities that may have an impact on liquidity and cash flow in future periods, disclosed in Note 11 to the Consolidated Financial Statements, are excluded from the above table.
U. S. Steel will monitor the funded status of the pension plan to determine when voluntary contributions may be prudent in order to mitigate potentially larger mandatory contributions in later years. The funded status of U. S. Steel’s pension plans is disclosed in Note 18 to the Consolidated Financial Statements.
The following table summarizes U. S. Steel’s commercial commitments at December 31, 2019,2020, and the effect such commitments could have on our liquidity and cash flows in future periods.
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Scheduled Reductions by Period | |||||||||||||||||||||||||||||||||||
| Commercial Commitments | Total | 2021 | 2022 through 2023 | 2024 through 2025 | Beyond 2025 | ||||||||||||||||||||||||||||||
Standby letters of credit(a) | $ | 64 | $ | 46 | $ | 8 | $ | — | $ | 10 | (b) | ||||||||||||||||||||||||
Surety bonds(a) | 104 | — | — | — | 104 | (b) | |||||||||||||||||||||||||||||
Funded Trusts(a) | 54 | — | — | — | 54 | (b) | |||||||||||||||||||||||||||||
| Total commercial commitments | $ | 222 | $ | 46 | $ | 8 | $ | — | $ | 168 | |||||||||||||||||||||||||
(a)Reflects a commitment or guarantee for which future cash outflow is not considered likely.
| (Dollars in millions) | |||||||||||||||||||||
| Scheduled Reductions by Period | |||||||||||||||||||||
| Commercial Commitments | Total | 2020 | 2021 through 2022 | 2023 through 2024 | Beyond 2024 | ||||||||||||||||
Standby letters of credit(a) | $ | 36 | $ | 25 | $ | 1 | $ | — | $ | 10 | (b) | ||||||||||
Surety bonds(a) | 109 | — | — | — | 109 | (b) | |||||||||||||||
Funded Trusts(a) | 3 | — | — | — | 3 | (b) | |||||||||||||||
| Total commercial commitments | $ | 148 | $ | 25 | $ | 1 | $ | — | $ | 122 | |||||||||||
Our major cash requirements in 20202021 are expected to be for capital expenditures, including strategic priorities, and asset revitalization, employee benefits and operating costs, which includes purchases of raw materials. We ended 20192020 with $749$1,985 million of cash and cash equivalents and $2,284$3,153 million of total liquidity. Available cash is left on deposit with financial institutions or invested in highly liquid securities with parties we believe to be creditworthy.
U. S. Steel management believes that U. S. Steel’s liquidity will be adequate to satisfy our obligations for the foreseeable future, including obligations to complete currently authorized capital spending programs. Future requirements for U. S. Steel’s business needs, including the funding of acquisitions and capital expenditures, scheduled debt maturities, repurchase of debt, share buybacks, dividends, contributions to employee benefit plans, and any amounts that may ultimately be paid in connection with contingencies, are expected to be funded by a combination of internally generated funds (including asset sales), proceeds from the sale of stock, borrowings, refinancings and other external financing sources.
Off-Balance Sheet Arrangements
U. S. Steel has invested in several joint ventures that are reported as equity investments. Several of these investments involved a transfer of assets in exchange for an equity interest. U. S. Steel has supply arrangements with several of these joint ventures.
U. S. Steel’s other off-balance sheet arrangements include guarantees, indemnifications, unconditional purchase obligations, surety bonds, trusts and letters of credit disclosed in Note 26 to the Consolidated Financial Statements.
Derivative Instruments
See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for discussion of derivative instruments and associated market risk for U. S. Steel.
77
Environmental Matters
U. S. Steel’s environmental expenditures were as follows:
| (Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| North America: | North America: | |||||||||||||||||||||||||||||||
| Capital | $ | 96 | $ | 105 | $ | 6 | Capital | $ | 36 | $ | 96 | $ | 105 | |||||||||||||||||||
| Compliance | Compliance | |||||||||||||||||||||||||||||||
| Operating & maintenance | 213 | 198 | 176 | Operating & maintenance | 188 | 213 | 198 | |||||||||||||||||||||||||
Remediation(a) | 22 | 6 | 9 | Remediation(a) | 37 | 22 | 6 | |||||||||||||||||||||||||
| Total North America | $ | 331 | $ | 309 | $ | 191 | Total North America | $ | 261 | $ | 331 | $ | 309 | |||||||||||||||||||
| USSE: | USSE: | |||||||||||||||||||||||||||||||
| Capital | $ | 27 | $ | 20 | $ | 46 | Capital | $ | 6 | $ | 27 | $ | 20 | |||||||||||||||||||
| Compliance | Compliance | |||||||||||||||||||||||||||||||
| Operating & maintenance | 10 | 12 | 11 | Operating & maintenance | 6 | 10 | 12 | |||||||||||||||||||||||||
Remediation(a) | 8 | 9 | 7 | Remediation(a) | 5 | 8 | 9 | |||||||||||||||||||||||||
| Total USSE | $ | 45 | $ | 41 | $ | 64 | Total USSE | $ | 17 | $ | 45 | $ | 41 | |||||||||||||||||||
| Total U. S. Steel | $ | 376 | $ | 350 | $ | 255 | Total U. S. Steel | $ | 278 | $ | 376 | $ | 350 | |||||||||||||||||||
(a) These amounts include spending charged against remediation reserves, net of recoveries where permissible, but do not include non-cash provisions recorded for environmental remediation.
U. S. Steel’s environmental capital expenditures accounted for 106 percent of total capital expenditures in 2020 and 10 percent in 2019 and 12 percent in 2018 and 10 percent in 2017.2018.
Environmental compliance expenditures represented 2 percent of U. S. Steel's total costs and expenses in 2020, 2019 2018 and 2017.2018. Remediation spending during 20172018 through 20192020 was mainly related to remediation activities at former and present operating locations.
For discussion of other relevant environmental items see “Part I, Item 3. Legal Proceedings – Environmental Proceedings.”
The following table shows activity with respect to environmental remediation liabilities for the years ended December 31, 20192020 and December 31, 2018.2019. These amounts exclude liabilities related to asset retirement obligations accounted for in accordance with ASC Topic 410. See Note 19 to the Consolidated Financial Statements.
| (Dollars in millions) | 2020 | 2019 | ||||||||||||
| Beginning Balance | $ | 186 | $ | 187 | ||||||||||
| Plus: Additions | 7 | 20 | ||||||||||||
| Less: Obligations settled | (47) | (21) | ||||||||||||
| Ending Balance | $ | 146 | $ | 186 | ||||||||||
| (Dollars in millions) | 2019 | 2018 | ||||||
| Beginning Balance | $ | 187 | $ | 179 | ||||
| Plus: Additions | 20 | 14 | ||||||
| Less: Obligations settled | (21 | ) | (6 | ) | ||||
| Ending Balance | $ | 186 | $ | 187 | ||||
New or expanded environmental requirements, which could increase U. S. Steel’s environmental costs, may arise in the future. U. S. Steel intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to predict accurately the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. U. S. Steel’s environmental capital expenditures are expected to be approximately $66 million in 2020, $52021, $7 million of which is related to projects at USSE. U. S. Steel's environmental expenditures for 20202021 for operating and maintenance and for remediation projects are expected to be approximately $215$203 million and $60$52 million, respectively, of which approximately $10 million and $5$6 million for operating and maintenance and remediation, respectively, is related to USSE. Although, the outcome of pending environmental matters are not estimable at this time, it is reasonably possible that U. S. Steel's environmental capital and operating and maintenance expenditures could materially increase as a result of the future resolution of these matters. Predictions of future environmental expenditures beyond 20202021 can only be broad-based estimates, which have varied, and will continue
to vary, due to the ongoing evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new technologies to remediate sites, among other factors.
Accounting Standards
See Notes 2 and 3 to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
78
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
U. S. Steel is exposed to certain risks related to its ongoing business operations, including financial, market, political, and economic risks. The following discussion provides information regarding U. S. Steel’s exposure to the risks of changing foreign currency exchange rates, commodity prices and interest rates.
U. S. Steel may enter into derivative financial instrument transactions in order to manage or reduce these market risks. The use of derivative instruments is subject to our corporate governance policies. These instruments are used solely to mitigate market exposure and are not used for trading or speculative purposes.
U. S. Steel may elect to use hedge accounting for certain commodity or currency transactions. For those transactions, the impact of the hedging instrument will be recognized in other comprehensive income until the transaction is settled. Once the transaction is settled, the effect of the hedged item will be recognized in income. For further information regarding derivative instruments see Notes 1 and 16 to the Consolidated Financial Statements.
Foreign Currency Exchange Rate Risk
U. S. Steel, through USSE, is subject to the risk of price fluctuations due to the effects of exchange rates on revenues and operating costs, firm commitments for capital expenditures and existing assets or liabilities denominated in currencies other than the U.S. dollar, particularly the euro. U. S. Steel historically has made limited use of forward currency contracts to manage exposure to certain currency price fluctuations. U. S. Steel elected cash flow hedge accounting for euro foreign exchange forwards prospectively effective July 1, 2019. Foreign currency derivative instruments entered into prior to July 1, 2019 have beenwere marked-to-market and the resulting gains or losses recognized in the current period in net interest and other financial costs. At December 31, 2019 and December 31, 2018,costs until those contracts matured in July 2020. U. S. Steel had no open euro forward sales contracts for U.S. dollars that were subject to mark-to-market accounting (total notional valueas of December 31, 2020. As of December 31, 2019 U. S. Steel had approximately $153 million and $344 million, respectively). A 10 percent increase in the December 31, 2019 euro forward rates would result in a $15 million chargesales contracts for U.S. dollars that were subject to income.mark-to-market accounting.
The fair value of our derivatives is determined using Level 2 inputs, which are defined as “significant other observable” inputs. The inputs used include quotes from counterparties that are corroborated with market sources.
Volatility in the foreign currency markets could have significant implications for U. S. Steel as a result of foreign currency transaction effects. Future foreign currency impacts will depend upon changes in currencies and the extent to which we engage in derivatives transactions. For additional information on U. S. Steel’s foreign currency exchange activity, see Note 16 to the Consolidated Financial Statements.
Commodity Price Risk and Related Risks
In the normal course of our business, U. S. Steel is exposed to market risk or price fluctuations related to the purchase, production or sale of steel products. U. S. Steel is also exposed to price risk related to the purchase, production or sale of coal, coke, natural gas, steel scrap, iron ore and pellets, and zinc, tin and other nonferrous metals used as raw materials. U. S. Steel is also subject to market price risk for the purchase of a portion of its electricity at certain facilities. See Note 16 to the Consolidated Financial Statements for further details on U. S. Steel’s derivatives.
U. S. Steel’s market risk strategy has generally been to obtain competitive prices for our products and services and allow operating results to reflect market price movements dictated by supply and demand; however, from time to time U. S. Steel has made forward physical purchases to manage exposure to price risk related to the purchases of natural gas and certain non-ferrous metals used in the production process. As of December 31, 2019,2020, U. S. Steel did not have forward buy contracts for natural gas or any of the other significant raw materials that it uses in its production process.
79
Interest Rate Risk
U. S. Steel is subject to the effects of interest rate fluctuations on the fair value of certain of our non-derivative financial instruments. A sensitivity analysis of the projected incremental effect of a hypothetical 10 percent increase/decrease in year-end 20192020 and 20182019 interest rates on the fair value of U. S. Steel’s non-derivative financial instruments is provided in the following table:
| (Dollars in millions) | 2020 | 2019 | ||||||||||||||||||||||||
Non-Derivative Financial Instruments(a) | Fair Value(b) | Change in Fair Value(c) | Fair Value(b) | Change in Fair Value(c) | ||||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||||||||
Debt(d)(e) | $ | 5,323 | $ | 141 | $ | 3,576 | $ | 138 | ||||||||||||||||||
(a)Fair values of cash and cash equivalents, current accounts and notes receivable, accounts payable, bank checks outstanding and accrued interest approximate carrying value and are relatively insensitive to changes in interest rates due to the short-term maturity of the instruments. Accordingly, these instruments are excluded from the table.
| (Dollars in millions) | 2019 | 2018 | ||||||||||||||
Non-Derivative Financial Instruments(a) | Fair Value(b) | Change in Fair Value(c) | Fair Value(b) | Change in Fair Value(c) | ||||||||||||
| Financial liabilities: | ||||||||||||||||
Debt(d)(e) | $ | 3,576 | $ | 138 | $ | 2,182 | $ | 102 | ||||||||
(c)Reflects, by class of financial instrument, the estimated incremental effect of a hypothetical 10 percent change in interest rates at December 31, 2020 and 2019, on the fair value of U. S. Steel’s non-derivative financial instruments. For financial liabilities, this assumes a 10 percent decrease in the weighted average yield to maturity of U. S. Steel’s long-term debt at December 31, 2020 and December 31, 2019.
(d)Excludes finance lease obligations.
(e)Fair value was determined using Level 2 inputs which were derived from quoted market prices and is based on the yield on public debt where available or current borrowing rates available for financings with similar terms and maturities.
U. S. Steel’s sensitivity to interest rate declines and corresponding increases in the fair value of our debt portfolio would unfavorably affect our results and cash flows only to the extent that we elected to repurchase or otherwise retire all or a portion of our fixed-rate debt portfolio at prices above carrying value.
Other Risks
U. S. Steel's purchase of a 49.9% equity ownership interest in Big River Steel on October 31, 2019 included certain call and put options. In 2020, U. S. Steel marksmarked these options to fair value each reporting period using a Monte Carlo simulation which is considered a Level 3 valuation technique. Level 3 valuation techniques include inputs to the valuation methodology that are considered unobservable and significant to the fair value measurement. The simulation reliesrelied on assumptions that includeincluded Big River Steel's future equity value, volatility, the risk free interest rate and U. S. Steel's credit spread. A significant factor in determining equity value was the discounted forecasted cash flows of Big River Steel. Forecasted cash flows are primarily impacted by the forecasted market price of steel and metallic inputs as well as the expected timing of significant capital expenditures. An updated forecast indicated an increase in the equity value which led to a favorable mark-to-market adjustment impact during 2020. Changes in the key assumptions can cause significant fluctuations in the value of the puts and calls that arewere recorded in net interest and other financial costs in our Consolidated Statement of Operations.
When the U. S. Steel Call Option was exercised on December 8, 2020, the options were legally extinguished and U. S. Steel recorded a contingent forward for the unsettled commitment to purchase the remaining interest in Big River Steel. As this is a contingent forward contract to purchase a business, it is no longer considered a derivative subject to ASC 815, Derivative Instruments and Hedging Activities, and is not subject to subsequent fair value adjustments. The value of the contingent forward purchase commitment asset of $11 million was determined by subtracting the fixed U. S. Steel Call Option strike price from the estimated equity value of the 50.1% interest in Big River Steel as of December 8, 2020. The fair value of the remaining equity in Big River Steel was calculated using a financial model which is also considered a Level 3 valuation technique. The model utilized a weighted average of the income and market approach. The significant inputs under the income approach were the updated forecast, weighted average cost of capital of 11.0% and long-term revenue growth rate of 2.0%. The market approach was primarily impacted by the EBITDA multiple of 8.5.
The net change in fair value of the options and recognition of the contingent forward purchase commitment during 20192020 resulted in a $7$39 million increasedecrease to net interest and other financial costs. See Note 5 and Note 20 to the Consolidated Financial Statements for further details.
80
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in our Consolidated Financial Statement contained in this Annual Report on Form 10-K. Specific financial statements can be found at the page listed below:
| PAGE | |||||
81
MANAGEMENT’S REPORT TO STOCKHOLDERS
February 12, 2021
To the Stockholders of United States Steel Corporation:
Financial Statements and Practices
The accompanying consolidated financial statements of United States Steel Corporation are the responsibility of and have been prepared by United States Steel Corporation in conformity with accounting principles generally accepted in the United States of America. They necessarily include some amounts that are based on our best judgments and estimates. United States Steel Corporation’s financial information displayed in other sections of this report is consistent with these financial statements.
United States Steel Corporation 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 communication programs aimed at assuring that its policies, procedures and methods are understood throughout the organization.
United States Steel Corporation has a comprehensive, formalized system of internal controls designed to provide reasonable assurance that assets are safeguarded, that financial records are reliable and that information required to be disclosed in reports filed with or submitted to the Securities and Exchange Commission is recorded, processed, summarized and reported within the required time limits. Appropriate management monitors the system for compliance and evaluates it for effectiveness, and the auditors independently measureindependent registered public accounting firm measures its effectiveness and recommendrecommends possible improvements thereto.
The Board of Directors exercises its oversight role in the area of financial reporting and internal control over financial reporting through its Audit Committee. This committee, composed solely of independent directors, regularly meets (jointly and separately) with the independent registered public accounting firm, management, internal audit and other executives to monitor the proper discharge by each of their responsibilities relative to internal control over financial reporting and United States Steel Corporation’s financial statements.
Internal Control Over Financial Reporting
United States Steel Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of United States Steel Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, United States Steel Corporation conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. On February 29, 2020, the Company acquired the remaining 50% ownership interest in USS-POSCO Industries. As the acquisition occurred in February 2020, the scope of the Company's assessment of the design and operating effectiveness of U. S. Steel’s internal control over financial reporting for the year ended December 31, 2020 excluded this acquired business. The total assets and total revenues excluded from our assessment represented approximately 2% and 6%, respectively, of U. S. Steel's consolidated total assets and total revenue as of and for the year ended December 31, 2020. This exclusion is in accordance with the SEC's staff guidance that an assessment of a recently acquired business may be omitted from the scope of the Company's evaluation of the effectiveness of its internal controls in the year of acquisition. This acquired business will be included in management’s assessment of the effectiveness of our internal controls over financial reporting as of December 31, 2021.
Based on this evaluation, United States Steel Corporation’s management concluded that United States Steel Corporation’s internal control over financial reporting was effective as of December 31, 2019.2020.
The effectiveness of United States Steel Corporation’s internal control over financial reporting as of December 31, 20192020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
82
/ | / | |||||||
| David B. Burritt | Christine S. Breves | |||||||
President and Chief Executive Officer | Senior Vice President and Chief Financial Officer | |||||||
/S/ MANPREET S. GREWAL | ||||||||
83
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of United States Steel Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of United States Steel Corporation and its subsidiaries (the “Company”) as of December 31, 20192020 and 2018,2019 and the related consolidated statements of operations, comprehensive (loss) income, (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019,2020, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report to Stockholders on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report to Stockholders on Internal Control over Financial Reporting, management has excluded USS-POSCO Industries (“UPI”) from its assessment of internal control over financial reporting as of December 31, 2020 because it was acquired by the Company in a purchase business combination during 2020. We have also excluded UPI from our audit of internal control over financial reporting. UPI is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 2% and 6%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2020.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
84
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that (i) relaterelates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
As described in Notes 1 and 11 to the consolidated financial statements, the Company has total deferred tax assets of $422 million, which is net of a valuation allowance of $563 million as of December 31, 2019. The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. After weighing all the positive and negative evidence, the Company determined that it was more likely than not that the net domestic deferred tax asset (excluding a portion of a deferred tax liability related to an asset with an indefinite life, as well as a deferred tax asset related to refundable AMT credits) may not be realized. As a result, the Company recorded a $334 million non-cash charge to tax expense in 2019.
U. S. Steel purchased a 49.9% ownership interest in Big River Steel in 2019.Steel. The transaction included a call option (U. S. Steel Call Option) to acquire the remaining 50.1% within the next four years at an agreed-upon price formula, which in years three and four is based on Big River Steel’s achievement of certain metrics. The transaction also included options where the other Big River Steel equity owners can require U. S. Steel to purchase their 50.1% ownership interest (Class B Common Put Option) or require U. S. Steel to sell its ownership interest (Class B Common Call Option) at an agreed-upon price ifformula. When the U. S. Steel Call Option expires. Allwas exercised on December 8, 2020, U. S. Steel recorded a contingent forward of $11 million for the options are markedunsettled commitment to fair value each period using a Monte Carlo simulation which relies on assumptions regardingpurchase the remaining interest in Big River Steel's equity value, volatility, the risk free interest rate and credit spread.Steel. The value of the contingent forward asset was determined by subtracting the fixed U. S. Steel Call Option strike price from the Class B Common Put Option and Class B Common Call Option are $166 million, $192 million and $2 million, respectively,estimated equity value of the 50.1% interest in Big River Steel as of December 31, 2019.8, 2020. The net change in fair value of the options during 2019 resultedremaining 50.1% equity interest in Big River Steel was calculated using a $7 million increase to net interestfinancial model which is considered a Level 3 valuation technique. The model utilized a weighted average of the income and other financial costs.market approach. The significant inputs under the income approach were the discounted forecasted cash flows which are primarily impacted by forecasted market price of steel and metallic inputs, the weighted average cost of capital, and the long-term growth rate. The market approach was primarily impacted by the EBITDA multiple.
The principal considerations for our determination that performing procedures relating to the fair value of optionsthe contingent forward commitment is a critical audit matter are there wasthe significant judgment by management when developingdetermining the fair value of these options using the Monte Carlo simulation. Thiscontingent forward commitment; this in turn led to a high degree of auditor judgment, subjectivity and effort in performing our audit procedures relating to evaluate the fair value of options andthe contingent forward commitment, including the significant assumptions related to the forecasted market price of Big River Steel’s equity value, volatility,steel and metallic inputs, the risk free interestweighted average cost of capital, the long-term growth rate, and credit spread used in developing the estimate.EBITDA multiple. Also, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the fair value of the options,contingent forward commitment, including controls over the Company’s methods, data and significant assumptions and data.used by management. The procedures also included, among others, developing an independent range(i) testing management’s process for determining the fair value estimate; (ii) evaluating the appropriateness of values for each optionthe income and performing a comparison of management’s estimate to the independently developed range to evaluate the reasonableness of management’s estimate. Developing the independent range of values involved (i) developing an independent Monte Carlo simulation model, (ii)market approaches; (iii) testing the completeness and accuracy of the contractual informationdata used by management to calculate the agreed-upon price to acquire the remaining 50.1% ownership interest in Big River Steel within the next four years, (iii)management; and (iv) evaluating the reasonableness of and testing the accuracy of the inputssignificant assumptions used by management related to estimate the Big River Steel equity value,forecasted market price of steel and (iv) independently developing risk-freemetallic inputs, the weighted average cost of capital, the long-term growth rate, credit spread and volatility assumptions.the EBITDA multiple. Evaluating management’s significant assumptions related to the forecasted market price of steel and metallic inputs involved considering the consistency with external market and industry data and evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in developing the independent Monte Carlo simulation model, the independent range of values and evaluating the audit evidence.Company’s income and market approaches and significant assumptions related to the long-term growth rate, the weighted average cost of capital, and the EBITDA multiple.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 14, 202012, 2021
We have served as the Company’s auditor since 1903.
85
UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions, except per share amounts) | 2020 | 2019 | 2018 | |||||||||||||||||
| Net sales: | ||||||||||||||||||||
| Net sales | $ | 8,765 | $ | 11,506 | $ | 12,758 | ||||||||||||||
Net sales to related parties (Note 23) | 976 | 1,431 | 1,420 | |||||||||||||||||
| Total (Note 6) | 9,741 | 12,937 | 14,178 | |||||||||||||||||
| Operating expenses (income): | ||||||||||||||||||||
| Cost of sales (excludes items shown below) | 9,558 | 12,082 | 12,305 | |||||||||||||||||
| Selling, general and administrative expenses | 274 | 289 | 336 | |||||||||||||||||
| Depreciation, depletion and amortization (Notes 13 and 14) | 643 | 616 | 521 | |||||||||||||||||
| Loss (earnings) from investees (Note 12) | 117 | (79) | (61) | |||||||||||||||||
| Asset impairment charges (Note 1) | 263 | 0 | 0 | |||||||||||||||||
| Gain on equity investee transactions (Note 12) | (31) | 0 | (38) | |||||||||||||||||
| Restructuring and other charges (Note 25) | 138 | 275 | 0 | |||||||||||||||||
| Net gain on sale of assets | (149) | (1) | (6) | |||||||||||||||||
| Other loss (income), net | 3 | (15) | (3) | |||||||||||||||||
| Total | 10,816 | 13,167 | 13,054 | |||||||||||||||||
| (Loss) earnings before interest and income taxes | (1,075) | (230) | 1,124 | |||||||||||||||||
| Interest expense | 280 | 142 | 168 | |||||||||||||||||
| Interest income | (7) | (17) | (23) | |||||||||||||||||
| Loss on debt extinguishment (Note 7) | 0 | 0 | 98 | |||||||||||||||||
| Other financial (gains) costs | (16) | 6 | 0 | |||||||||||||||||
| Net periodic benefit (income) cost (other than service cost) | (25) | 91 | 69 | |||||||||||||||||
| Net interest and other financial costs (Note 7) | 232 | 222 | 312 | |||||||||||||||||
| (Loss) earnings before income taxes | (1,307) | (452) | 812 | |||||||||||||||||
| Income tax (benefit) provision (Note 11) | (142) | 178 | (303) | |||||||||||||||||
| Net (loss) earnings | (1,165) | (630) | 1,115 | |||||||||||||||||
| Less: Net earnings attributable to noncontrolling interests | 0 | 0 | 0 | |||||||||||||||||
| (Loss) earnings attributable to United States Steel Corporation | $ | (1,165) | $ | (630) | $ | 1,115 | ||||||||||||||
| (Loss) earnings per common share (Note 8) | ||||||||||||||||||||
| (Loss) earnings per share attributable to United States Steel Corporation stockholders: | ||||||||||||||||||||
| — Basic | $ | (5.92) | $ | (3.67) | $ | 6.31 | ||||||||||||||
| — Diluted | $ | (5.92) | $ | (3.67) | $ | 6.25 | ||||||||||||||
| Year Ended December 31, | ||||||||||||
| (Dollars in millions, except per share amounts) | 2019 | 2018 | 2017 | |||||||||
| Net sales: | ||||||||||||
| Net sales | $ | 11,506 | $ | 12,758 | $ | 11,046 | ||||||
Net sales to related parties (Note 23) | 1,431 | 1,420 | 1,204 | |||||||||
| Total (Note 6) | 12,937 | 14,178 | 12,250 | |||||||||
| Operating expenses (income): | ||||||||||||
| Cost of sales (excludes items shown below) | 12,082 | 12,305 | 10,858 | |||||||||
| Selling, general and administrative expenses | 289 | 336 | 320 | |||||||||
| Depreciation, depletion and amortization (Notes 13 and 14) | 616 | 521 | 501 | |||||||||
| Earnings from investees (Note 12) | (79 | ) | (61 | ) | (44 | ) | ||||||
| Gain on equity investee transactions (Note 12) | — | (38 | ) | (2 | ) | |||||||
| Gain associated with U. S. Steel Canada Inc. (Note 5) | — | — | (72 | ) | ||||||||
| Restructuring and other charges (Note 25) | 275 | — | 31 | |||||||||
| Net gain on disposals of assets | (1 | ) | (6 | ) | (5 | ) | ||||||
| Other income, net | (15 | ) | (3 | ) | (6 | ) | ||||||
| Total | 13,167 | 13,054 | 11,581 | |||||||||
| (Loss) earnings before interest and income taxes | (230 | ) | 1,124 | 669 | ||||||||
| Interest expense | 142 | 168 | 226 | |||||||||
| Interest income | (17 | ) | (23 | ) | (17 | ) | ||||||
| Loss on debt extinguishment (Note 7) | — | 98 | 54 | |||||||||
| Other financial costs | 6 | — | 44 | |||||||||
Net periodic benefit cost (other than service cost) (Note 3) (a) | 91 | 69 | 61 | |||||||||
| Net interest and other financial costs (Note 7) | 222 | 312 | 368 | |||||||||
| (Loss) earnings before income taxes | (452 | ) | 812 | 301 | ||||||||
| Income tax provision (benefit) (Note 11) | 178 | (303 | ) | (86 | ) | |||||||
| Net (loss) earnings | (630 | ) | 1,115 | 387 | ||||||||
| Less: Net earnings attributable to noncontrolling interests | — | — | — | |||||||||
| (Loss) earnings attributable to United States Steel Corporation | $ | (630 | ) | $ | 1,115 | $ | 387 | |||||
| (Loss) earnings per common share (Note 8) | ||||||||||||
| (Loss) earnings per share attributable to United States Steel Corporation stockholders: | ||||||||||||
| — Basic | $ | (3.67 | ) | $ | 6.31 | $ | 2.21 | |||||
| — Diluted | $ | (3.67 | ) | $ | 6.25 | $ | 2.19 | |||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
86
UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (LOSS)
| Year Ended December 31, | ||||||||||||
| (Dollars in millions) | 2019 | 2018 | 2017 | |||||||||
| Net (loss) earnings | $ | (630 | ) | $ | 1,115 | $ | 387 | |||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
Changes in foreign currency translation adjustments (a) | (22 | ) | (60 | ) | 189 | |||||||
Changes in pension and other employee benefit accounts (a) | 573 | (107 | ) | 462 | ||||||||
Changes in derivative financial instruments (a) | (3 | ) | (14 | ) | 1 | |||||||
| Total other comprehensive income (loss), net of tax | 548 | (181 | ) | 652 | ||||||||
| Comprehensive income including noncontrolling interest | (82 | ) | 934 | 1,039 | ||||||||
| Comprehensive income attributable to noncontrolling interest | — | — | — | |||||||||
| Comprehensive income attributable to United States Steel Corporation | $ | (82 | ) | $ | 934 | $ | 1,039 | |||||
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Net (loss) earnings | $ | (1,165) | $ | (630) | $ | 1,115 | ||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
Changes in foreign currency translation adjustments (a) | 68 | (22) | (60) | |||||||||||||||||
Changes in pension and other employee benefit accounts (a) | 385 | 573 | (107) | |||||||||||||||||
Changes in derivative financial instruments (a) | (22) | (3) | (14) | |||||||||||||||||
| Total other comprehensive income (loss), net of tax | 431 | 548 | (181) | |||||||||||||||||
| Comprehensive (loss) income including noncontrolling interest | (734) | (82) | 934 | |||||||||||||||||
| Comprehensive (loss) income attributable to noncontrolling interest | 0 | 0 | 0 | |||||||||||||||||
| Comprehensive (loss) income attributable to United States Steel Corporation | $ | (734) | $ | (82) | $ | 934 | ||||||||||||||
(a) Related income tax benefit (provision)
Foreign currency translation adjustments (b) | $ | 6 | $ | — | $ | — | ||||||
Pension and other benefits adjustments (b) | (191 | ) | — | — | ||||||||
Derivative adjustments (b) | 1 | — | — | |||||||||
Foreign currency translation adjustments (b) | $ | (16) | $ | 6 | $ | 0 | ||||||||||||||
Pension and other benefits adjustments (b) | (123) | (191) | 0 | |||||||||||||||||
Derivative adjustments (b) | 4 | 1 | 0 | |||||||||||||||||
(b) Amounts for 2018 and 2017 do not reflect a tax benefit as a result of a full valuation allowance on our domestic deferred tax assets.
The accompanying notes are an integral part of these Consolidated Financial Statements.
87
UNITED STATES STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||||||||
| (Dollars in millions) | 2020 | 2019 | ||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents (Note 9) | $ | 1,985 | $ | 749 | ||||||||||
| Receivables, less allowance of $34 and $28 | 914 | 956 | ||||||||||||
| Receivables from related parties (Note 23) | 80 | 221 | ||||||||||||
| Inventories (Note 10) | 1,402 | 1,785 | ||||||||||||
| Other current assets | 51 | 102 | ||||||||||||
| Total current assets | 4,432 | 3,813 | ||||||||||||
| Long-term restricted cash (Note 9) | 130 | 188 | ||||||||||||
| Investments and long-term receivables, less allowance of $5 in both periods (Note 12) | 1,177 | 1,466 | ||||||||||||
| Operating lease assets (Note 24) | 214 | 230 | ||||||||||||
| Property, plant and equipment, net (Note 13) | 5,444 | 5,447 | ||||||||||||
| Intangibles, net (Note 14) | 129 | 150 | ||||||||||||
| Deferred income tax benefits (Note 11) | 22 | 19 | ||||||||||||
| Other noncurrent assets | 511 | 295 | ||||||||||||
| Total assets | $ | 12,059 | $ | 11,608 | ||||||||||
| Liabilities | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable and other accrued liabilities | $ | 1,779 | $ | 1,970 | ||||||||||
| Accounts payable to related parties (Note 23) | 105 | 84 | ||||||||||||
| Payroll and benefits payable | 308 | 336 | ||||||||||||
| Accrued taxes | 154 | 116 | ||||||||||||
| Accrued interest | 59 | 45 | ||||||||||||
| Current operating lease liabilities (Note 24) | 59 | 60 | ||||||||||||
| Short-term debt and current maturities of long-term debt (Note 17) | 192 | 14 | ||||||||||||
| Total current liabilities | 2,656 | 2,625 | ||||||||||||
| Noncurrent operating lease liabilities (Note 24) | 163 | 177 | ||||||||||||
| Long-term debt, less unamortized discount and debt issuance costs (Note 17) | 4,695 | 3,627 | ||||||||||||
| Employee benefits (Note 18) | 322 | 532 | ||||||||||||
| Deferred income tax liabilities (Note 11) | 11 | 4 | ||||||||||||
| Deferred credits and other noncurrent liabilities | 333 | 550 | ||||||||||||
| Total liabilities | 8,180 | 7,515 | ||||||||||||
| Contingencies and commitments (Note 26) | 0 | 0 | ||||||||||||
| Stockholders’ Equity | ||||||||||||||
| Common stock issued — 229,105,589 and 178,555,206 shares issued (par value $1 per share, authorized 400,000,000 shares) (Note 8) | 229 | 179 | ||||||||||||
| Treasury stock, at cost (8,673,131 shares and 8,509,337 shares) | (175) | (173) | ||||||||||||
| Additional paid-in capital | 4,402 | 4,020 | ||||||||||||
| (Accumulated deficit) retained earnings | (623) | 544 | ||||||||||||
| Accumulated other comprehensive loss (Note 21) | (47) | (478) | ||||||||||||
| Total United States Steel Corporation stockholders’ equity | 3,786 | 4,092 | ||||||||||||
| Noncontrolling interests | 93 | 1 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 12,059 | $ | 11,608 | ||||||||||
| December 31, | ||||||||
| (Dollars in millions) | 2019 | 2018 | ||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents (Note 9) | $ | 749 | $ | 1,000 | ||||
| Receivables, less allowance of $28 and $29 | 956 | 1,435 | ||||||
| Receivables from related parties (Note 23) | 221 | 224 | ||||||
| Inventories (Note 10) | 1,785 | 2,092 | ||||||
| Other current assets | 102 | 79 | ||||||
| Total current assets | 3,813 | 4,830 | ||||||
| Long-term restricted cash (Note 9) | 188 | 37 | ||||||
| Investments and long-term receivables, less allowance of $5 in both periods (Note 12) | 1,466 | 513 | ||||||
| Operating lease assets (Note 24) | 230 | — | ||||||
| Property, plant and equipment, net (Note 13) | 5,447 | 4,865 | ||||||
| Intangibles — net (Note 14) | 150 | 158 | ||||||
| Deferred income tax benefits (Note 11) | 19 | 445 | ||||||
| Other noncurrent assets | 295 | 134 | ||||||
| Total assets | $ | 11,608 | $ | 10,982 | ||||
| Liabilities | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and other accrued liabilities | $ | 1,970 | $ | 2,454 | ||||
| Accounts payable to related parties (Note 23) | 84 | 81 | ||||||
| Payroll and benefits payable | 336 | 440 | ||||||
| Accrued taxes | 116 | 118 | ||||||
| Accrued interest | 45 | 39 | ||||||
| Current operating lease liabilities (Note 24) | 60 | — | ||||||
| Short-term debt and current maturities of long-term debt (Note 17) | 14 | 65 | ||||||
| Total current liabilities | 2,625 | 3,197 | ||||||
| Noncurrent operating lease liabilities (Note 24) | 177 | — | ||||||
| Long-term debt, less unamortized discount and debt issuance costs (Note 17) | 3,627 | 2,316 | ||||||
| Employee benefits (Note 18) | 532 | 980 | ||||||
| Deferred income tax liabilities (Note 11) | 4 | 14 | ||||||
| Deferred credits and other noncurrent liabilities | 550 | 272 | ||||||
| Total liabilities | 7,515 | 6,779 | ||||||
| Contingencies and commitments (Note 26) | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock issued — 178,555,206 and 177,386,430 shares issued (par value $1 per share, authorized 400,000,000 shares) (Note 8) | 179 | 177 | ||||||
| Treasury stock, at cost (8,509,337 shares and 2,857,578 shares) | (173 | ) | (78 | ) | ||||
| Additional paid-in capital | 4,020 | 3,917 | ||||||
| Retained earnings | 544 | 1,212 | ||||||
| Accumulated other comprehensive loss (Note 21) | (478 | ) | (1,026 | ) | ||||
| Total United States Steel Corporation stockholders’ equity | 4,092 | 4,202 | ||||||
| Noncontrolling interests | 1 | 1 | ||||||
| Total liabilities and stockholders’ equity | $ | 11,608 | $ | 10,982 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
88
UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| (Dollars in millions) | 2019 | 2018 | 2017 | |||||||||
| Increase (decrease) in cash and cash equivalents | ||||||||||||
| Operating activities: | ||||||||||||
| Net (loss) earnings | $ | (630 | ) | $ | 1,115 | $ | 387 | |||||
| Adjustments to reconcile net cash provided by operating activities: | ||||||||||||
| Depreciation, depletion and amortization (Notes 13 and 14) | 616 | 521 | 501 | |||||||||
| Gain associated with retained interest in U. S. Steel Canada Inc. (Note 5) | — | — | (72 | ) | ||||||||
| Gain on equity investee transactions (Note 12) | — | (38 | ) | (2 | ) | |||||||
| Restructuring and other charges (Note 25) | 275 | — | 31 | |||||||||
| Loss on debt extinguishment (Note 7) | — | 98 | 54 | |||||||||
| Pensions and other post-employment benefits | 101 | 77 | (16 | ) | ||||||||
| Deferred income taxes (Note 11) | 202 | (329 | ) | (72 | ) | |||||||
| Net gain on disposal of assets | (1 | ) | (6 | ) | (5 | ) | ||||||
| Equity investees earnings, net of distributions received | (74 | ) | (47 | ) | (32 | ) | ||||||
| Changes in: | ||||||||||||
| Current receivables | 453 | (312 | ) | (36 | ) | |||||||
| Inventories | 296 | (374 | ) | (117 | ) | |||||||
| Current accounts payable and accrued expenses | (473 | ) | 282 | 225 | ||||||||
| Income taxes receivable/payable | 13 | (8 | ) | (52 | ) | |||||||
| All other, net | (96 | ) | (41 | ) | 32 | |||||||
| Net cash provided by operating activities | 682 | 938 | 826 | |||||||||
| Investing activities: | ||||||||||||
| Capital expenditures | (1,252 | ) | (1,001 | ) | (505 | ) | ||||||
| Investment in Big River Steel | (710 | ) | — | — | ||||||||
| Disposal of assets | 4 | 10 | 5 | |||||||||
| Proceeds from sale of ownership interests in equity investees | — | 30 | 116 | |||||||||
| Investments, net | — | (2 | ) | (2 | ) | |||||||
| Net cash used in investing activities | (1,958 | ) | (963 | ) | (386 | ) | ||||||
| Financing activities: | ||||||||||||
| Revolving credit facilities - borrowings, net of financing costs | 860 | 228 | — | |||||||||
| Revolving credit facilities - repayments | (100 | ) | — | — | ||||||||
| Issuance of long-term debt, net of financing costs (Note 17) | 702 | 640 | 737 | |||||||||
| Repayment of long-term debt (Note 17) | (155 | ) | (1,299 | ) | (1,127 | ) | ||||||
| Common stock repurchased (Note 27) | (88 | ) | (75 | ) | — | |||||||
| Receipts from exercise of stock options (Note 15) | — | 35 | 20 | |||||||||
| Taxes paid for equity compensation plans (Note 15) | (7 | ) | (8 | ) | (10 | ) | ||||||
| Dividends paid | (35 | ) | (36 | ) | (35 | ) | ||||||
| Net cash provided by (used in) financing activities | 1,177 | (515 | ) | (415 | ) | |||||||
| Effect of exchange rate changes on cash | (2 | ) | (17 | ) | 17 | |||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (101 | ) | (557 | ) | 42 | |||||||
| Cash, cash equivalents and restricted cash at beginning of year (Note 9) | 1,040 | 1,597 | 1,555 | |||||||||
| Cash, cash equivalents and restricted cash at end of year (Note 9) | $ | 939 | $ | 1,040 | $ | 1,597 | ||||||
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Increase (decrease) in cash and cash equivalents | ||||||||||||||||||||
| Operating activities: | ||||||||||||||||||||
| Net (loss) earnings | $ | (1,165) | $ | (630) | $ | 1,115 | ||||||||||||||
| Adjustments to reconcile net cash provided by operating activities: | ||||||||||||||||||||
| Depreciation, depletion and amortization (Notes 13 and 14) | 643 | 616 | 521 | |||||||||||||||||
| Asset impairment charges (Note 1) | 263 | 0 | 0 | |||||||||||||||||
| Gain on equity investee transactions (Note 12) | (31) | 0 | (38) | |||||||||||||||||
| Restructuring and other charges (Note 25) | 138 | 275 | 0 | |||||||||||||||||
| Loss on debt extinguishment (Note 7) | 0 | 0 | 98 | |||||||||||||||||
| Pensions and other post-employment benefits | (21) | 101 | 77 | |||||||||||||||||
| Deferred income taxes (Note 11) | (130) | 202 | (329) | |||||||||||||||||
| Net gain on sale of assets | (149) | (1) | (6) | |||||||||||||||||
| Equity investees loss (earnings), net of distributions received | 117 | (74) | (47) | |||||||||||||||||
| Changes in: | ||||||||||||||||||||
| Current receivables | 98 | 453 | (312) | |||||||||||||||||
| Inventories | 506 | 296 | (374) | |||||||||||||||||
| Current accounts payable and accrued expenses | (29) | (473) | 282 | |||||||||||||||||
| Income taxes receivable/payable | 20 | 13 | (8) | |||||||||||||||||
| All other, net | (122) | (96) | (41) | |||||||||||||||||
| Net cash provided by operating activities | 138 | 682 | 938 | |||||||||||||||||
| Investing activities: | ||||||||||||||||||||
| Capital expenditures | (725) | (1,252) | (1,001) | |||||||||||||||||
| Investment in Big River Steel | (9) | (710) | 0 | |||||||||||||||||
| Proceeds from sale of assets | 167 | 4 | 10 | |||||||||||||||||
| Proceeds from sale of ownership interests in equity investees | 8 | 0 | 30 | |||||||||||||||||
| Investments, net | (4) | 0 | (2) | |||||||||||||||||
| Net cash used in investing activities | (563) | (1,958) | (963) | |||||||||||||||||
| Financing activities: | ||||||||||||||||||||
| Net change in short-term debt, net of financing costs | 170 | 0 | 0 | |||||||||||||||||
| Revolving credit facilities - borrowings, net of financing costs | 1,402 | 860 | 228 | |||||||||||||||||
| Revolving credit facilities - repayments | (1,621) | (100) | 0 | |||||||||||||||||
| Issuance of long-term debt, net of financing costs (Note 17) | 1,148 | 702 | 640 | |||||||||||||||||
| Repayment of long-term debt (Note 17) | (13) | (155) | (1,299) | |||||||||||||||||
| Net proceeds from public offering of common stock (Note 27) | 410 | 0 | 0 | |||||||||||||||||
| Proceeds from Stelco Option Agreement, net of financing costs | 94 | 0 | 0 | |||||||||||||||||
| Common stock repurchased (Note 27) | — | (88) | (75) | |||||||||||||||||
| Receipts from exercise of stock options (Note 15) | 0 | 0 | 35 | |||||||||||||||||
| Taxes paid for equity compensation plans (Note 15) | (1) | (7) | (8) | |||||||||||||||||
| Dividends paid | (8) | (35) | (36) | |||||||||||||||||
| Net cash provided by (used in) financing activities | 1,581 | 1,177 | (515) | |||||||||||||||||
| Effect of exchange rate changes on cash | 23 | (2) | (17) | |||||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 1,179 | (101) | (557) | |||||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of year (Note 9) | 939 | 1,040 | 1,597 | |||||||||||||||||
| Cash, cash equivalents and restricted cash at end of year (Note 9) | $ | 2,118 | $ | 939 | $ | 1,040 | ||||||||||||||
See Note 22 for supplemental cash flow information.
The accompanying notes are an integral part of these Consolidated Financial Statements.
89
UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Dollars in Millions | Shares in Thousands | |||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
| Common stock: | ||||||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | 179 | $ | 177 | $ | 176 | 178,555 | 177,386 | 176,425 | |||||||||||||||||||||||||||||
| Common stock issued | 50 | 2 | 1 | 50,551 | 1,169 | 961 | ||||||||||||||||||||||||||||||||
| Balance at end of year | $ | 229 | $ | 179 | $ | 177 | 229,106 | 178,555 | 177,386 | |||||||||||||||||||||||||||||
| Treasury stock: | ||||||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | (173) | $ | (78) | $ | (76) | (8,509) | (2,858) | (1,203) | |||||||||||||||||||||||||||||
| Common stock repurchased | 0 | (88) | (75) | 0 | (5,289) | (2,760) | ||||||||||||||||||||||||||||||||
| Common stock (repurchased) reissued for employee/non-employee director stock plans | (2) | (7) | 73 | (164) | (362) | 1,105 | ||||||||||||||||||||||||||||||||
| Balance at end of year | $ | (175) | $ | (173) | $ | (78) | (8,673) | (8,509) | (2,858) | |||||||||||||||||||||||||||||
| Additional paid-in capital: | ||||||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | 4,020 | $ | 3,917 | $ | 3,932 | ||||||||||||||||||||||||||||||||
| Dividends on common stock | (6) | 0 | 0 | |||||||||||||||||||||||||||||||||||
| Common stock issued | 360 | 0 | 0 | |||||||||||||||||||||||||||||||||||
| Issuance of conversion option in 2026 Senior Convertible Notes, net of tax | 0 | 77 | 0 | |||||||||||||||||||||||||||||||||||
| Employee stock plans | 28 | 26 | (15) | |||||||||||||||||||||||||||||||||||
| Balance at end of year | $ | 4,402 | $ | 4,020 | $ | 3,917 | ||||||||||||||||||||||||||||||||
| Dollars in Millions | Shares in Thousands | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||
| Common stock: | |||||||||||||||||||||
| Balance at beginning of year | $ | 177 | $ | 176 | $ | 176 | 177,386 | 176,425 | 176,425 | ||||||||||||
| Common stock issued | 2 | 1 | — | 1,169 | 961 | — | |||||||||||||||
| Balance at end of year | $ | 179 | $ | 177 | $ | 176 | 178,555 | 177,386 | 176,425 | ||||||||||||
| Treasury stock: | |||||||||||||||||||||
| Balance at beginning of year | $ | (78 | ) | $ | (76 | ) | $ | (182 | ) | (2,858 | ) | (1,203 | ) | (2,614 | ) | ||||||
| Common stock repurchased | (88 | ) | (75 | ) | — | (5,289 | ) | (2,760 | ) | — | |||||||||||
| Common stock (repurchased) reissued for employee/non-employee director stock plans | (7 | ) | 73 | 106 | (362 | ) | 1,105 | 1,411 | |||||||||||||
| Balance at end of year | $ | (173 | ) | $ | (78 | ) | $ | (76 | ) | (8,509 | ) | (2,858 | ) | (1,203 | ) | ||||||
| Additional paid-in capital: | |||||||||||||||||||||
| Balance at beginning of year | $ | 3,917 | $ | 3,932 | $ | 4,027 | |||||||||||||||
| Dividends on common stock | — | — | (26 | ) | |||||||||||||||||
| Issuance of conversion option in 2026 Senior Convertible Notes, net of tax | 77 | — | — | ||||||||||||||||||
| Employee stock plans | 26 | (15 | ) | (69 | ) | ||||||||||||||||
| Balance at end of year | $ | 4,020 | $ | 3,917 | $ | 3,932 | |||||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
90
UNITED STATES STEEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Continued)
| Comprehensive (Loss) Income | ||||||||||||||||||||||||
| (Dollars in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Retained earnings: | ||||||||||||||||||||||||
| Balance at beginning of year | $ | 1,212 | $ | 133 | $ | (250 | ) | |||||||||||||||||
| Net (loss) earnings attributable to United States Steel Corporation | (630 | ) | 1,115 | 387 | $ | (630 | ) | $ | 1,115 | $ | 387 | |||||||||||||
| Dividends on common stock | (35 | ) | (36 | ) | (9 | ) | ||||||||||||||||||
| Other | (3 | ) | — | 5 | ||||||||||||||||||||
| Balance at end of year | $ | 544 | $ | 1,212 | $ | 133 | ||||||||||||||||||
| Accumulated other comprehensive (loss) income: | ||||||||||||||||||||||||
Pension and other benefit adjustments (Note 18): | ||||||||||||||||||||||||
| Balance at beginning of year | $ | (1,416 | ) | $ | (1,309 | ) | $ | (1,771 | ) | |||||||||||||||
Changes during year, net of taxes (a) | 580 | (108 | ) | 454 | 580 | (108 | ) | 454 | ||||||||||||||||
Changes during year, equity investee net of taxes (a) | (7 | ) | 1 | 8 | (7 | ) | 1 | 8 | ||||||||||||||||
| Balance at end of year | $ | (843 | ) | $ | (1,416 | ) | $ | (1,309 | ) | |||||||||||||||
| Foreign currency translation adjustments: | ||||||||||||||||||||||||
| Balance at beginning of year | $ | 403 | $ | 463 | $ | 274 | ||||||||||||||||||
Changes during year, net of taxes (a) | (22 | ) | (60 | ) | 189 | (22 | ) | (60 | ) | 189 | ||||||||||||||
| Balance at end of year | $ | 381 | $ | 403 | $ | 463 | ||||||||||||||||||
| Derivative financial instruments: | ||||||||||||||||||||||||
| Balance at beginning of year | $ | (13 | ) | $ | 1 | $ | — | |||||||||||||||||
Changes during year, net of taxes (a) | (3 | ) | (14 | ) | 1 | (3 | ) | (14 | ) | 1 | ||||||||||||||
| Balance at end of year | $ | (16 | ) | $ | (13 | ) | $ | 1 | ||||||||||||||||
| Total balances at end of year | $ | (478 | ) | $ | (1,026 | ) | $ | (845 | ) | |||||||||||||||
| Total stockholders’ equity | $ | 4,092 | $ | 4,202 | $ | 3,320 | ||||||||||||||||||
| Noncontrolling interests: | ||||||||||||||||||||||||
| Balance at beginning of year | $ | 1 | $ | 1 | $ | 1 | ||||||||||||||||||
| Net loss | — | — | — | — | — | — | ||||||||||||||||||
| Balance at end of year | $ | 1 | $ | 1 | $ | 1 | ||||||||||||||||||
| Total comprehensive (loss) income | $ | (82 | ) | $ | 934 | $ | 1,039 | |||||||||||||||||
| Comprehensive (Loss) Income | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||
| Retained earnings: | ||||||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | 544 | $ | 1,212 | $ | 133 | ||||||||||||||||||||||||||||||||
| Net (loss) earnings attributable to United States Steel Corporation | (1,165) | (630) | 1,115 | $ | (1,165) | $ | (630) | $ | 1,115 | |||||||||||||||||||||||||||||
| Dividends on common stock | (2) | (35) | (36) | |||||||||||||||||||||||||||||||||||
| Other | 0 | (3) | 0 | |||||||||||||||||||||||||||||||||||
| Balance at end of year | $ | (623) | $ | 544 | $ | 1,212 | ||||||||||||||||||||||||||||||||
| Accumulated other comprehensive (loss) income: | ||||||||||||||||||||||||||||||||||||||
Pension and other benefit adjustments (Note 18): | ||||||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | (843) | $ | (1,416) | $ | (1,309) | ||||||||||||||||||||||||||||||||
Changes during year, net of taxes (a) | 360 | 580 | (108) | 360 | 580 | (108) | ||||||||||||||||||||||||||||||||
Changes during year, equity investee net of taxes (a) | 25 | (7) | 1 | 25 | (7) | 1 | ||||||||||||||||||||||||||||||||
| Balance at end of year | $ | (458) | $ | (843) | $ | (1,416) | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments: | ||||||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | 381 | $ | 403 | $ | 463 | ||||||||||||||||||||||||||||||||
Changes during year, net of taxes (a) | 68 | (22) | (60) | 68 | (22) | (60) | ||||||||||||||||||||||||||||||||
| Balance at end of year | $ | 449 | $ | 381 | $ | 403 | ||||||||||||||||||||||||||||||||
| Derivative financial instruments: | ||||||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | (16) | $ | (13) | $ | 1 | ||||||||||||||||||||||||||||||||
Changes during year, net of taxes (a) | (22) | (3) | (14) | (22) | (3) | (14) | ||||||||||||||||||||||||||||||||
| Balance at end of year | $ | (38) | $ | (16) | $ | (13) | ||||||||||||||||||||||||||||||||
| Total balances at end of year | $ | (47) | $ | (478) | $ | (1,026) | ||||||||||||||||||||||||||||||||
| Total stockholders’ equity | $ | 3,786 | $ | 4,092 | $ | 4,202 | ||||||||||||||||||||||||||||||||
| Noncontrolling interests: | ||||||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | 1 | $ | 1 | $ | 1 | ||||||||||||||||||||||||||||||||
| Stelco Option Agreement | 93 | 0 | 0 | |||||||||||||||||||||||||||||||||||
| Other | (1) | 0 | 0 | |||||||||||||||||||||||||||||||||||
| Net loss | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
| Balance at end of year | $ | 93 | $ | 1 | $ | 1 | ||||||||||||||||||||||||||||||||
| Total comprehensive (loss) income | $ | (734) | $ | (82) | $ | 934 | ||||||||||||||||||||||||||||||||
(a) Related income tax benefit (provision):
Foreign currency translation adjustments (b) | $ | 6 | $ | — | $ | — | ||||||
Pension and other benefits adjustments (b) | (191 | ) | — | — | ||||||||
Derivative adjustments (b) | 1 | — | — | |||||||||
Foreign currency translation adjustments (b) | $ | (16) | $ | 6 | $ | 0 | ||||||||||||||
Pension and other benefits adjustments (b) | (123) | (191) | 0 | |||||||||||||||||
Derivative adjustments (b) | 4 | 1 | 0 | |||||||||||||||||
(b) Amounts for 2018 and 2017 do not reflect a tax benefit as a result of a full valuation allowance on our domestic deferred tax assets.
The accompanying notes are an integral part of these Consolidated Financial Statements.
91
1. Nature of Business and Significant Accounting Policies
Nature of Business
U. S. Steel produces and sells steel products, including flat-rolled and tubular products, in North America and Europe. Operations in the United States also include iron ore and coke production facilities, railroad services and real estate operations. Operations in Europe also include coke production facilities.
Significant Accounting Policies
Principles applied in consolidation
These financial statements include the accounts of U. S. Steel and its majority-owned subsidiaries. Additionally, variable interest entities for which U. S. Steel is the primary beneficiary are included in the Consolidated Financial Statements and their impacts are either partially or completely offset by noncontrolling interests. Intercompany accounts, transactions and profits have been eliminated in consolidation.
Investments in entities over which U. S. Steel has significant influence are accounted for using the equity method of accounting and are carried at U. S. Steel’s share of net assets plus loans, advances and our share of earnings less distributions.
Earnings or loss from investees includes U. S. Steel’s share of earnings or loss from equity method investments (and any amortization of basis differences), which are generally recorded a month in arrears, except for significant and unusual items which are recorded in the period of occurrence.arrears.
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 property, plant and equipment; intangible assets; the fair value of assets or liabilities acquired in a business combination; valuation allowances for receivables, inventories and deferred income tax assets and liabilities; environmental liabilities; liabilities for potential tax deficiencies; potential litigation claims and settlements; assets and obligations related to employee benefits; put, and call option and contingent forward purchase commitment assets and liabilities and restructuring and other charges. Actual results could differ materially from the estimates and assumptions used.
The preparation of the financial statements includes an assessment of certain accounting matters using all available information including consideration of forecasted financial information in context with other information reasonably available to us. However, our future assessment of current expectations, including consideration of the unknown future impacts of the COVID-19 pandemic, could result in material impacts to our consolidated financial statements in future reporting periods. All such adjustments are of a normal recurring nature unless disclosed otherwise.
Sales recognition
Sales are recognized when U. S. Steel's performance obligations are satisfied. Generally, U. S. Steel’s performance obligations are satisfied, control of our products is transferred, and revenue is recognized at a single point in time, when title transfers to our customer for product shipped or when services are provided. Revenues are recorded net of any sales incentives. Shipping and other transportation costs charged to customers are treated as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. See Note 6 for further details on U. S. Steel’s revenue.
Inventories
Inventories are carried at the lower of cost or market.net realizable value. Fixed costs related to abnormal production capacity are expensed in the period incurred rather than capitalized into inventory.
LIFO (last-in, first-out) is the predominant method of inventory costing for inventories in the United States and FIFO (first-in, first-out) is the predominant method in Europe. The LIFO method of inventory costing was used on 7559 percent and 7475 percent of consolidated inventories at December 31, 20192020 and 2018,2019, respectively.
Derivative instruments
From time to time, U. S. Steel may use fixed price forward physical purchase contracts to partially manage our exposure to price risk. Generally, forward physical purchase contracts qualify for the normal purchase normal sales exclusion in Accounting Standards Codification (ASC) 815, Derivatives and Hedging, and are not subject to mark-to-market accounting. U. S. Steel also uses derivatives such as commodity-based financial swaps and foreign currency exchange forward contracts to manage its exposure to purchase and sale price fluctuations and foreign currency exchange rate risk. U. S. Steel elects hedge accounting for some of its derivatives. Under hedge accounting, fluctuations in the value of the derivative are recognized in Accumulated Other Comprehensive Income (AOCI) until the associated underlying is recognized in earnings. When the associated underlying is recognized in earnings, the value of the derivative is
92
reclassified to earnings from AOCI. We recognize fair value
changes for derivatives where hedge accounting has not been elected immediately in earnings. See Note 16 for further details on U. S. Steel’s derivatives.
Financial Instruments
U. S. Steel's purchase of a 49.9% equity ownership interest in Big River Steel on October 31, 2019 included certain call and put options. U. S. Steel marks thesemarked those options to fair value each reporting period using a Monte Carlo simulation which is considered a Level 3 valuation technique. Level 3 valuation techniques include inputs to the valuation methodology that are considered unobservable and significant to the fair value measurement. On December 8, 2020, U. S. Steel exercised its call option to purchase the remaining interest in Big River Steel. When the U. S. Steel call option was exercised, the options were legally extinguished and a contingent forward purchase commitment was recorded for the value of the unsettled commitment to purchase the remaining interest in Big River Steel. The contingent forward purchase commitment was removed with the close of the Big River Steel purchase which occurred on January 15, 2021. See Note 5 and Note 20 for further details.
Property, plant and equipment
Property, plant and equipment is carried at cost less accumulated depreciation and is depreciated on a straight-line basis over the estimated useful lives of the assets.
Depletion of mineral properties is based on rates which are expected to amortize cost over the estimated tonnage of minerals to be removed.
When property, plant and equipment is sold or otherwise disposed of, any gains or losses are reflected in income. If a loss on disposal is expected, such losses are recognized when the assets are reclassified as assets held for sale or when impaired as part of an asset group’s impairment.
Asset Impairment
U. S. Steel evaluates impairment of its property, plant and equipment whenever circumstances indicate that the carrying value may not be recoverable. We evaluate the impairment of long-lived assets at the asset group level. Our asset groups are Flat-Rolled, welded tubular, seamless tubular and U. S. Steel Europe (USSE). Asset impairments are recognized when the carrying value of an asset group exceeds its recoverable amount as determined by the asset group's aggregate projected undiscounted cash flows.
For the period ended March 31, 2020, the steep decline in oil prices that resulted from market oversupply and declining demand was considered a triggering event for the welded tubular and seamless tubular asset groups. A quantitative analysis was completed for both asset groups and a $263 million impairment, consisting of an impairment of $196 million for property, plant and equipment and $67 million for intangible assets was recorded for the welded tubular asset group while no impairment was indicated for the seamless tubular asset group. There were no other triggering events that required an impairment evaluation of our long-lived asset groups during the year-ended December 31, 2020.
During 2019, the challenging steel market environment in the U.S. that led to the idling of certain Flat-Rolled facilities, the challenging steel market in Europe that led to the temporary idling of a blast furnace and significant headcount reductions at USSE, and recent losses in the welded tubular asset group were considered triggering events for those asset groups, respectively. U. S. Steel completed a quantitative analysis of its long-lived assets for these asset groups and determined that the assets were not impaired. There were no triggering events for seamless tubular in 2019.
Environmental remediation
Environmental expenditures are capitalized if the costs mitigate or prevent future contamination or if the costs improve existing assets’ environmental safety or efficiency. U. S. Steel provides for remediation costs and penalties when the
93
responsibility to remediate is probable and the amount of associated costs is reasonably estimable. The timing of remediation accruals typically coincides with completion of studies defining the scope of work to be undertaken or when it is probable that a formal plan of action will be approved by the oversight agency. Remediation liabilities are accrued based on estimates of believed environmental exposure and are discounted if the amount and timing of the cash disbursements are readily determinable.
Asset retirement obligations
Asset retirement obligations (AROs) are initially recorded at fair value and are capitalized as part of the cost of the related long-lived asset and depreciated in accordance with U. S. Steel’s depreciation policies for property, plant and equipment. The fair value of the obligation is determined as the discounted value of expected future cash flows. Accretion expense is recorded each month to increase this discounted obligation over time. Certain AROs related to disposal costs of the majority of assets at our integrated steel facilities are not recorded because they have an indeterminate settlement date. These AROs will be initially recognized in the period in which sufficient information exists to estimate their fair value. See Note 19 for further details on U. S. Steel's AROs.
Pensions and other post-employment benefits
U. S. Steel has defined contribution or multi-employer arrangements for pension benefits for more than three-quarters of its employees in the United States and defined benefit pension plans covering the remaining employees. For hires before January 1, 2016, U. S. Steel has defined benefit retiree health care and life insurance plans (Other Benefits) that cover its represented employees in North America upon their retirement. Government-sponsored programs into which U. S. Steel makes required contributions cover the majority of U. S. Steel’s European employees. For more details regarding pension and other post-employment benefits see Note 18 of the Consolidated Financial Statements.
The pension and Other Benefits obligations and the related net periodic benefit costs are based on, among other things, assumptions ofregarding the discount rate, estimated return on plan assets, salary increases, the projected mortality of participants and the current level and future escalation of health care costs. Additionally, U. S. Steel recognizes an obligation to provide post-employment benefits for disability-related claims covering indemnity and medical payments for certain employees in North America. The obligation for these claims and the related periodic costs are measured using actuarial techniques and assumptions. Actuarial gains and losses occur when actual experience differs from any of the many assumptions used to value the benefit plans, or when assumptions change. For pension and Other Benefits, the Company recognizes into income on an annual basis a portion of unrecognized actuarial net gains or losses that exceed 10 percent of the larger of projected benefit obligations or plan assets (the corridor). These unrecognized amounts in excess of the corridor are amortized over the plan participants' average life expectancy or average future service, depending on the demographics of the plan. Unrecognized actuarial net gains and losses for disability-related claims are immediately recognized into income.
Deferred taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The realization of deferred tax assets is assessed quarterly based on several interrelated factors. These factors include U. S. Steel’s expectation to generate sufficient future taxable income and the projected time period over which these deferred tax assets will be realized. U. S. Steel records a valuation allowance when necessary to reduce deferred tax assets to the amount that will more likely than not be realized. See Note 11 for further details of deferred taxes.
2. New Accounting Standards
In December 2019,August 2020, the Financial Accounting Standards Board (FASB) Issuedissued Accounting Standards Update (ASU) 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU 2020-06 requires entities to provide expanded disclosures about the terms and features of convertible instruments and amends certain guidance in ASC 260 on the computation of EPS for convertible instruments and contracts on an entity’s own equity. ASU 2020-06 is effective for public companies for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption of all amendments in the same period permitted. The Company is currently assessing the impact of adoption of the ASU.
In December 2019, the FASB Issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes (ASU 2019-12). ASU 2019-12 simplifies accounting for income taxes by removing certain exceptions from the general principles in Topic 740 including elimination of the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items such as other comprehensive income. ASU 2019-12 also clarifies and amends certain guidance in Topic 740. ASU 2019-12 is effective for public companies for fiscal years beginning after December 15, 2020, including interim periods, with early adoption of all amendments in the same period permitted. Although we believe that adoption of ASU 2019-12 in 2021 will not have a material impact, the tax benefit for the year ended 2020 includes a $138 million benefit related to recording a loss from
94
continuing operations and income from other comprehensive income categories. There was not a material impact in 2019 or 2018 related to intraperiod tax allocation.
3. Recently Adopted Accounting Standards
In March 2020, the FASB issued Accounting Standards Update 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04). ASU 2020-04 provides optional exceptions for applying generally accepted accounting principles to modifications of contracts, hedging relationships, and other transactions that reference LIBOR or another rate that will be discontinued by reference rate reform if certain criteria are met. The guidance is effective beginning on March 12, 2020 and the amendments will be applied prospectively through December 31, 2022. U. S. Steel is currently assessing the impactadopted this guidance during 2020. The adoption of the ASU, but doesthis guidance did not believe it will have a material impact on itsthe Company's Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which adds an impairment model that is based on expected losses rather than incurred losses. Under ASU 2016-13 an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 iswas effective for public companies for fiscal years beginning after December 15, 2019 including interim reporting periods, with early adoption permitted.periods. U. S. Steel is inadopted this standard effective January 1, 2020. The impact of adoption was not material to the process of adopting this ASU and does not expect it to have a significant impact on its Consolidated Financial Statements.
| (in millions) | U.S. | USSE | Total Allowance | |||||||||||||||||
| Balance at December 31, 2019 | $ | 12 | $ | 16 | $ | 28 | ||||||||||||||
| Additional reserve | 5 | 1 | 6 | |||||||||||||||||
| Balance at December 31, 2020 | 17 | 17 | 34 | |||||||||||||||||
In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02). Under ASU 2016-02, for operating leases, a lessee should recognize in its statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term; recognize a single lease cost, which is allocated over the lease term, generally on a straight line basis, and classify all cash payments within operating activities in the statement of cash flows. For finance leases, a lessee is required to recognize a right-of-use asset and a lease liability; recognize interest on the lease liability separately from amortization of the right-of-use asset, and classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) -Targeted Improvements (ASU 2018-11), which provides an option to use a modified retrospective transition method at the adoption date. U. S. Steel adopted the new lease accounting standard effective January 1, 2019 using the optional modified retrospective transition method outlined in ASU 2018-11.method. As a result of the adoption, an operating lease asset and current and noncurrent liabilities for operating leases were recorded, and there was an insignificant reduction in prior year retained earnings for the cumulative effect of adoption for operating leases where payment started after lease commencement. See Note 24 for further details.
| Year Ended December 31, 2017 | ||||||||||||
| Statement of Operations (In millions) | As Revised | Previously Reported | Effect of Change Higher/(Lower) | |||||||||
| Cost of Sales | $ | 10,858 | $ | 10,864 | $ | (6 | ) | |||||
| Selling, general and administrative expenses | 320 | 375 | (55 | ) | ||||||||
| Net periodic benefit cost (other than service cost) | 61 | — | 61 | |||||||||
U. S. Steel's adoption of the following ASU's did not have a material impact on U. S. Steel's financial position, results of operations or cash flows:
| Effective Date | Description | |||||||
| January 1, 2018 | 2014-09 | Revenue from Contracts with Customers | ||||||
| January 1, 2018 | 2017-09 | Compensation - Stock Compensation: Scope of Modification Accounting | ||||||
| January 1, 2018 | 2017-12 | Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities | ||||||
| July 1, 2018 | 2018-02 | Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | ||||||
| January 1, 2019 | 2018-07 | Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting | ||||||
| January 1, 2019 | 2018-15 | Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs in a Cloud Computing Arrangement That is a Service Contract | ||||||
95
4. Segment Information
U. S. Steel has 3 reportable segments: North American Flat-Rolled (Flat-Rolled), USSE and Tubular Products (Tubular). The results of Big River Steel and our railroad and real estate businesses that do not constitute reportable segments are combined and disclosed in the Other Businesses category. The majority of U. S. Steel's customers are located in North America and Europe. No single customer accounted for more than 10 percent of gross annual revenues.
The Flat-Rolled segment includes the operating results of U. S. Steel’s integrated steel plants and equity investees in the United States (except for Big River Steel, which is included in Other Businesses) involved in the production of slabs, strip mill plates, sheets and tin mill products, as well as all iron ore and coke production facilities in the United States. These operations primarily serve North American customers in the service center, conversion, transportation (including automotive), construction, container, and appliance and electrical markets.
The USSE segment includes the operating results of U. S. Steel Košice (USSK), U. S. Steel’s integrated steel plant and coke production facilities in Slovakia, and its subsidiaries. USSE conducts its business mainly in Central and Western Europe and primarily serves customers in the European transportation (including automotive), construction, container, appliance, electrical, service center, conversion and oil, gas and petrochemical markets. USSE produces and sells slabs, strip mill plate, sheet, tin mill products and spiral welded pipe, as well as refractory ceramic materials.
The Tubular segment includes the operating results of U. S. Steel’s tubular production facilities and an equity investee in the United States. We sold our ownership interest in an equity investee in Brazil in December of 2017. These operations produce and sell seamless and electric resistance welded (welded) steel casing and tubing (commonly known as oil country tubular goods or OCTG), standard and line pipe and mechanical tubing and primarily serve customers in the oil, gas and petrochemical markets. We sold our Bellville facility in 2018. In June 2019, U. S. Steel restarted Pipe Mill #1 at our Lone Star facility.
The chief operating decision maker evaluates performance and determines resource allocations based on a number of factors, the primary measure being earnings (loss) before interest and income taxes. Earnings (loss) before interest and income taxes for reportable segments and Other Businesses does not include net interest and other financial costs (income), income taxes, and certain other items that management believes are not indicative of future results. In 2018, U. S. Steel began allocating certain post-employment benefits to its segments. Prior year information was adjusted to conform with the current year presentation.
The accounting principles applied at the operating segment level in determining earnings (loss) before interest and income taxes are generally the same as those applied at the consolidated financial statement level.
Intersegment sales and transfers are accounted for at market-based prices and are eliminated at the corporate consolidation level. Corporate-level selling, general and administrative expenses and costs related to certain former businesses are allocated to the reportable segments and Other Businesses based on measures of activity that management believes are reasonable.
96
The results of segment operations are as follows:
| (In millions) | Customer Sales | Intersegment Sales | Net Sales | (Loss) Earnings from investees | (Loss) Earnings before Interest and Income Taxes | Depreciation, depletion & amortization | Capital expenditures | |||||||||||||||||||||||||||||||||||||
| 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Flat-Rolled | $ | 7,071 | $ | 208 | $ | 7,279 | $ | (9) | $ | (596) | $ | 496 | $ | 484 | ||||||||||||||||||||||||||||||
| USSE | 1,967 | 3 | 1,970 | 0 | 9 | 97 | 79 | |||||||||||||||||||||||||||||||||||||
| Tubular | 639 | 7 | 646 | 4 | (179) | 39 | 159 | |||||||||||||||||||||||||||||||||||||
| Total reportable segments | 9,677 | 218 | 9,895 | (5) | (766) | 632 | 722 | |||||||||||||||||||||||||||||||||||||
| Other Businesses | 64 | 98 | 162 | (94) | (39) | 11 | 3 | |||||||||||||||||||||||||||||||||||||
| Reconciling Items and Eliminations | — | (316) | (316) | (18) | (270) | 0 | 0 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 9,741 | $ | — | $ | 9,741 | $ | (117) | $ | (1,075) | $ | 643 | $ | 725 | ||||||||||||||||||||||||||||||
| 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| Flat-Rolled | $ | 9,279 | $ | 281 | $ | 9,560 | $ | 84 | $ | 196 | $ | 456 | $ | 943 | ||||||||||||||||||||||||||||||
| USSE | 2,417 | 3 | 2,420 | 0 | (57) | 92 | 153 | |||||||||||||||||||||||||||||||||||||
| Tubular | 1,188 | 3 | 1,191 | 5 | (67) | 46 | 145 | |||||||||||||||||||||||||||||||||||||
| Total reportable segments | 12,884 | 287 | 13,171 | 89 | 72 | 594 | 1,241 | |||||||||||||||||||||||||||||||||||||
| Other Businesses | 53 | 115 | 168 | (10) | 23 | 22 | 11 | |||||||||||||||||||||||||||||||||||||
| Reconciling Items and Eliminations | — | (402) | (402) | 0 | (325) | 0 | 0 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 12,937 | $ | — | $ | 12,937 | $ | 79 | $ | (230) | $ | 616 | $ | 1,252 | ||||||||||||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||||||||||||||||||||||
| Flat-Rolled | $ | 9,681 | $ | 231 | $ | 9,912 | $ | 54 | $ | 883 | $ | 367 | $ | 820 | ||||||||||||||||||||||||||||||
| USSE | 3,205 | 23 | 3,228 | 0 | 359 | 87 | 104 | |||||||||||||||||||||||||||||||||||||
| Tubular | 1,231 | 5 | 1,236 | 7 | (58) | 47 | 45 | |||||||||||||||||||||||||||||||||||||
| Total reportable segments | 14,117 | 259 | 14,376 | 61 | 1,184 | 501 | 969 | |||||||||||||||||||||||||||||||||||||
| Other Businesses | 61 | 125 | 186 | 0 | 55 | 20 | 32 | |||||||||||||||||||||||||||||||||||||
| Reconciling Items and Eliminations | — | (384) | (384) | 0 | (115) | 0 | 0 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 14,178 | $ | — | $ | 14,178 | $ | 61 | $ | 1,124 | $ | 521 | $ | 1,001 | ||||||||||||||||||||||||||||||
| (In millions) | Customer Sales | Intersegment Sales | Net Sales | Earnings (loss) from investees | Earnings (Loss) before Interest and Income Taxes | Depreciation, depletion & amortization | Capital expenditures | |||||||||||||||||||||
| 2019 | ||||||||||||||||||||||||||||
| Flat-Rolled | $ | 9,279 | $ | 281 | $ | 9,560 | $ | 84 | $ | 196 | $ | 456 | $ | 943 | ||||||||||||||
| USSE | 2,417 | 3 | 2,420 | — | (57 | ) | 92 | 153 | ||||||||||||||||||||
| Tubular | 1,188 | 3 | 1,191 | 5 | (67 | ) | 46 | 145 | ||||||||||||||||||||
| Total reportable segments | 12,884 | 287 | 13,171 | 89 | 72 | 594 | 1,241 | |||||||||||||||||||||
| Other Businesses | 53 | 115 | 168 | (10 | ) | 23 | 22 | 11 | ||||||||||||||||||||
| Reconciling Items and Eliminations | — | (402 | ) | (402 | ) | — | (325 | ) | — | — | ||||||||||||||||||
| Total | $ | 12,937 | $ | — | $ | 12,937 | $ | 79 | $ | (230 | ) | $ | 616 | $ | 1,252 | |||||||||||||
| 2018 | ||||||||||||||||||||||||||||
| Flat-Rolled | $ | 9,681 | $ | 231 | $ | 9,912 | $ | 54 | $ | 883 | $ | 367 | $ | 820 | ||||||||||||||
| USSE | 3,205 | 23 | 3,228 | — | 359 | 87 | 104 | |||||||||||||||||||||
| Tubular | 1,231 | 5 | 1,236 | 7 | (58 | ) | 47 | 45 | ||||||||||||||||||||
| Total reportable segments | 14,117 | 259 | 14,376 | 61 | 1,184 | 501 | 969 | |||||||||||||||||||||
| Other Businesses | 61 | 125 | 186 | — | 55 | 20 | 32 | |||||||||||||||||||||
| Reconciling Items and Eliminations | — | (384 | ) | (384 | ) | — | (115 | ) | — | — | ||||||||||||||||||
| Total | $ | 14,178 | $ | — | $ | 14,178 | $ | 61 | $ | 1,124 | $ | 521 | $ | 1,001 | ||||||||||||||
| 2017 | ||||||||||||||||||||||||||||
| Flat-Rolled | $ | 8,297 | $ | 194 | $ | 8,491 | $ | 38 | $ | 375 | $ | 352 | $ | 388 | ||||||||||||||
| USSE | 2,949 | 25 | 2,974 | — | 327 | 76 | 83 | |||||||||||||||||||||
| Tubular | 944 | 1 | 945 | 8 | (99 | ) | 51 | 28 | ||||||||||||||||||||
| Total reportable segments | 12,190 | 220 | 12,410 | 46 | 603 | 479 | 499 | |||||||||||||||||||||
| Other Businesses | 60 | 119 | 179 | (2 | ) | 44 | 22 | 6 | ||||||||||||||||||||
| Reconciling Items and Eliminations | — | (339 | ) | (339 | ) | — | 22 | — | — | |||||||||||||||||||
| Total | $ | 12,250 | $ | — | $ | 12,250 | $ | 44 | $ | 669 | $ | 501 | $ | 505 | ||||||||||||||
A summary of total assets by segment is as follows:
| December 31, | ||||||||||||||
| (In millions) | 2020 | 2019 | ||||||||||||
| Flat-Rolled | $ | 7,099 | $ | 7,267 | ||||||||||
USSE (a) | 5,502 | 5,360 | ||||||||||||
| Tubular | 887 | 1,150 | ||||||||||||
| Total reportable segments | $ | 13,488 | $ | 13,777 | ||||||||||
| Other Businesses | $ | 911 | $ | 1,267 | ||||||||||
Corporate, reconciling items, and eliminations(b) | (2,340) | (3,436) | ||||||||||||
| Total assets | $ | 12,059 | $ | 11,608 | ||||||||||
(a)Included in the USSE segment assets is goodwill of $4 million as of both December 31, 2020 and 2019.
(b)The majority of Corporate, reconciling items, and eliminations total assets is comprised of cash and the elimination of intersegment amounts.
97
| December 31, | ||||||||
| (In millions) | 2019 | 2018 | ||||||
Flat-Rolled (a) | $ | 7,267 | $ | 6,977 | ||||
USSE (b) | 5,360 | 5,607 | ||||||
| Tubular | 1,150 | 1,076 | ||||||
| Total reportable segments | $ | 13,777 | $ | 13,660 | ||||
| Other Businesses | $ | 1,267 | $ | 329 | ||||
Corporate, reconciling items, and eliminations(c) | (3,436 | ) | (3,007 | ) | ||||
| Total assets | $ | 11,608 | $ | 10,982 | ||||
The detail of reconciling items to consolidated earnings (loss) before interest and income taxes is as follows:
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Items not allocated to segments: | ||||||||||||||||||||
| Asset impairment charges | (263) | 0 | 0 | |||||||||||||||||
| Gain on previously held investment in UPI | 25 | 0 | — | |||||||||||||||||
| Tubular inventory impairment charges | (24) | 0 | 0 | |||||||||||||||||
| December 24, 2018 Clairton coke making facility fire | 6 | (50) | 0 | |||||||||||||||||
| Fairless property sale | 145 | 0 | 0 | |||||||||||||||||
| Big River Steel debt extinguishment charges | (18) | 0 | 0 | |||||||||||||||||
| Big River Steel transaction and other related costs | (3) | 0 | 0 | |||||||||||||||||
| United Steelworkers labor agreement signing bonus and related costs | 0 | 0 | (81) | |||||||||||||||||
| Granite City Works restart and related costs | 0 | 0 | (80) | |||||||||||||||||
| Restructuring and other charges (Note 25) | (138) | (275) | 0 | |||||||||||||||||
| Granite City Works temporary idling charges | 0 | 0 | 8 | |||||||||||||||||
| Gain on equity investee transactions (Note 12) | 0 | 0 | 38 | |||||||||||||||||
| Total reconciling items | $ | (270) | $ | (325) | $ | (115) | ||||||||||||||
| (In millions) | 2019 | 2018 | 2017 | |||||||||
| Items not allocated to segments: | ||||||||||||
| December 24, 2018 Clairton coke making facility fire | (50 | ) | — | — | ||||||||
| United Steelworkers labor agreement signing bonus and related costs | — | (81 | ) | — | ||||||||
| Granite City Works restart and related costs | — | (80 | ) | — | ||||||||
| Loss on shutdown of certain tubular pipe mill assets (Note 25) | — | — | (35 | ) | ||||||||
| Gain associated with U. S. Steel Canada Inc. (Note 5) | — | — | 72 | |||||||||
| Restructuring and other charges (Note 25) | (275 | ) | — | — | ||||||||
| Granite City Works temporary idling charges | — | 8 | (17 | ) | ||||||||
| Gain on equity investee transactions (Note 12) | — | 38 | 2 | |||||||||
| Total reconciling items | $ | (325 | ) | $ | (115 | ) | $ | 22 | ||||
Geographic Area:
The information below summarizes external sales, property, plant and equipment and equity method investments based on the location of the operating segment to which they relate.
| (In millions) | Year | External Sales | Assets | ||||||||||||||||||||
| North America | 2020 | $ | 7,774 | $ | 5,590 | (a) | |||||||||||||||||
| 2019 | 10,520 | 5,772 | (a) | ||||||||||||||||||||
| 2018 | 10,973 | 4,432 | (a) | ||||||||||||||||||||
| Europe | 2020 | 1,967 | 993 | ||||||||||||||||||||
| 2019 | 2,417 | 947 | |||||||||||||||||||||
| 2018 | 3,205 | 919 | |||||||||||||||||||||
| Total | 2020 | 9,741 | 6,583 | ||||||||||||||||||||
| 2019 | 12,937 | 6,719 | |||||||||||||||||||||
| 2018 | 14,178 | 5,351 | |||||||||||||||||||||
| (In millions) | Year | External Sales | Assets | ||||||||
| North America | 2019 | $ | 10,520 | $ | 5,772 | (a) | |||||
| 2018 | 10,973 | 4,432 | (a) | ||||||||
| 2017 | 9,301 | 3,831 | (a) | ||||||||
| Europe | 2019 | 2,417 | 947 | ||||||||
| 2018 | 3,205 | 919 | |||||||||
| 2017 | 2,949 | 906 | |||||||||
| Total | 2019 | 12,937 | 6,719 | ||||||||
| 2018 | 14,178 | 5,351 | |||||||||
| 2017 | 12,250 | 4,737 | |||||||||
| (In millions) | Consolidated Balance Sheet Classification | December 31, 2019 | ||
| U. S. Steel Call Option | Investments and other long-term receivables | $ | 166 | |
| Class B Put Option | Deferred credits and other long-term liabilities | $ | 192 | |
| Class B Call Option | Deferred credits and other long-term liabilities | $ | 2 | |
| Customer Sales by Product: | ||||||||||||||||
| (In millions) Year Ended December 31, 2019 | Flat-Rolled | USSE | Tubular | Other Businesses | Total | |||||||||||
| Semi-finished | $ | 305 | $ | 11 | $ | — | $ | — | $ | 316 | ||||||
| Hot-rolled sheets | 2,504 | 997 | — | — | 3,501 | |||||||||||
| Cold-rolled sheets | 2,512 | 283 | — | — | 2,795 | |||||||||||
| Coated sheets | 2,993 | 1,006 | — | — | 3,999 | |||||||||||
| Tubular products | — | 40 | 1,166 | — | 1,206 | |||||||||||
All Other (a) | 965 | 80 | 22 | 53 | 1,120 | |||||||||||
| Total | $ | 9,279 | $ | 2,417 | $ | 1,188 | $ | 53 | $ | 12,937 | ||||||
| (In millions) Year Ended December 31, 2018 | Flat-Rolled | USSE | Tubular | Other Businesses | Total | |||||||||||
| Semi-finished | $ | 156 | $ | 174 | $ | — | $ | — | $ | 330 | ||||||
| Hot-rolled sheets | 2,816 | 1,313 | — | — | 4,129 | |||||||||||
| Cold-rolled sheets | 2,709 | 384 | — | — | 3,093 | |||||||||||
| Coated sheets | 3,090 | 1,164 | — | — | 4,254 | |||||||||||
| Tubular products | — | 48 | 1,195 | — | 1,243 | |||||||||||
All Other (a) | 910 | 122 | 36 | 61 | 1,129 | |||||||||||
| Total | $ | 9,681 | $ | 3,205 | $ | 1,231 | $ | 61 | $ | 14,178 | ||||||
| (In millions) Year Ended December 31, 2017 | Flat-Rolled | USSE | Tubular | Other Businesses | Total | |||||||||||
| Semi-finished | $ | 72 | $ | 232 | $ | — | $ | — | $ | 304 | ||||||
| Hot-rolled sheets | 2,045 | 1,210 | — | — | 3,255 | |||||||||||
| Cold-rolled sheets | 2,355 | 328 | — | — | 2,683 | |||||||||||
| Coated sheets | 2,902 | 1,038 | — | — | 3,940 | |||||||||||
| Tubular products | — | 39 | 909 | — | 948 | |||||||||||
All Other (a) | 923 | 102 | 35 | 60 | 1,120 | |||||||||||
| Total | $ | 8,297 | $ | 2,949 | $ | 944 | $ | 60 | $ | 12,250 | ||||||
| (In millions) | 2019 | 2018 | 2017 | |||||||||
| Interest income: | ||||||||||||
| Interest income | $ | (17 | ) | $ | (23 | ) | $ | (17 | ) | |||
| Interest expense and other financial costs: | ||||||||||||
| Interest incurred | 162 | 175 | 229 | |||||||||
| Less interest capitalized | 20 | 7 | 3 | |||||||||
| Total interest expense | 142 | 168 | 226 | |||||||||
Loss on debt extinguishment (a) | — | 98 | 54 | |||||||||
Net periodic benefit costs (other than service cost) (b) | 91 | 69 | 61 | |||||||||
Foreign currency net (gain) loss (c) | (17 | ) | (19 | ) | 23 | |||||||
| Financial costs on: | ||||||||||||
| Amended Credit Agreement | 5 | 5 | 6 | |||||||||
| USSK credit facilities | 1 | 3 | 3 | |||||||||
Other (d) | 10 | 3 | 2 | |||||||||
| Amortization of discounts and deferred financing costs | 7 | 8 | 10 | |||||||||
| Total other financial costs | 6 | — | 44 | |||||||||
| Net interest and other financial costs | $ | 222 | $ | 312 | $ | 368 | ||||||
| (Dollars in millions, except per share amounts) | 2019 | 2018 | 2017 | |||||||||
| Net (loss) earnings attributable to United States Steel Corporation stockholders | $ | (630 | ) | $ | 1,115 | $ | 387 | |||||
| Weighted-average shares outstanding (in thousands): | ||||||||||||
| Basic | 171,418 | 176,633 | 174,793 | |||||||||
| Effect of convertible notes | — | — | — | |||||||||
| Effect of stock options, restricted stock units and performance awards | — | 1,828 | 1,727 | |||||||||
| Adjusted weighted-average shares outstanding, diluted | 171,418 | 178,461 | 176,520 | |||||||||
| Basic (loss) earnings per common share | $ | (3.67 | ) | $ | 6.31 | $ | 2.21 | |||||
| Diluted (loss) earnings per common share | $ | (3.67 | ) | $ | 6.25 | $ | 2.19 | |||||
| (In thousands) | 2019 | 2018 | 2017 | ||||||
| Securities granted under the 2005 Stock Incentive Plan | 4,459 | 1,631 | 1,579 | ||||||
| Securities convertible under the Senior Convertible Notes | 650 | — | — | ||||||
| Total | 5,109 | 1,631 | 1,579 | ||||||
| December 31, | ||||||||||||
| (In millions) | 2019 | 2018 | 2017 | |||||||||
| Cash and cash equivalents | $ | 749 | $ | 1,000 | $ | 1,553 | ||||||
| Restricted cash in other current assets | 2 | 3 | 6 | |||||||||
| Long-term restricted cash | 188 | 37 | 38 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 939 | $ | 1,040 | $ | 1,597 | ||||||
| (In millions) | December 31, 2019 | December 31, 2018 | ||||||
| Raw materials | $ | 628 | $ | 605 | ||||
| Semi-finished products | 720 | 1,021 | ||||||
| Finished products | 376 | 404 | ||||||
| Supplies and sundry items | 61 | 62 | ||||||
| Total | $ | 1,785 | $ | 2,092 | ||||
| (In millions) | 2019 | 2018 | 2017 | |||||||||
| United States | $ | (381 | ) | $ | 434 | $ | 75 | |||||
| Foreign | (71 | ) | 378 | 226 | ||||||||
| (Loss) earnings before income taxes | $ | (452 | ) | $ | 812 | $ | 301 | |||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||||
| (In millions) | Current | Deferred | Total | Current | Deferred | Total | Current | Deferred | Total | |||||||||||||||||||||||||||
| Federal | $ | (18 | ) | $ | 196 | $ | 178 | $ | (40 | ) | $ | (283 | ) | $ | (323 | ) | $ | (66 | ) | $ | (81 | ) | $ | (147 | ) | |||||||||||
| State and local | — | 23 | 23 | 2 | (58 | ) | (56 | ) | (1 | ) | — | (1 | ) | |||||||||||||||||||||||
| Foreign | (6 | ) | (17 | ) | (23 | ) | 64 | 12 | 76 | 53 | 9 | 62 | ||||||||||||||||||||||||
| Total | $ | (24 | ) | $ | 202 | $ | 178 | $ | 26 | $ | (329 | ) | $ | (303 | ) | $ | (14 | ) | $ | (72 | ) | $ | (86 | ) | ||||||||||||
| (In millions) | 2019 | 2018 | 2017 | |||||||||
| Statutory rate applied to earnings (loss) before income taxes | $ | (95 | ) | $ | 171 | $ | 105 | |||||
| Valuation allowance | 334 | (412 | ) | 36 | ||||||||
| Excess percentage depletion | (46 | ) | (48 | ) | (68 | ) | ||||||
| State and local income taxes after federal income tax effects | (36 | ) | 8 | (28 | ) | |||||||
| Effects of foreign operations | (23 | ) | 74 | 62 | ||||||||
| U.S. impact of foreign operations | 25 | (21 | ) | (6 | ) | |||||||
| Impact of tax credits | 5 | (71 | ) | (56 | ) | |||||||
| Effect of tax reform | — | — | (81 | ) | ||||||||
| Alternative minimum tax credit refund | — | — | (48 | ) | ||||||||
| Adjustment of prior years' federal income taxes | 7 | — | — | |||||||||
| Other | 7 | (4 | ) | (2 | ) | |||||||
| Total provision (benefit) | $ | 178 | $ | (303 | ) | $ | (86 | ) | ||||
| December 31, | ||||||||
| (In millions) | 2019 | 2018 | ||||||
| Deferred tax assets: | ||||||||
| Federal tax loss carryforwards (expiring in 2035 through 2036) | $ | 176 | $ | 220 | ||||
| Federal capital loss carryforwards (expiring 2021) | 27 | 33 | ||||||
| State tax credit carryforwards (expiring in 2020 through 2028) | 18 | 16 | ||||||
| State tax loss carryforwards (expiring in 2020 through 2039) | 130 | 137 | ||||||
| Minimum tax credit carryforwards | 19 | 38 | ||||||
| General business credit carryforwards (expiring in 2027 through 2039) | 85 | 85 | ||||||
| Foreign tax loss and credit carryforwards (expiring in 2024 through 2029) | 170 | 173 | ||||||
| Employee benefits | 173 | 337 | ||||||
| Contingencies and accrued liabilities | 71 | 62 | ||||||
| Investments in subsidiaries and equity investees | 49 | 59 | ||||||
| Inventory | 32 | — | ||||||
| Other temporary differences | 35 | 26 | ||||||
| Valuation allowance | (563 | ) | (214 | ) | ||||
| Total deferred tax assets | 422 | 972 | ||||||
| Deferred tax liabilities: | ||||||||
| Property, plant and equipment | 368 | 468 | ||||||
| Inventory | — | 22 | ||||||
| Receivables, payables and debt | 17 | 33 | ||||||
| Indefinite-lived intangible assets | 19 | 18 | ||||||
| Other temporary differences | 3 | — | ||||||
| Total deferred tax liabilities | 407 | 541 | ||||||
| Net deferred tax asset | $ | 15 | $ | 431 | ||||
| (In millions) | 2019 | 2018 | 2017 | |||||||||
| Unrecognized tax benefits, beginning of year | $ | 35 | $ | 42 | $ | 72 | ||||||
| Increases – tax positions taken in prior years | — | — | 1 | |||||||||
| Decreases – tax positions taken in prior years | — | (2 | ) | (26 | ) | |||||||
| Settlements | (32 | ) | — | (4 | ) | |||||||
| Lapse of statute of limitations | — | (5 | ) | (1 | ) | |||||||
| Unrecognized tax benefits, end of year | $ | 3 | $ | 35 | $ | 42 | ||||||
| December 31, | ||||||||
| (In millions) | 2019 | 2018 | ||||||
| Equity method investments | $ | 1,272 | $ | 485 | ||||
| Receivables due after one year, less allowance of $5 and $11 | 191 | 24 | ||||||
| Other | 3 | 4 | ||||||
| Total | $ | 1,466 | $ | 513 | ||||
| (In millions) | 2019 | 2018 | 2017 | |||||||||
Income data – year ended December 31:(a) | ||||||||||||
| Net Sales | $ | 2,528 | $ | 2,193 | $ | 2,485 | ||||||
| Operating income | 253 | 157 | 132 | |||||||||
| Net earnings | 235 | 134 | 109 | |||||||||
| Balance sheet date – December 31: | ||||||||||||
| Current Assets | $ | 1,144 | $ | 642 | $ | 633 | ||||||
| Noncurrent Assets | 2,976 | 853 | 710 | |||||||||
| Current liabilities | 573 | 348 | 441 | |||||||||
| Noncurrent Liabilities | 2,542 | 516 | 335 | |||||||||
Big River Steel
On October 31, 2019, a wholly owned subsidiary of U. S. Steel purchased a 49.9% ownership interest in Big River Steel at a purchase price of approximately $683 million in cash, with a call option (U. S. Steel Call Option) to acquire the remaining 50.1% within the next four years at an agreed-upon price formula. On December 8, 2020, U. S. Steel announced that it exercised the U. S. Steel Call Option to acquire the remaining equity of Big River Steel. The purchase of the remaining interest in Big River Steel closed on January 15, 2021 for approximately $723 million in cash and the assumption of liabilities of approximately $50 million. The Company assumed certain indebtedness with the purchase, see Note 28 for further details. Big River Steel is a technologically advanced mini mill that completed an expansion in November 2020 that doubled its hot-rolled steel production capacity to 3.3 million tons annually.
Prior to the closing of the acquisition on January 15, 2021, U. S. Steel accounted for its investment in Big River Steel under the equity method as control and risk of loss were shared among the partnership members. U. S. Steel recorded an equity investment asset for Big River Steel of $710 million that included approximately $27 million of transaction costs and is reflected in the investments and long-term receivables line on our balance sheet.
U. S. Steel’s 49.9% share of the total net assets of Big River Steel was approximately $155 million at October 31, 2019 resulting in a basis difference of approximately $550 million due to the step-up to fair value of certain assets attributable to Big River Steel. Approximately $88 million of the step-up was attributable to property, plant and equipment and approximately $460 million was attributable to goodwill. This basis difference, excluding the portion attributable to goodwill, is being amortized based on the remaining weighted average useful life of the assets of approximately 18 years.
The transaction to acquire Big River Steel included the U. S. Steel Call Option described above and options where the other Big River Steel equity owners could require U. S. Steel to purchase their 50.1% ownership interest (Class B Common Put Option) or require U. S. Steel to sell its ownership interest (Class B Common Call Option) at an agreed upon
98
price if the U. S. Steel Call Option expires. When the U. S. Steel Call Option was exercised on December 8, 2020, the options were legally extinguished and U. S. Steel recorded a contingent forward purchase commitment for the unsettled commitment to purchase the remaining interest in Big River Steel, see Note 20 for further details.
USS-POSCO Industries
On February 29, 2020, U. S. Steel purchased the remaining 50% ownership interest in USS-POSCO Industries (UPI) for $3 million, net of cash received of $2 million. There was an assumption of accounts payable owed to U. S. Steel for prior sales of steel substrate of $135 million associated with the purchase that was reflected as a reduction in receivables from related parties on the Company's Consolidated Balance Sheet.
Using step acquisition accounting U. S. Steel increased the value of the Company's previously held equity investment to its fair value of $5 million which resulted in a gain of approximately $25 million. The gain was recorded in gain on equity investee transactions in the Consolidated Statement of Operations.
Receivables of $44 million, inventories of $96 million, accounts payable and accrued liabilities of $19 million, current portion of long-term debt of $55 million and payroll and employee benefits liabilities of $78 million were recorded with the acquisition. Property, plant and equipment of $97 million which included a fair value step-up of $47 million and an intangible asset of $54 million were also recorded on the Company's Consolidated Balance Sheet. The intangible asset, which will be amortized over ten years, arises from a land lease contract, under which a certain portion of payment owed to UPI is realized in the form of deductions from electricity costs.
6. Revenue
Revenue is generated primarily from contracts to produce, ship and deliver steel products, and to a lesser extent, raw materials sales such as iron ore pellets and coke by-products and railroad services. Generally, U. S. Steel’s performance obligations are satisfied and revenue is recognized at a point in time, when title transfers to our customer for product shipped or services are provided. Revenues are recorded net of any sales incentives. Shipping and other transportation costs charged to customers are treated as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. Costs related to obtaining sales contracts are incidental and are expensed when incurred. Because customers are invoiced at the time title transfers and U. S. Steel’s right to consideration is unconditional at that time, U. S. Steel does not maintain contract asset balances. Additionally, U. S. Steel does not maintain contract liability balances, as performance obligations are satisfied prior to customer payment for product. U. S. Steel offers industry standard payment terms.
99
The following table disaggregates our revenue by product for each of our reportable business segments for the years ended December 31, 2020, 2019 and 2018, respectively:
| Customer Sales by Product: | ||||||||||||||||||||
| (In millions) Year Ended December 31, 2020 | Flat-Rolled | USSE | Tubular | Other Businesses | Total | |||||||||||||||
| Semi-finished | $ | 94 | $ | 2 | $ | 0 | $ | 0 | $ | 96 | ||||||||||
| Hot-rolled sheets | 1,273 | 793 | 0 | 0 | 2,066 | |||||||||||||||
| Cold-rolled sheets | 2,102 | 164 | 0 | 0 | 2,266 | |||||||||||||||
| Coated sheets | 2,990 | 904 | 0 | 0 | 3,894 | |||||||||||||||
| Tubular products | 0 | 40 | 621 | 0 | 661 | |||||||||||||||
All Other (a) | 612 | 64 | 18 | 64 | 758 | |||||||||||||||
| Total | $ | 7,071 | $ | 1,967 | $ | 639 | $ | 64 | $ | 9,741 | ||||||||||
| (In millions) Year Ended December 31, 2019 | Flat-Rolled | USSE | Tubular | Other Businesses | Total | |||||||||||||||
| Semi-finished | $ | 305 | $ | 11 | $ | 0 | $ | 0 | $ | 316 | ||||||||||
| Hot-rolled sheets | 2,504 | 997 | 0 | 0 | 3,501 | |||||||||||||||
| Cold-rolled sheets | 2,512 | 283 | 0 | 0 | 2,795 | |||||||||||||||
| Coated sheets | 2,993 | 1,006 | 0 | 0 | 3,999 | |||||||||||||||
| Tubular products | 0 | 40 | 1,166 | 0 | 1,206 | |||||||||||||||
All Other (a) | 965 | 80 | 22 | 53 | 1,120 | |||||||||||||||
| Total | $ | 9,279 | $ | 2,417 | $ | 1,188 | $ | 53 | $ | 12,937 | ||||||||||
| (In millions) Year Ended December 31, 2018 | Flat-Rolled | USSE | Tubular | Other Businesses | Total | |||||||||||||||
| Semi-finished | $ | 156 | $ | 174 | $ | 0 | $ | 0 | $ | 330 | ||||||||||
| Hot-rolled sheets | 2,816 | 1,313 | 0 | 0 | 4,129 | |||||||||||||||
| Cold-rolled sheets | 2,709 | 384 | 0 | 0 | 3,093 | |||||||||||||||
| Coated sheets | 3,090 | 1,164 | 0 | 0 | 4,254 | |||||||||||||||
| Tubular products | 0 | 48 | 1,195 | 0 | 1,243 | |||||||||||||||
All Other (a) | 910 | 122 | 36 | 61 | 1,129 | |||||||||||||||
| Total | $ | 9,681 | $ | 3,205 | $ | 1,231 | $ | 61 | $ | 14,178 | ||||||||||
(a) Consists primarily of sales of raw materials and coke making by-products.
100
7. Net Interest and Other Financial Costs
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Interest income: | ||||||||||||||||||||
| Interest income | $ | (7) | $ | (17) | $ | (23) | ||||||||||||||
| Interest expense and other financial costs: | ||||||||||||||||||||
| Interest incurred | 306 | 162 | 175 | |||||||||||||||||
| Less interest capitalized | 26 | 20 | 7 | |||||||||||||||||
| Total interest expense | 280 | 142 | 168 | |||||||||||||||||
Loss on debt extinguishment (a) | 0 | 0 | 98 | |||||||||||||||||
| Net periodic benefit (income) costs (other than service cost) | (25) | 91 | 69 | |||||||||||||||||
Foreign currency net gain (b) | (15) | (17) | (19) | |||||||||||||||||
| Financial costs on: | ||||||||||||||||||||
| Amended Credit Agreement | 3 | 5 | 5 | |||||||||||||||||
| USSK credit facilities | 2 | 1 | 3 | |||||||||||||||||
Other (c) | (21) | 10 | 3 | |||||||||||||||||
| Amortization of discounts and deferred financing costs | 15 | 7 | 8 | |||||||||||||||||
| Total other financial costs | (16) | 6 | 0 | |||||||||||||||||
| Net interest and other financial costs | $ | 232 | $ | 222 | $ | 312 | ||||||||||||||
(a)Represents a net pretax charge of $98 million during 2018 related to the retirement of our 2020 Senior Notes and 2021 Senior Secured Notes.
(b)The functional currency for USSE is the euro. Foreign currency net gain is a result of transactions denominated in currencies other than the euro.
(c)2020 and 2019 include a $(39) million and $7 million change in fair value of certain call and put options, respectively, related to U. S. Steel's purchase of its 49.9% ownership interest in Big River Steel during 2019. See Note 5 and Note 20 for further details.
8. (Loss) Earnings and Dividends Per Common Share
(Loss) Earnings per Share Attributable to United States Steel Corporation Stockholders
Basic (loss) earnings per common share is based on the weighted average number of common shares outstanding during the period.
Diluted (loss) earnings per common share assumes the exercise of stock options, the vesting of restricted stock units and performance awards, provided in each case the effect is dilutive. The "treasury stock" method is used to calculate the dilutive effect of the Senior Convertible Notes due in 2026 (due to our current intent and policy, among other factors, to settle the principal amount of the 2026 Senior Convertible Notes in cash upon conversion).
The computations for basic and diluted (loss) earnings per common share from continuing operations are as follows:
| (Dollars in millions, except per share amounts) | 2020 | 2019 | 2018 | |||||||||||||||||
| Net (loss) earnings attributable to United States Steel Corporation stockholders | $ | (1,165) | $ | (630) | $ | 1,115 | ||||||||||||||
| Weighted-average shares outstanding (in thousands): | ||||||||||||||||||||
| Basic | 196,721 | 171,418 | 176,633 | |||||||||||||||||
| Effect of convertible notes | 0 | 0 | 0 | |||||||||||||||||
| Effect of stock options, restricted stock units and performance awards | 0 | 0 | 1,828 | |||||||||||||||||
| Adjusted weighted-average shares outstanding, diluted | 196,721 | 171,418 | 178,461 | |||||||||||||||||
| Basic (loss) earnings per common share | $ | (5.92) | $ | (3.67) | $ | 6.31 | ||||||||||||||
| Diluted (loss) earnings per common share | $ | (5.92) | $ | (3.67) | $ | 6.25 | ||||||||||||||
The following table summarizes the securities that were antidilutive, and therefore, were not included in the computation of diluted (loss) earnings per common share:
| (In thousands) | 2020 | 2019 | 2018 | |||||||||||||||||
| Securities granted under the 2005 Stock Incentive Plan | 6,780 | 4,459 | 1,631 | |||||||||||||||||
| Securities convertible under the Senior Convertible Notes | 0 | 650 | 0 | |||||||||||||||||
| Total | 6,780 | 5,109 | 1,631 | |||||||||||||||||
Dividends Paid per Share
Quarterly dividends on common stock were 1 cent per share for each quarter in 2020 and 5 cents per share for each quarter in 2019 and 2018.
101
9. Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within U. S. Steel's Consolidated Balance Sheets that sum to the total of the same amounts shown in the Consolidated Statement of Cash Flows:
| December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Cash and cash equivalents | $ | 1,985 | $ | 749 | $ | 1,000 | ||||||||||||||
| Restricted cash in other current assets | 3 | 2 | 3 | |||||||||||||||||
| Long-term restricted cash | 130 | 188 | 37 | |||||||||||||||||
| Total cash, cash equivalents and restricted cash | $ | 2,118 | $ | 939 | $ | 1,040 | ||||||||||||||
Amounts included in restricted cash represent cash balances which are legally or contractually restricted, primarily for electric arc furnace construction, environmental capital expenditure projects and insurance purposes.
10. Inventories
| (In millions) | December 31, 2020 | December 31, 2019 | ||||||||||||
| Raw materials | $ | 416 | $ | 628 | ||||||||||
| Semi-finished products | 633 | 720 | ||||||||||||
| Finished products | 300 | 376 | ||||||||||||
| Supplies and sundry items | 53 | 61 | ||||||||||||
| Total | $ | 1,402 | $ | 1,785 | ||||||||||
Current acquisition costs were estimated to exceed the above inventory values at December 31 by $848 million in 2020 and $735 million in 2019. As a result of the liquidation of LIFO inventories, cost of sales decreased and (loss) earnings before interest and income taxes increased by $5 million, $28 million and $10 million in 2020, 2019 and 2018, respectively.
11. Income Taxes
Components of (loss) earnings
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| United States | $ | (1,303) | $ | (381) | $ | 434 | ||||||||||||||
| Foreign | (4) | (71) | 378 | |||||||||||||||||
| (Loss) earnings before income taxes | $ | (1,307) | $ | (452) | $ | 812 | ||||||||||||||
At the end of both 2020 and 2019, U. S. Steel does not have any undistributed foreign earnings and profits for which U.S. deferred taxes have not been provided.
Income tax (benefit) provision
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Current | Deferred | Total | Current | Deferred | Total | Current | Deferred | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Federal | $ | (10) | $ | (95) | $ | (105) | $ | (18) | $ | 196 | $ | 178 | $ | (40) | $ | (283) | $ | (323) | ||||||||||||||||||||||||||||||||||||||
| State and local | (3) | (24) | (27) | 0 | 23 | 23 | 2 | (58) | (56) | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign | 1 | (11) | (10) | (6) | (17) | (23) | 64 | 12 | 76 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | (12) | $ | (130) | $ | (142) | $ | (24) | $ | 202 | $ | 178 | $ | 26 | $ | (329) | $ | (303) | ||||||||||||||||||||||||||||||||||||||
A reconciliation of the federal statutory tax rate of 21 percent to total (benefit) provision follows:
102
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Statutory rate applied to (loss) earnings before income taxes | $ | (275) | $ | (95) | $ | 171 | ||||||||||||||
| Valuation allowance | 367 | 334 | (412) | |||||||||||||||||
| Tax accounting benefit related to increase in OCI | (138) | 0 | 0 | |||||||||||||||||
| Excess percentage depletion | (31) | (46) | (48) | |||||||||||||||||
| State and local income taxes after federal income tax effects | (47) | (36) | 8 | |||||||||||||||||
| Effects of foreign operations | (10) | (23) | 74 | |||||||||||||||||
| U.S. impact of foreign operations | 1 | 25 | (21) | |||||||||||||||||
| Impact of tax credits | (18) | 5 | (71) | |||||||||||||||||
| Adjustment of prior years' federal income taxes | 12 | 7 | 0 | |||||||||||||||||
| Other | (3) | 7 | (4) | |||||||||||||||||
| Total (benefit) provision | $ | (142) | $ | 178 | $ | (303) | ||||||||||||||
The 2020 tax benefit includes a $138 million benefit related to recording a loss from continuing operations and income from other comprehensive income categories and expense of $13 million for an updated estimate to tax reserves related to an unrecognized tax benefit. Due to the full valuation allowance on our domestic deferred tax assets, the tax benefit in 2020 does not reflect any additional tax benefit for domestic pretax losses.
In 2019, the tax benefit differs from the domestic statutory rate of 21 percent primarily due to the fact that it does not reflect any tax benefit in the U.S. as a valuation allowance was recorded against the Company's net domestic deferred tax asset (excluding a portion of a deferred tax liability related to an asset with an indefinite life, as well as a deferred tax asset related to refundable Alternative Minimum Tax (AMT) credits).
Included in the 2018 tax benefit is a benefit of $374 million related to the reversal of a portion of the valuation allowance recorded against the Company's net domestic deferred tax asset, as well as a benefit of $38 million related to the reversal of the valuation allowance for current year activity.
Deferred taxes
Deferred tax assets and liabilities resulted from the following:
| December 31, | ||||||||||||||
| (In millions) | 2020 | 2019 | ||||||||||||
| Deferred tax assets: | ||||||||||||||
| Federal tax loss carryforwards (expiring in 2035 through 2037) | $ | 443 | $ | 176 | ||||||||||
| Federal capital loss carryforwards (expiring 2021) | 0 | 27 | ||||||||||||
| State tax credit carryforwards (expiring in 2021 through 2029) | 16 | 18 | ||||||||||||
| State tax loss carryforwards (expiring in 2021 through 2040) | 182 | 130 | ||||||||||||
| Minimum tax credit carryforwards | 0 | 19 | ||||||||||||
| General business credit carryforwards (expiring in 2026 through 2040) | 103 | 85 | ||||||||||||
| Foreign tax loss and credit carryforwards (expiring in 2023 through 2030) | 171 | 170 | ||||||||||||
| Employee benefits | 71 | 173 | ||||||||||||
| Contingencies and accrued liabilities | 52 | 71 | ||||||||||||
| Operating lease liabilities | 51 | 58 | ||||||||||||
| Section 59(e) amortization | 27 | 18 | ||||||||||||
| Investments in subsidiaries and equity investees | 0 | 49 | ||||||||||||
| Inventory | 21 | 32 | ||||||||||||
| Other temporary differences | 46 | 17 | ||||||||||||
| Valuation allowance | (796) | (563) | ||||||||||||
| Total deferred tax assets | 387 | 480 | ||||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Property, plant and equipment | 244 | 368 | ||||||||||||
| Operating right-of-use assets | 49 | 58 | ||||||||||||
| Investments in subsidiaries and equity investees | 23 | 0 | ||||||||||||
| Receivables, payables and debt | 22 | 17 | ||||||||||||
| Indefinite-lived intangible assets | 19 | 19 | ||||||||||||
| Other temporary differences | 19 | 3 | ||||||||||||
| Total deferred tax liabilities | 376 | 465 | ||||||||||||
| Net deferred tax asset | $ | 11 | $ | 15 | ||||||||||
103
U. S. Steel recognizes deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The realization of deferred tax assets is assessed quarterly based on several interrelated factors. These factors include U. S. Steel’s expectation to generate sufficient future taxable income and the projected time period over which these deferred tax assets will be realized.
Each quarter U. S. Steel analyzes the likelihood that our deferred tax assets will be realized. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not that some portion, or all, of a deferred tax asset will not be realized.
At December 31, 2020, we identified the following negative evidence concerning U. S. Steel's ability to use some or all of its domestic deferred tax assets:
•U. S. Steel's domestic operations generated a significant loss in the current year and the Company is currently in a cumulative 12 quarter loss position, and
•some of our domestic deferred tax assets are carryforwards, which have expiration dates.
Most positive evidence can be categorized into one of the four sources of taxable income sequentially. These are (from least to most subjective):
•taxable income in prior carryback years, if carryback is permitted,
•future reversal of existing taxable temporary differences,
•tax planning strategies, and
•future taxable income exclusive of reversing temporary differences and carryforwards.
U. S. Steel utilized all available carrybacks, and therefore, our analysis at December 31, 2020 focused on the other sources of taxable income. Our projection of the reversal of our existing temporary differences generated significant taxable income. This source of taxable income, however, was not sufficient to project full utilization of U. S. Steel’s domestic deferred tax assets. To assess the realizability of the remaining domestic deferred tax assets, U. S. Steel analyzed its prudent and feasible tax planning strategies.
At December 31, 2020, after weighing all the positive and negative evidence, U. S. Steel determined that it was still more likely than not that the net domestic deferred tax asset (excluding a portion of a deferred tax liability related to an asset with an indefinite life) may not be realized. As a result, U. S. Steel recorded a $229 million non-cash charge to tax expense. In the future, if we determine that it is more likely than not that we will be able to realize all or a portion of our deferred tax assets, the valuation allowance will be reduced, and we will record a benefit to earnings.
At December 31, 2020, the net domestic deferred tax liability was $7 million, net of an established valuation allowance of $793 million. At December 31, 2019, the net domestic deferred tax asset was $12 million, net of an established valuation allowance of $560 million.
At December 31, 2020, the net foreign deferred tax asset was $18 million, net of an established valuation allowance of $3 million. At December 31, 2019, the net foreign deferred tax asset was $3 million, net of an established valuation allowance of $3 million. The net foreign deferred tax asset will fluctuate as the value of the U.S. dollar changes with respect to the euro.
U. S. Steel will continue to monitor the realizability of its deferred tax assets on a quarterly basis taking into consideration, among other items, the uncertainty regarding the Company's continued ability to generate domestic income in the near term. In the future, if we determine that realization is more likely than not for a deferred tax asset with a valuation allowance, the related valuation allowance will be reduced, and we will record a non-cash benefit to earnings.
Unrecognized tax benefits
Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken, in a tax return and the benefit recognized for accounting purposes pursuant to the guidance in ASC Topic 740 on income taxes. The total amount of unrecognized tax benefits was $16 million, $3 million and $35 million as of December 31, 2020, 2019 and 2018, respectively.
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $15 million and $2 million as of December 31, 2020 and 2019, respectively.
U. S. Steel records interest related to uncertain tax positions as a part of net interest and other financial costs in the Consolidated Statements of Operations. Any penalties are recognized as part of selling, general and administrative expenses. U. S. Steel had accrued liabilities of $2 million for interest and penalties related to uncertain tax positions as of both December 31, 2020 and 2019.
104
A tabular reconciliation of unrecognized tax benefits follows:
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Unrecognized tax benefits, beginning of year | $ | 3 | $ | 35 | $ | 42 | ||||||||||||||
| Increases – tax positions taken in prior years | 13 | 0 | 0 | |||||||||||||||||
| Decreases – tax positions taken in prior years | 0 | 0 | (2) | |||||||||||||||||
| Settlements | 0 | (32) | 0 | |||||||||||||||||
| Lapse of statute of limitations | 0 | 0 | (5) | |||||||||||||||||
| Unrecognized tax benefits, end of year | $ | 16 | $ | 3 | $ | 35 | ||||||||||||||
It is reasonably expected that during the next 12 months unrecognized tax benefits related to income tax issues will change by an immaterial amount.
Tax years subject to examination
Below is a summary of the tax years open to examination by major tax jurisdiction:
U.S. Federal – 2017 and forward
U.S. States – 2012 and forward
Slovakia – 2010 and forward
Status of Internal Revenue Service (IRS) examinations
The IRS audit of U. S. Steel’s 2017-2018 federal consolidated tax returns began in 2020 and is ongoing. The IRS completed its audit of the Company's 2014 and 2016 tax returns in 2020.
12. Investments, Long-Term Receivables and Equity Investee Transactions
| December 31, | ||||||||||||||
| (In millions) | 2020 | 2019 | ||||||||||||
| Equity method investments | $ | 1,140 | $ | 1,272 | ||||||||||
| Receivables due after one year, less allowance of $5 in both periods | 34 | 191 | ||||||||||||
| Other | 3 | 3 | ||||||||||||
| Total | $ | 1,177 | $ | 1,466 | ||||||||||
Summarized financial information of all investees accounted for by the equity method of accounting is as follows (amounts represent 100% of investee financial information):
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
Income data – year ended December 31:(a) | ||||||||||||||||||||
| Net Sales | $ | 2,485 | $ | 2,528 | $ | 2,193 | ||||||||||||||
| Operating income | 12 | 253 | 157 | |||||||||||||||||
| Net earnings | (124) | 235 | 134 | |||||||||||||||||
| Balance sheet date – December 31: | ||||||||||||||||||||
| Current Assets | $ | 960 | $ | 1,144 | $ | 642 | ||||||||||||||
| Noncurrent Assets | 3,101 | 2,976 | 853 | |||||||||||||||||
| Current liabilities | 419 | 573 | 348 | |||||||||||||||||
| Noncurrent Liabilities | 3,063 | 2,542 | 516 | |||||||||||||||||
(a)We exited Leeds Retail Center, LLC and sold Acero Prime, S.R.L. de CV on May 31, 2018, and October 23, 2018, respectively. The former equity affiliates are included in the income data through the month prior to the date of sale.
U. S. Steel's portion of the (loss) income from investees reflected on the Consolidated Statements of Operations was $(117) million, $79 million and $61 million for the years ended December 31, 2020, 2019 and 2018, respectively.
105
All of our significant investees are located in the U.S. Investees accounted for using the equity method include:
| Investee | December 31, 2020 Interest | ||||
Big River Steel(a) | 49.9 | % | |||
| Chrome Deposit Corporation | 50 | % | |||
| Daniel Ross Bridge, LLC | 50 | % | |||
| Double G Coatings Company, Inc. | 50 | % | |||
| Hibbing Development Company | 24.1 | % | |||
Hibbing Taconite Company(b) | 14.7 | % | |||
| Patriot Premium Threading Services, LLC | 50 | % | |||
| PRO-TEC Coating Company, LLC | 50 | % | |||
Strategic Investment Fund Partners II(c) | 5.2 | % | |||
| Worthington Specialty Processing | 49 | % | |||
(a)U. S. Steel's 49.9% ownership in Big River Steel consists of 47.7535% interests in Big River Steel Holdings LLC and BRS Stock Holdco LLC. U. S. Steel Blocker LLC, a wholly-owned subsidiary of U. S. Steel, holds a 2.1465% interest in both of those entities.
(b)Hibbing Taconite Company (Hibbing) is an unincorporated joint venture that is owned, in part, by Hibbing Development Company (HDC), which is accounted for using the equity method. Through HDC we are able to influence the activities of HTC, and as such, its activities are accounted for using the equity method.
(c)Strategic Investment Fund Partners II is a limited partnership and in accordance with ASC Topic 323, the financial activities are accounted for using the equity method.
In 2020, we recognized pre-tax gains on equity investee transactions of approximately $6 million on the sale of our 49 percent ownership interest in Feralloy Processing Company and $25 million for the step-up to fair value of our previously held investment in UPI.
In 2018, we recognized pre-tax gains on equity investee transactions of approximately $18 million for the assignment of our ownership interest in Leeds Retail Center, LLC and $20 million from the sale of our 40 percent ownership interest in Acero Prime, S. R. L. de CV.
There were no dividends or partnership distributions received from equity investees in 2020. There were dividends or partnership distributions of $5 million in 2019 and $13 million in 2018.
U. S. Steel evaluates impairment of its equity method investments whenever circumstances indicate that a decline in value below carrying value is other than temporary. Under these circumstances, we would adjust the investment down to its estimated fair value, which then becomes its new carrying value.
We supply substrate to certain of our equity method investees and from time to time will extend the payment terms for their trade receivables. For discussion of transactions and related receivable and payable balances between U. S. Steel and its investees, see Note 23.
Big River Steel
On October 31, 2019, a wholly owned subsidiary of U. S. Steel purchased a 49.9% ownership interest in Big River Steel at a purchase price of approximately $683 million in cash. U. S. Steel recorded an equity investment asset for Big River Steel of $710 million that includes approximately $27 million of transaction costs. On January 15, 2021, U. S. Steel accounts for its investmentpurchased the remaining interest in Big River Steel underfor $723 million in cash and the equity method as control and riskassumption of loss are shared among the partnership members. Big River Steel is not a variable interest entity as it qualifies for the business scope exception under ASC 810, Consolidation.approximately $50 million in liabilities. See Note 5 for further details.
Patriot Premium Threading Services, LLC
Patriot Premium Threading Services, LLC (Patriot) is located in Midland, Texas and provides oil country threading, accessory threading, repair services and rig site services to exploration and production companies located principally in the Permian Basin. During the fourth quarter of 2019, Patriot’s 50-50 joint venture partners, a wholly owned subsidiary of U. S. Steel and Butch Gilliam Enterprises, Inc. (BGE) amended the joint venture agreement. In accordance with the amended agreement, U. S. Steel will be entitled to receive distributions of 100% of Patriot’s earnings starting January 1, 2020 and will purchase BGE’s ownership interest in Patriot after a three-yearthree-year period in exchange for certain fixed payments and payments equal to 10 percent of Patriot’s earnings before interest and taxes during that time period. The prepaid asset (recorded in other noncurrent assets) related to the future purchase of Patriot was $33.0 million and $27.7$33 million at December 31, 2019both year end 2020 and December 31, 2018,
Patriot is now classified as a variable interest entity because its economics are not proportional to the equal voting interests of its two joint venture partners. U. S. Steel is not the primary beneficiary because it does not direct the decisions that most significantly impact the economic performance of Patriot. These decisions include those related to sales of Patriot’s goods and services, its production planning and scheduling and its negotiation of procurement contracts.
106
At December 31, 20192020 and 2018,2019, U. S. Steel had other assets of approximately $29.8$28 million and $23.7$30 million, respectively, on its consolidated balance sheets related to Patriot. These assets were comprised primarily of our equity investment in Patriot which is classified in investments and other long-term receivables and an insignificant related party receivable for the sale of pipe to Patriot for threading services. The assets represent our maximum exposure to Patriot without consideration of any recovery that could be received if there were a sale of Patriot’s assets. Creditors of Patriot have no recourse to the general credit of U. S. Steel.
13. Property, Plant and Equipment
| December 31, | ||||||||||||||||||||
| (In millions) | Useful Lives | 2020 | 2019 | |||||||||||||||||
| Land and depletable property | — | $ | 237 | $ | 202 | |||||||||||||||
| Buildings | 35 years | 1,154 | 1,105 | |||||||||||||||||
| Machinery and equipment | ||||||||||||||||||||
| Steel producing | 2-30 years | 14,417 | 13,658 | |||||||||||||||||
| Transportation | 3-40 years | 282 | 280 | |||||||||||||||||
| Other | 5-30 years | 92 | 129 | |||||||||||||||||
| Information technology | 5-6 years | 796 | 787 | |||||||||||||||||
| Assets under finance lease | 5-15 years | 113 | 83 | |||||||||||||||||
| Construction in process | — | 613 | 833 | |||||||||||||||||
| Total | 17,704 | 17,077 | ||||||||||||||||||
| Less accumulated depreciation and depletion | 12,260 | 11,630 | ||||||||||||||||||
| Net | $ | 5,444 | $ | 5,447 | ||||||||||||||||
| December 31, | |||||||||||
| (In millions) | Useful Lives | 2019 | 2018 | ||||||||
| Land and depletable property | — | $ | 202 | $ | 207 | ||||||
| Buildings | 35 years | 1,105 | 1,098 | ||||||||
| Machinery and equipment | |||||||||||
| Steel producing | 2-30 years | 13,658 | 12,784 | ||||||||
| Transportation | 3-40 years | 280 | 268 | ||||||||
| Other | 5-30 years | 129 | 123 | ||||||||
| Information technology | 5-6 years | 787 | 786 | ||||||||
| Assets under finance lease | 5-15 years | 83 | 36 | ||||||||
| Construction in process | — | 833 | 706 | ||||||||
| Total | 17,077 | 16,008 | |||||||||
| Less accumulated depreciation and depletion | 11,630 | 11,143 | |||||||||
| Net | $ | 5,447 | $ | 4,865 | |||||||
Amounts in accumulated depreciation and depletion for assets acquired under finance leases (including sale-leasebacks accounted for as financings) were $27$40 million and $20$27 million at December 31, 20192020 and 2018,2019, respectively.
14. Intangible Assets
Intangible assets are being amortized on a straight-line basis over their estimated useful lives and are detailed below:
| As of December 31, 2020 | As of December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Useful Lives | Gross Carrying Amount | Accumulated Impairment (a) | Accumulated Amortization | Net Amount | Gross Carrying Amount | Accumulated Amortization | Net Amount | ||||||||||||||||||||||||||||||||||||||||||
| Customer relationships | 22 Years | $ | 132 | $ | 55 | $ | 77 | $ | 0 | $ | 132 | $ | 76 | $ | 56 | |||||||||||||||||||||||||||||||||||
| Patents | 10-15 Years | 22 | 7 | 10 | 5 | 22 | 8 | 14 | ||||||||||||||||||||||||||||||||||||||||||
| Energy Contract | 10 Years | 54 | 0 | 5 | $ | 49 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||
| Other | 4-20 Years | 14 | 5 | 9 | 0 | 14 | 9 | 5 | ||||||||||||||||||||||||||||||||||||||||||
| Total amortizable intangible assets | $ | 222 | $ | 67 | $ | 101 | $ | 54 | $ | 168 | $ | 93 | $ | 75 | ||||||||||||||||||||||||||||||||||||
| As of December 31, 2019 | As of December 31, 2018 | |||||||||||||||||||||||||
| (In millions) | Useful Lives | Gross Carrying Amount | Accumulated Amortization | Net Amount | Gross Carrying Amount | Accumulated Amortization | Net Amount | |||||||||||||||||||
| Customer relationships | 22 Years | $ | 132 | $ | 76 | $ | 56 | $ | 132 | $ | 70 | $ | 62 | |||||||||||||
| Patents | 10-15 Years | 22 | 8 | 14 | 22 | 7 | 15 | |||||||||||||||||||
| Other | 4-20 Years | 14 | 9 | 5 | 14 | 8 | 6 | |||||||||||||||||||
| Total amortizable intangible assets | $ | 168 | $ | 93 | $ | 75 | $ | 168 | $ | 85 | $ | 83 | ||||||||||||||
Amortization expense was $8 million for both years ended December 31, 20192020 and December 31, 2018.2019. We expect a consistent level ofapproximately $6 million in annual amortization expense through 2024.2025 and approximately $24 million in remaining amortization expense thereafter.
The carrying amount of acquired water rights with indefinite lives as of December 31, 20192020 and December 31, 20182019 totaled $75 million. The acquired water rights are tested for impairment annually in the third quarter, or whenever events or circumstances indicate the carrying value may not be recoverable. U. S. Steel performed a quantitative impairment evaluation of its acquired water rights during the third quarter of 2019. Based on the results of the evaluation, the water rights were not impaired.
15. Stock-Based Compensation Plans
U. S. Steel has outstanding stock-based compensation awards that were granted by the Compensation & Organization Committee of the Board of Directors (the Committee) under the 2005 Stock Incentive Plan (the 2005 Plan) and the 2016 Omnibus Incentive Compensation Plan (the Omnibus Plan) (collectively the Plans). On April 26, 2016, the Company's stockholders approved the Omnibus Plan and authorized the Company to issue up to 7,200,000 shares of U. S. Steel common stock under the Omnibus Plan. The Company's stockholders authorized the issuance of an additional 6,300,000 shares under the Omnibus Plan on April 25, 2017.2017 and an additional 4,700,000 shares under the Omnibus Plan on April 28, 2020. While awards that were previously granted under the 2005 Plan remain outstanding, all future awards will be granted under the Omnibus Plan. As of December 31, 2019,2020, there were 7,464,7796,092,033 shares available for future grants under the
107
Omnibus Plan. Generally, a share issued under the Omnibus Plan pursuant to an award other than a stock option will reduce the number of shares available under the Stock Plan by 1.731.78 shares. Shares related to awards under either plan (i) that are forfeited, (ii) that terminate without shares having been issued or (iii) for which payment is made in cash or property other than shares, are again available for awards under the Omnibus Plan. Shares delivered to U. S. Steel or withheld for purposes of satisfying the exercise price or tax withholding obligations are not available for future awards. The purpose of the Plans is to attract, retain and motivate employees and non-employee directors of outstanding ability, and to align their interests with those of the stockholders of U. S. Steel. The Committee administers the Plans, and under the Omnibus Plan may make grants of stock options, restricted stock units (RSUs), performance awards, and other stock-based awards.
The following table summarizes the total stock-based compensation awards granted during the years 2020, 2019 2018 and 2017:2018:
| Restricted Stock Units | TSR Performance Awards | ROCE Performance Awards (a) | ||||||||||||||||||
| 2020 Grants | 2,640,690 | 671,390 | 0 | |||||||||||||||||
| 2019 Grants | 1,005,500 | 210,520 | 527,470 | |||||||||||||||||
| 2018 Grants | 824,195 | 79,190 | 247,510 | |||||||||||||||||
(a) The ROCE awards granted in 2020 are not shown in the table because they were granted in cash.
| Stock Options | Restricted Stock Units | TSR Performance Awards | ROCE Performance Awards | |||||||||
| 2019 Grants | — | 1,005,500 | 210,520 | 527,470 | ||||||||
| 2018 Grants | — | 824,195 | 79,190 | 247,510 | ||||||||
| 2017 Grants | 647,780 | 348,040 | 169,850 | — | ||||||||
Stock-based compensation expense
The following table summarizes the total compensation expense recognized for stock-based compensation awards:
| (In millions, except per share amounts) | Year Ended December 31, 2020 | Year Ended December 31, 2019 | Year Ended December 31, 2018 | |||||||||||||||||
| Stock-based compensation expense recognized: | ||||||||||||||||||||
| Cost of sales | $ | 8 | $ | 9 | $ | 11 | ||||||||||||||
| Selling, general and administrative expenses | 18 | 17 | 21 | |||||||||||||||||
| Decrease in net income | 26 | 26 | 32 | |||||||||||||||||
| Decrease in basic earnings per share | 0.13 | 0.15 | 0.14 | |||||||||||||||||
| Decrease in diluted earnings per share | 0.13 | 0.15 | 0.13 | |||||||||||||||||
| (In millions, except per share amounts) | Year Ended December 31, 2019 | Year Ended December 31, 2018 | Year Ended December 31, 2017 | |||||||||
| Stock-based compensation expense recognized: | ||||||||||||
| Cost of sales | $ | 9 | $ | 11 | $ | 10 | ||||||
| Selling, general and administrative expenses | 17 | 21 | 17 | |||||||||
| Decrease in net income | 26 | 32 | 27 | |||||||||
| Decrease in basic earnings per share | 0.15 | 0.14 | 0.15 | |||||||||
| Decrease in diluted earnings per share | 0.15 | 0.13 | 0.15 | |||||||||
As of December 31, 2019,2020, total future compensation cost related to nonvested stock-based compensation arrangements was $16$12 million and the average period over which this cost is expected to be recognized is approximately 1820 months.
Stock options
Compensation expense for stock options is recorded over the vesting period based on the fair value on the date of grant, as calculated by U. S. Steel using the Black-Scholes model and the assumptions listed below. Awards generally vest ratably over a three-yearthree-year service period and have a term of ten years.years. Stock options are generally issued at the market price of the underlying stock on the date of the grant. Upon exercise of stock options, shares of U. S. Steel stock are issued from treasury stock or from authorized, but unissued common stock. There were no stock options granted in 2020, 2019 and 2018.
Black-Scholes Assumptions (a) | 2017 Grants | |||
| Grant date price per share of option award | $ | 36.94 | ||
| Exercise price per share of option award | $ | 36.94 | ||
| Expected annual dividends per share | $ | 0.20 | ||
| Expected life in years | 5.0 | |||
| Expected volatility | 57 | % | ||
| Risk-free interest rate | 2.0 | % | ||
| Average grant date fair value per share of unvested option awards as calculated from above | $ | 17.28 | ||
The expected annual dividends per share are based on the latest annualized dividend rate at the date of grant; the expected life in years is determined primarily from historical stock option exercise data; the expected volatility is based on the historical volatility of U. S. Steel stock; and the risk-free interest rate is based on the U.S. Treasury strip rate for the expected life of the option.
108
The following table shows a summary of the status and activity of stock options for the year ended December 31, 2019:2020:
| Shares | Weighted- Average Exercise Price (per share) | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in millions) | |||||||||||||||||||||||
| Outstanding at January 1, 2020 | 2,351,831 | $ | 27.08 | |||||||||||||||||||||||
| Granted | 0 | $ | 0 | |||||||||||||||||||||||
| Exercised | (22,849) | $ | 14.78 | |||||||||||||||||||||||
| Forfeited or expired | (282,746) | $ | 36.10 | |||||||||||||||||||||||
| Outstanding at December 31, 2020 | 2,046,236 | $ | 25.98 | 3.72 | $ | 1 | ||||||||||||||||||||
| Exercisable at December 31, 2020 | 2,046,236 | $ | 25.98 | 3.72 | $ | 1 | ||||||||||||||||||||
| Exercisable and expected to vest at December 31, 2020 | 2,046,236 | $ | 25.98 | 3.72 | $ | 1 | ||||||||||||||||||||
| Shares | Weighted- Average Exercise Price (per share) | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in millions) | ||||||||||
| Outstanding at January 1, 2019 | 2,746,520 | $ | 27.73 | ||||||||||
| Granted | — | $ | — | ||||||||||
| Exercised | (10,435 | ) | $ | 16.05 | |||||||||
| Forfeited or expired | (384,254 | ) | $ | 32.00 | |||||||||
| Outstanding at December 31, 2019 | 2,351,831 | $ | 27.08 | 4.43 | $ | — | |||||||
| Exercisable at December 31, 2019 | 2,209,073 | $ | 26.50 | 4.28 | $ | — | |||||||
| Exercisable and expected to vest at December 31, 2019 | 2,323,996 | $ | 26.97 | 4.40 | $ | — | |||||||
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (difference between our closing stock price on the last trading day of 20192020 and the exercise price, multiplied by the number of in-the-money options). Intrinsic value changes are a function of the fair market value of our stock.
The total intrinsic value of stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the option) was immaterial during the year ended December 31, 2020 and December 31, 2019 and $27 million during the year ended December 31, 2018 and $11 million during the year ended December 31, 2017.2018. The total amount of cash received by U. S. Steel from the exercise of options during the year ended December 31, 20192020 and December 31, 2018,2019, was an immaterial amount and $35 million, respectively, and the related net tax benefit realized from the exercise of these options was an immaterial amount in 2020 and $3 million in 2019 and 2018, respectively.2019.
Stock awards
Compensation expense for nonvested stock awards is recorded over the vesting period based on the fair value at the date of grant.
RSUs awarded as part of annual grants generally vest ratably over three years.years. Their fair value is the market price of the underlying common stock on the date of grant. RSUs granted in connection with new-hire or retention awards generally cliff vest three years from the date of the grant.
Total shareholder return (TSR) performance awards may vest at varying levels at the end of a three-year performance period if U. S. Steel’s total shareholder return compared to the total shareholder return of a peer group of companies meets performance criteria during the three-year performance period. For the 2017 and 2018 awards, TSR is calculated over the full three-yearthree-year performance period. For the 2020 and 2019 awards, TSR is calculated as follows: 20 percent for each year in the three-yearthree-year performance period and 40 percent for the full three-yearthree-year period. TSR performance awards may vest and payout 50 percent at the threshold level, 100 percent at the target level and 200 percent at the maximum level for payouts. Payment for performance in between the threshold percentages will be interpolated. The fair value of the performance awards is calculated using a Monte-Carlo simulation.
Performance awards based on the return on capital employed (ROCE) metric were granted in cash in 2020, and in equity in 2019 and 2018 in equity and in 2017 in cash.2018. ROCE awards granted will be measured on a weighted average basis of the Company’s consolidated worldwide earnings (loss) before interest and income taxes, as adjusted, divided by consolidated worldwide capital employed, as adjusted, over a three year period.
Weighted average ROCE is calculated based on the ROCE achieved in the first, second and third years of the performance period, weighted at 20 percent, 30 percent and 50 percent, respectively. The ROCE awards will payout 50 percent at the threshold level, 100 percent at the target level and 200 percent at the maximum level. Payouts for performance in between the threshold percentages will be interpolated.
Compensation expense associated with the ROCE awards will be contingent based upon the achievement of the specified ROCE performance goals and will be adjusted on a quarterly basis to reflect the probability of achieving the ROCE metric.
ROCE performance awards may vest at the end of a three-yearthree-year performance period contingent upon meeting ROCE performance goals approved by the Committee. The fair value of the ROCE performance awards is the average market price of the underlying common stock on the date of grant.
109
The following table shows a summary of the performance awards outstanding as of December 31, 2019,2020, and their fair market value on the respective grant date:
| Performance Period | Fair Value (in millions) | Minimum Shares | Target Shares | Maximum Shares | ||||||||||||||||||||||
| 2020 - 2022 | $ | 5 | 0 | 671,390 | 1,342,780 | |||||||||||||||||||||
| 2019 - 2021 | $ | 16 | 0 | 632,217 | 1,264,434 | |||||||||||||||||||||
| 2018 - 2020 | $ | 13 | 0 | 281,693 | 563,386 | |||||||||||||||||||||
| Performance Period | Fair Value (in millions) | Minimum Shares | Target Shares | Maximum Shares | |||||||||
| 2019 - 2021 | $ | 17 | — | 653,194 | 1,306,388 | ||||||||
| 2018 - 2020 | $ | 14 | — | 288,379 | 576,758 | ||||||||
| 2017 - 2019 | $ | 4 | — | 101,587 | 203,174 | ||||||||
The following table shows a summary of the status and activity of nonvested stock awards for the year ended December 31, 2019:2020:
| Restricted Stock Units | TSR Performance Awards (a) | ROCE Performance Awards (a) | Total | Weighted- Average Grant-Date Fair Value | ||||||||||||||||||||||||||||||||||||||||||||
| Restricted Stock Units | TSR Performance Awards (a) | ROCE Performance Awards (a) | Total | Weighted- Average Grant-Date Fair Value | ||||||||||||||||||||||||||||||||||||||||||||
| Nonvested at January 1, 2018 | 1,496,272 | 375,787 | 235,898 | 2,107,957 | $ | 30.92 | ||||||||||||||||||||||||||||||||||||||||||
| Nonvested at January 1, 2020 | Nonvested at January 1, 2020 | 1,589,824 | 350,317 | 692,843 | 2,632,984 | $ | 30.72 | |||||||||||||||||||||||||||||||||||||||||
| Granted | 1,005,500 | 210,520 | 527,470 | 1,743,490 | 24.46 | Granted | 2,640,690 | 671,390 | 0 | 3,312,080 | 8.69 | |||||||||||||||||||||||||||||||||||||
| Vested | (771,677 | ) | (384,664 | ) | — | (1,156,341 | ) | 18.26 | Vested | (527,534) | 0 | 0 | (527,534) | 30.55 | ||||||||||||||||||||||||||||||||||
Performance adjustment factor (b) | — | 192,332 | — | 192,332 | 10.02 | Performance adjustment factor (b) | 0 | 0 | (101,587) | (101,587) | 34.82 | |||||||||||||||||||||||||||||||||||||
| Forfeited or expired | (140,271 | ) | (43,658 | ) | (70,525 | ) | (254,454 | ) | 30.45 | Forfeited or expired | (187,255) | (1,556) | (26,107) | (214,918) | 19.00 | |||||||||||||||||||||||||||||||||
| Nonvested at December 31, 2019 | 1,589,824 | 350,317 | 692,843 | 2,632,984 | $ | 30.72 | ||||||||||||||||||||||||||||||||||||||||||
| Nonvested at December 31, 2020 | Nonvested at December 31, 2020 | 3,515,725 | 1,020,151 | 565,149 | 5,101,025 | $ | 16.85 | |||||||||||||||||||||||||||||||||||||||||
(a)The number of shares shown for the performance awards is based on the target number of share awards.
(b)Consists of adjustments to vested performance awards to reflect actual performance. The adjustments were required since the original grants of the awards were at 100 percent of the targeted amounts and the awards vested at greater than target.
The following table presents information on RSUs and performance awards granted:
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Number of awards granted | 3,312,080 | 1,743,490 | 1,150,895 | |||||||||||||||||
| Weighted-average grant-date fair value per share | $ | 8.69 | $ | 24.46 | $ | 41.65 | ||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Number of awards granted | 1,743,490 | 1,150,895 | 517,890 | |||||||||
| Weighted-average grant-date fair value per share | $ | 24.46 | $ | 41.65 | $ | 37.68 | ||||||
During the years ended December 31, 2020, 2019, 2018, and 2017,2018, the total fair value of shares vested was $16 million, $21 million, $14 million, and $11$14 million, respectively.
16. Derivative Instruments
U. S. Steel is exposed to foreign currency exchange rate risks in our European operations. USSE’s revenues are primarily in euros and costs are primarily in euros and U.S. dollars (USD). U. S. Steel uses foreign exchange forward sales contracts (foreign exchange forwards) with maturities no longer than 12 months to exchange euros for USD to manage our currency requirements and exposure to foreign currency exchange rate fluctuations. Derivative instruments are required to be recognized at fair value in the Consolidated Balance Sheet. U. S. Steel did not designate euro foreign exchange forwards entered into prior to July 1, 2019, as hedges; therefore, changes in their fair value were recognized immediately in the Consolidated Statements of Operations (mark-to-market accounting). For those contracts, U. S. Steel will continue to recognizerecognized changes in fair value immediately through earnings until all of the contracts mature.matured in July 2020. U. S. Steel elected cash flow hedge accounting for euro foreign exchange forwards prospectively effective July 1, 2019. Accordingly, future gains and losses for euro foreign exchange forwards entered into after July 1, 2019 will beare recorded within accumulated other comprehensive income (AOCI) until the related contract impacts earnings. We mitigate the risk of concentration of counterparty credit risk by purchasing our forwards from several counterparties.
In 2018, U. S. Steel entered into long-term freight contracts in its domestic operations that require payment in Canadian dollars (CAD). We entered into foreign exchange forward contracts with remaining maturities up to 12 months to exchange USD for CAD to mitigate a portion of the related risk of exchange rate fluctuations and to manage our currency requirements. We elected to designate these contracts as cash flow hedges.
All of these contracts had matured as of December 2020.
U. S. Steel may use fixed-price forward physical purchase contracts to partially manage our exposure to price risk related to the purchases of natural gas, zinc and tin used in the production process. Generally, forward physical purchase contracts qualify for the normal purchase and normal sales exceptions described in ASC Topic 815 and are not subject to mark-to-market accounting. U. S. Steel also uses financial swaps to protect from the commodity price risk associated with purchases of natural gas, zinc, tin and tinelectricity (commodity purchase swaps). We elected cash flow hedge accounting for domestic commodity purchase swaps for natural gas, zinc and tin and use mark-to-market accounting for electricity swaps used in our domestic operations and for commodity purchase swaps used in our European operations.
110
From time to time, we enter into financial swaps that are used to partially manage the sales price of certain hot-rolled coil and iron ore pellet sales (sales swaps). We elected cash flow hedge accounting for hot-rolled coil sales swaps effective January 1, 2018 and for iron ore pellet sales swaps effective January 1, 2019.
In accordance with the guidance in ASC Topic 820 on fair value measurements and disclosures, the fair value of our foreign exchange forwards, commodity purchase swaps and sales swaps was determined using Level 2 inputs, which are defined as "significant other observable" inputs. The inputs used are from market sources that aggregate data based upon market transactions.
The table below shows the outstanding swap quantities used to hedge forecasted purchases and sales as of December 31, 20192020 and December 31, 20182019:
| Hedge Contracts | Classification | December 31, 2019 | December 31, 2018 | ||||||
| Natural gas (in mmbtus) | Commodity purchase swaps | 56,613,200 | 33,951,016 | ||||||
| Tin (in metric tons) | Commodity purchase swaps | 145 | 585 | ||||||
| Zinc (in metric tons) | Commodity purchase swaps | 9,819 | 3,471 | ||||||
| Hot-rolled coils (in tons) | Sales swaps | — | 9,000 | ||||||
| Foreign currency (in millions of euros) | Foreign exchange forwards | € | 282 | € | 286 | ||||
| Foreign currency (in millions of CAD) | Foreign exchange forwards | C$ | 25 | C$ | 50 | ||||
| Hedge Contracts | Classification | December 31, 2020 | December 31, 2019 | ||||||||||||||
| Natural gas (in mmbtus) | Commodity purchase swaps | 38,801,400 | 56,613,200 | ||||||||||||||
| Tin (in metric tons) | Commodity purchase swaps | 812 | 145 | ||||||||||||||
| Zinc (in metric tons) | Commodity purchase swaps | 25,361 | 9,819 | ||||||||||||||
| Electricity (in megawatt hours) | Commodity purchase swaps | 760,320 | 0 | ||||||||||||||
| Hot-rolled coils (in tons) | Sales swaps | 120,000 | 0 | ||||||||||||||
| Foreign currency (in millions of euros) | Foreign exchange forwards | € | 242 | € | 282 | ||||||||||||
| Foreign currency (in millions of CAD) | Foreign exchange forwards | $ | 0 | $ | 25 | ||||||||||||
The following summarizes the fair value amounts included in our Consolidated Balance Sheets as of December 31, 20192020 and December 31, 2018:2019:
| (In millions) Designated as Hedging Instruments | Balance Sheet Location | December 31, 2019 | December 31, 2018 | ||||||
| Sales swaps | Accounts payable | $ | — | $ | 1 | ||||
| Commodity purchase swaps | Accounts receivable | 1 | 2 | ||||||
| Commodity purchase swaps | Accounts payable | 17 | 17 | ||||||
| Commodity purchase swaps | Investments and long-term receivables | 1 | — | ||||||
| Commodity purchase swaps | Other long-term liabilities | 7 | 1 | ||||||
| Foreign exchange forwards | Accounts payable | 1 | 1 | ||||||
| Foreign exchange forwards | Other long-term liabilities | — | 1 | ||||||
| Not Designated as Hedging Instruments | |||||||||
| Foreign exchange forwards | Accounts receivable | 4 | 12 | ||||||
| (In millions) Designated as Hedging Instruments | Balance Sheet Location | December 31, 2020 | December 31, 2019 | ||||||||||||||
| Sales swaps | Accounts payable | $ | 26 | $ | 0 | ||||||||||||
| Sales swaps | Other long-term liabilities | 0 | 0 | ||||||||||||||
| Commodity purchase swaps | Accounts receivable | 5 | 1 | ||||||||||||||
| Commodity purchase swaps | Accounts payable | 10 | 17 | ||||||||||||||
| Commodity purchase swaps | Investments and long-term receivables | 0 | 1 | ||||||||||||||
| Commodity purchase swaps | Other long-term liabilities | 0 | 7 | ||||||||||||||
| Foreign exchange forwards | Accounts payable | 18 | 1 | ||||||||||||||
| Foreign exchange forwards | Other long-term liabilities | 0 | 0 | ||||||||||||||
| Not Designated as Hedging Instruments | |||||||||||||||||
| Commodity purchase swaps | Investments and long-term receivables | 1 | 4 | ||||||||||||||
The table below summarizes the effect of hedge accounting on AOCI and amounts reclassified from AOCI into earnings for 2020, 2019, 2018, and 2017:2018:
| Gain (Loss) on Derivatives in AOCI | Amount of Gain (Loss) Recognized in Income | (Loss) Gain on Derivatives in AOCI | Amount of Loss Recognized in Income | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | 2019 | 2018 | 2017 | Location of Reclassification from AOCI (a) | 2019 | 2018 | 2017 | (In millions) | 2020 | 2019 | 2018 | Location of Reclassification from AOCI (a) | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales swaps | $ | 1 | $ | — | $ | — | Net sales (b) | $ | (1 | ) | $ | (13 | ) | $ | — | Sales swaps | $ | (26) | $ | 1 | $ | 0 | Net sales (b) | $ | 0 | $ | (1) | $ | (13) | |||||||||||||||||||||||||||||||||||||||||
| Commodity purchase swaps | (6 | ) | (15 | ) | 1 | Cost of sales (c) | (19 | ) | (8 | ) | (2 | ) | Commodity purchase swaps | 17 | (6) | (15) | Cost of sales (c) | (24) | (19) | (8) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange forwards | 1 | (2 | ) | — | Cost of sales | (1 | ) | — | — | Foreign exchange forwards | (17) | 1 | (2) | Cost of sales | (7) | (1) | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(a) The earnings impact of our hedging instruments substantially offsets the earnings impact of the related hedged items since ineffectiveness is less than $1 million.resulting in immaterial ineffectiveness.
(b) U. S. Steel elected cash flow hedge accounting for hot-rolled coil sales swaps effective January 1, 2018 and for iron ore pellet sales swaps effective January 1, 2019.
(c) Costs for commodity purchase swaps are recognized in cost of sales as products are sold.
111
The table below summarizes the impact of derivative activity where hedge accounting has not been elected on our Consolidated Statements of Operations for 2020, 2019 2018 and 2017:2018:
| Amount of Gain (Loss) Recognized in Income | Amount of (Loss) Gain Recognized in Income | |||||||||||||||||||||||||||||||||||
| (In millions) | Consolidated Statement of Operations Location | 2019 | 2018 | 2017 | (In millions) | Consolidated Statement of Operations Location | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
Sales swaps (a) | Net sales | $ | — | $ | (1 | ) | $ | 6 | Sales swaps (a) | Net sales | $ | 0 | $ | 0 | $ | (1) | ||||||||||||||||||||
Commodity purchase swaps (b) | Cost of sales | — | — | 3 | ||||||||||||||||||||||||||||||||
Foreign exchange forwards (c) | Other financial costs | 17 | 24 | (23 | ) | |||||||||||||||||||||||||||||||
| Commodity purchase swaps | Commodity purchase swaps | Cost of sales | (1) | 0 | 0 | |||||||||||||||||||||||||||||||
Foreign exchange forwards (b) | Foreign exchange forwards (b) | Other financial costs | 0 | 17 | 24 | |||||||||||||||||||||||||||||||