UNITED STATES STEEL CORPORATION 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 2018 Form 10-K for further discussion and analysis of our 2017 financial condition and results of operations.
Overview
According toWorld Steel Association's latest published statistics, U. S. Steel was the twenty-sixth largest steel producer in the world in 2018. Also in 2018 according toWorld Steel Association's latest published statistics, U. S. Steel was the third largest steel producer inthe 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 inthe United States , U. S. Steel has significant operations inEastern Europe through U. S. Steel Košice (USSK), located inSlovakia .
We are proud to report the following accomplishments achieved in 2019:
• Set a safety performance record with a 2019 Days Away from Work rate of
0.10, which is seven times better than the industry average reported by
the U.S. Bureau of Labor Statistics .
• Articulating and executing on the transformative 'best of both" strategy,
including acquiring a 49.9% interest in Big
acquire the remaining 50.1% within four years and beginning process of
constructing a world-class endless casting and rolling line at
Works.
• Positive operating cash flow of
• Strong year-end liquidity of approximately$2.3 billion , including$749 million of cash, to support the execution of our strategy.
• Successfully raised approximately
through debt offerings and an increase in our
million, providing for future financial flexibility.
• Continued executing investments in our assets, including strategicinvestments in the electric arc furnace at Fairfield Tubular Operations,
Gary Works hot strip mill upgrades and the dynamo line at USSE.
• Announced industry-leading GHG emissions intensity reduction goal aligned
to our strategy.
• Named to the Forbes Global 2000 World's Best Employers list for 2019.
• Awarded a perfect "100" score on the Human Rights Campaign Corporate
Equality Index.
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,
"best of 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 "best of both" company, 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.
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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 inthe 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 inthe United States and FIFO is the predominant method used inEurope . The LIFO method of inventory costing was used on 75 percent and 74 percent of consolidated inventories atDecember 31, 2019 and 2018, 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 inU.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. 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 BigRiver Steel onOctober 31, 2019 included certain call and put options. U. S. Steel marks 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. 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 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 itsU.S. pension plan assets provides for a diversified mix of high quality bonds, public equities and selected smaller investments in private equities, timber and mineral interests. For itsU.S. pension plan, U. S. Steel has a target allocation for plan assets of 45 percent in corporate bonds, government bonds and 68
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mortgage and asset-backed securities. The balance is 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 6.50 percent assumed rate of return on assets for the development of net periodic cost for the main defined benefit pension plan in 2020. The 2020 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 6.50 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. 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 the balance primarily invested in equity securities, timber, private equity 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 2020 assumed rate of return has been conservatively set, taking into account 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 forU.S. plans we utilize a bond matching approach to select specific bonds that would satisfy our projected benefit payments. AtDecember 31, 2019 , the weighted average discount rate used for our pension and Other Benefit obligations was determined to be 3.35 percent and 3.43 percent, respectively, compared to the weighted average discount rate used of 4.41 percent and 4.47 percent, respectively, atDecember 31, 2018 . 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 domesticUnited 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. This rate is assumed to decrease gradually to an ultimate rate of 4.50 percent in 2028 and remain at that level thereafter. Net periodic pension cost, including multiemployer plans, is expected to total approximately$141 million in 2020 compared to$179 million in 2019. Excluding settlement and special termination losses totaling$11 million in 2019, the decrease in expected pension expense in 2020 is primarily due the 2019 asset performance and a change in mortality assumptions, partially offset by the decrease in discount rates. Total Other Benefits income in 2020 is expected to be approximately$29 million , compared to$57 million of expense in 2019. The expected improvement in the 2020 Other Benefit expense (income) is primarily due to the expiration of a prior service cost from the 2008 labor agreement and projected decreases in future healthcare costs and assumed participant enrollments. The tables below project the incremental effect of a hypothetical one percentage point change in significant assumptions used in determining the funded status and expense for pension and Other Benefits: 69
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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)
Fixed Income Assets, (increase)/decrease 433 (524 ) Net impact on funded status, increase/(decrease) $ 238
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 effectiveDecember 31, 2019 . 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 pension and other benefit expense. The table below estimates the impact to expense 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 & 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 Flows and Liquidity - Liquidity."
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).
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.
In 2019, there were no triggering events for the seamless tubular asset group
that required long-lived assets to be evaluated for impairment and in 2018 none
of the asset groups had a triggering event that required long-lived assets to be
evaluated for impairment.
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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 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. AtDecember 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. AtDecember 31, 2018 , U. S. Steel determined that a partial valuation allowance was required for only certain of its domestic deferred tax assets that have expiration dates which may limit their realizability, including state net operating losses (NOLs), state income tax credits, foreign tax credits, general business credits (GBCs) and capital losses. Accordingly, we reversed a portion of the valuation allowance, which resulted in a$374 million non-cash benefit to earnings. That determination was based in part, on U. S. Steel's cumulative income from the past three years and projections of income in future years. In addition, U. S. Steel had seven consecutive quarters of positive pretax income. At the end of both 2019 and 2018, U. S. Steel did not have any undistributed foreign earnings and profits for whichU.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 seven sites under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) as ofDecember 31, 2019 . 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 18 additional sites where U. S. Steel may be liable for remediation costs in excess of$100,000 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 forU.S. and international facilities as ofDecember 31, 2019 and 2018 was$186 million and$187 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. SteelEurope (USSE) and Tubular Products (Tubular). The results of our 49.9% ownership interest in BigRiver Steel and our railroad and real estate businesses that do not constitute reportable segments are combined and disclosed in the Other Businesses category. 71
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The Flat-Rolled segment includes the operating results of U. S. Steel's integrated steel plants and equity investees inNorth America (except for BigRiver 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 inthe 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 inSlovakia , and its subsidiaries. USSE conducts its business mainly in Central andWestern 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 inthe United States . These operations produce and sell seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as oil country tubular goods or OCTG), standard and line pipe and mechanical tubing and primarily serve customers in the oil, gas and petrochemical markets. For further information, see Note 4 to the Consolidated Financial Statements.Net Sales [[Image Removed: chart-7349a4cf9461534e970.jpg]]
(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
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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, 2019 versus Year December 31, 2018
Steel Products(a)
Net
Volume Price Mix FX(b) Coke, Pellets & Other(c) Change
Flat-Rolled 1 % (5 )% (1 )% - % 1 % (4 )%
USSE (19 )% (3 )% 3 % (5 )% (1 )% (25 )%
Tubular (1 )% (1 )% (1 )% - % - % (3 )%
(a) Excludes intersegment sales
(b) Foreign currency translation effects
(c) Includes sales of scrap inventory
The decrease in 2019 sales 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 inDecember 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 GreatLake Works ). The decrease in 2019 sales for the USSE segment was primarily due to decreased shipments (decrease of 867 thousand net tons) and lower average realized prices (decrease of$41 per net ton) in most product categories due to increased import competition, flat to declining demand and the weakening of the Euro versus theU.S. dollar. The decrease in 2019 sales for the Tubular segment resulted from lower average realized prices (decrease of$33 per net ton) and decreased net shipments (decrease of 11 thousand net tons) from lower demand for tubular products. Operating Expenses Union profit-sharing costs 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
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 benefits costs
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
Other benefit expense included in cost of sales totaled
Costs related to defined contribution plans totaled
Selling, general and administrative expenses
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Selling, general and administrative expenses were
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 "best of both" leading integrated and mini mill technology. InDecember 2019 , U. S. Steel announced that it would indefinitely idle a significant portion of Great Lakes Works. The Company expects to begin idling the iron and steelmaking facilities on or aroundApril 1, 2020 , and the hot strip mill rolling facility before the end of 2020. The carrying value of the Great Lakes Works facilities that we intend to indefinitely idle was approximately$385 million as ofDecember 31, 2019 . InDecember 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 theU.S. Additionally, U. S. Steel indefinitely idled its finishing facility inDearborn, Michigan (which operates an electrolytic galvanizing line), during the fourth quarter of 2019. The carrying value of these facilities was approximately$20 million as ofDecember 31, 2019 . InOctober 2019 , the Company announced that it is implementing an enhanced operating model and organizational structure to accelerate the Company's strategic transformation and better serve its customers. The new operating model was effectiveJanuary 1, 2020 and 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 is a logical next step in the execution of the Company's strategy and will make us a more nimble company positioned to deliver the benefits of our strategy through the cycle. InJuly 2019 , U. S. Steel began implementing a labor productivity strategy at USSK so that it could better compete in the European steel market, which has experienced softening demand as well as a significant increase in imports. It is anticipated that the labor productivity strategy will result in total headcount reductions, including contractors, of approximately 2,500 by the end of 2021. As ofDecember 31, 2019 , approximately 1,900 positions, including approximately 400 contractors, were eliminated. InJune 2019 , U. S. Steel idled two blast furnaces in theU.S. and one blast furnace inEurope to better align global production with its order book. As a result, monthly blast furnace production capacity was reduced by approximately 200,000 - 225,000 tons in theU.S. and 125,000 tons inEurope . InDecember 2019 , for theU.S. , we restarted one of the idled blast furnaces and announced the indefinite idling on or aroundApril 1, 2020 of the other. The production at the idled blast furnace inEurope may resume when market conditions improve. InJune 2019 , U. S. Steel restarted the No. 1Electric-Weld Pipe Mill (No. 1Pipe Mill ) at its Lone Star Tubular Operations to enable the Company to support increased demand for high-quality electric-welded pipe produced inthe United States . The No. 1Pipe Mill produces 7-16 inch welded pipe and is complementing our current Tubular product offerings. It had been idled since 2016. InFebruary 2019 , U. S. Steel restarted construction of the electric arc furnace (EAF) capital project located inFairfield, Alabama . Construction had previously been delayed.
In 2018 and 2017, the Granite City Works steelmaking operations and hot strip mill, respectively, were restarted after they were temporarily idled in 2015.
Depreciation, depletion and amortization
Depreciation, depletion and amortization expenses were
Earnings from investees
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Earnings from investees were$79 million in 2019 and$61 million in 2018. The increase from 2018 to 2019 is primarily due to increased earnings from our iron ore investee and our PRO-TEC joint venture, partially offset by an equity loss related to our investment in BigRiver Steel . Restructuring and Other Charges During 2019, U. S. Steel recorded restructuring and other charges of$275 million , which consists of charges of$25 million at USSK for headcount reductions and plant exit costs,$227 million for the indefinite idling of ECT, our finishing facility inDearborn, Michigan , and the intended indefinite idling of a significant portion of Great Lakes Works and$23 million for Company-wide headcount reductions. 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.
Earnings (loss) before interest and income taxes by Segment (a)
Year Ended December 31,
(Dollars in Millions) 2019 2018
Flat-Rolled $ 196 $ 883
USSE (57 ) 359
Tubular (67 ) (58 )
Total earnings (loss) from reportable segments 72 1,184
Other Businesses 23 55
Segment earnings (loss) before interest and income taxes 95 1,239
Other items not allocated to segments:
December 24, 2018 Clairton coke making facility fire (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
(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.
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Table of Contents Gross Margin by Segment
Year Ended December 31,
2019 2018
Flat-Rolled 8 % 15 %
USSE 3 % 15 %
Tubular (1 )% 1 %
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Segment results for Flat-Rolled [[Image Removed: chart-c812d35fdaf65fb58f9.jpg]][[Image Removed: chart-bb25abc6dbd55d4a809.jpg]]
Segment Earnings (Loss) before
Average Realized Price Per Ton Interest andIncome Taxes
[[Image Removed: chart-b0321aa1d6f45be08ee.jpg]][[Image Removed: chart-269d6c1b86a35e1693c.jpg]]
The Flat-Rolled segment had earnings of$196 million for the year endedDecember 31, 2019 compared to earnings of$883 million for the year endedDecember 31, 2018 . The decrease in Flat-Rolled results for 2019 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 ). Gross margin for 2019 as compared to 2018 decreased primarily as a result of lower average prices due to lower spot prices and adjustable, spot market index-based contract prices, both of which consistently decreased throughout 2019. 77
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[[Image Removed: chart-ef94f559d2765482bda.jpg]][[Image Removed: chart-359bac338b6152cf81c.jpg]]
[[Image Removed: chart-62ae38274c47560cbfa.jpg]][[Image Removed: chart-642058c25084506ca3d.jpg]]
The USSE segment had a loss of$57 million for the year endedDecember 31, 2019 compared to earnings of$359 million for the year endedDecember 31, 2018 . The decrease in USSE results in 2019 compared to 2018 was primarily due to significant market challenges from weakening economic conditions resulting in decreased shipments (approximately$130 million ), lower average realized prices (approximately$100 million ), higher raw material costs (approximately$115 million ), the weakening of the euro versus theU.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 decreased from 2019 as compared to 2018 primarily due to lower average realized prices.
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Segment results for Tubular [[Image Removed: chart-d61d5a59bdba540983a.jpg]][[Image Removed: chart-5559549c3a105be6ae4.jpg]]
[[Image Removed: chart-5fd112231eb95c558ba.jpg]]
The Tubular segment had a loss of$67 million for the year endedDecember 31, 2019 compared to a loss of$58 million for the year endedDecember 31, 2018 . The decrease in Tubular results in 2019 as 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 ).
Gross margin for 2019 as compared to 2018 decreased primarily due to lower average realized prices.
Results for Other Businesses
Other Businesses had earnings of
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Items not allocated to segments:
We incurred charges of
We recorded$275 million of restructuring and other charges for the intended indefinite idling of a significant portion of Great Lakes Works, the indefinite idling of ECT and our finishing facility inDearborn, Michigan , within the Flat-Rolled segment, the labor productivity strategy within the USSE segment and company-wide headcount reductions.
We recorded a charge of
We recorded$80 million for Granite City Works restart and related costs in 2018 as a result of costs associated with the restart of the "A" and "B" blast furnaces. We recorded a favorable adjustment of$8 million in 2018 related to Granite City Works temporary idling charges. We recognized a gain on equity investee transactions of$38 million in 2018. The gain on equity investee transactions included approximately$18 million for the assignment of our 33% ownership interest inLeeds Retail Center, LLC and$20 million from the sale of our 40% ownership interest inAcero Prime ,S. R. L. de CV . (see Note 12 to the Consolidated Financial Statements, "Investments and Long-Term Receivables and Equity Investee Transactions" for further details).
Net Interest and Other Financial Costs
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
During 2019, U. S. Steel entered into a new five-year senior secured asset-based revolving credit facility in an aggregate amount of$2.0 billion (Fifth Credit Facility Agreement) to replace its former$1.5 billion credit facility. Also, during 2019 U. S. Steel had net borrowings of$600 million from the Fifth Credit Facility Agreement; launched offerings of two series of environmental revenue bonds in aggregate principal amount of approximately$368 million , that will mature between 2024 and 2049 of which approximately$93 million was used to redeem a portion of our existing outstanding environmental revenue bonds; issued$350 million aggregate principal amount of 5.00% Senior Convertible Notes due 2026 (2026 Senior Convertible Notes) and, had additional borrowings of €150 million (approximately$164 million ) from the USSK Credit Agreement. For additional information regarding changes in our debt profile see Note 17 to the Consolidated Financial Statements. During 2018, U. S. Steel issued$650 million aggregate principal amount of 6.250% Senior Notes due 2026 (2026 Senior Notes) and had borrowings of €200 million (approximately$229 million ) from the USSK Credit Agreement. Also, during 2018, through a series of open market purchases, U. S. Steel repurchased approximately$75 million of its 7.375% Senior Notes due in 2020 (2020 Senior Notes) and redeemed the remaining$357 million . Additionally, U. S. Steel tendered and then redeemed the$780 million aggregate principal amount of its 8.375% Senior Secured Notes due 2021 (2021 Senior Secured Notes). The aggregate redemption costs of these repurchases and redemptions totaled$1,296 million , which included$1,212 million for the remaining principal balances and$84 million of redemption premiums which have been reflected within the loss on debt extinguishment line in the table above. The net periodic benefit cost (other than service cost) of pension and other benefit costs are a component of net interest and other financial costs. The increase in 2019 pension and Other Benefit expense was primarily due to lower asset returns than expected for 2018 and a lower asset return assumption used in 2019, partially offset by the natural maturation of the plans. 80
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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 expense for the year endedDecember 31, 2019 was$178 million compared to an income tax benefit of$303 million in 2018. The tax provision in 2019 does not reflect any tax benefit in theU.S. as a valuation allowance was recorded against the net domestic deferred tax asset (excluding 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 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. The net domestic deferred tax asset was$12 million atDecember 31, 2019 , net of an established valuation allowance of$560 million , compared to a net domestic deferred tax asset of$445 million atDecember 31, 2018 , net of an established valuation allowance of$211 million . AtDecember 31, 2019 , the net foreign deferred tax asset was$3 million , net of an established valuation allowance of$3 million . AtDecember 31, 2018 , the net foreign deferred tax liability was$14 million , net of an established valuation allowance of$3 million .
For further information on income taxes see Note 11 to the Consolidated Financial Statements.
Net earnings/(loss) attributable to U. S. Steel
Net loss attributable to U. S. Steel in 2019 was$(630) million compared to net earnings of$1,115 million in 2018. The changes primarily reflected the factors discussed above.
Financial Condition, Cash Flows and Liquidity
Financial Condition
Accounts receivable decreased by$482 million fromDecember 31, 2018 primarily as a result of lower average realized prices in all of our segments and lower shipments in our European segment.
Inventories decreased by
Long-term restricted cash increased by$151 million primarily related to proceeds from environmental revenue bonds that are restricted to pay for the electric arc furnace construction and certain other capital expenditure projects at the Company's Fairfield Tubular Operations. Investments and long-term receivables increased by$953 million from year-end 2018 primarily as a result of our purchase of a 49.9% ownership interest in BigRiver Steel and the call option related to it.
Operating lease assets increased by
Property, plant and equipment, net increased by
Deferred income tax benefits decreased by$426 million from year-end 2018 primarily because it was 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.
Other noncurrent assets increased by
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Accounts payable and other accrued liabilities decreased by
Payroll and benefits payable decreased by$104 million from year-end 2018 primarily due to lower accruals for variable compensation, reclassification of liabilities to noncurrent assets due to the overfunded status of our OPEB obligation, partially offset by employee costs associated with the idling of facilities. Noncurrent operating lease liabilities increased by$177 million from year-end 2018 as a result of the adoption of the new accounting standard for leases (see Note 24 for further details).
Long-term debt increased by
Employee benefits decreased by$448 million from year-end 2018 primarily due to higher than expected returns on pension plan assets and a reduction in future health care costs partially offset by a lower discount rate. Deferred credits and other noncurrent liabilities increased by$278 million from year-end 2018 primarily due to the put option related to our purchase of a 49.9% ownership interest in BigRiver Steel and liabilities associated with the idling of facilities. Cash Flows Net cash provided by operating activities was$682 million in 2019 compared to$938 million in 2018. The decrease in 2019 compared to 2018 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 key working capital components include accounts receivable and inventory.
The accounts receivable and inventory turnover ratios for the years ended
Year Ended December 31,
2019 2018
Accounts Receivable Turnover 9.1 9.3
Inventory Turnover 6.2 6.4
The decrease in accounts receivable turnover approximates one day for 2019 as
compared to 2018 and is primarily due to decreased sales as a result of
decreased shipments in our USSE segment and lower average realized prices across
all segments. The decrease in inventory turnover approximates two days for 2019
as compared to 2018 and is primarily due to lower inventory levels from reduced
production in our Flat-Rolled and USSE segments.
The last-in, first-out (LIFO) inventory method is the predominant method of
inventory costing in the United States . At December 31, 2019 and 2018, the LIFO
method accounted for 75 percent and 74 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, 2019 and 2018, the replacement cost of the inventory was higher by
approximately $735 million and $1,038 million , respectively.
Our cash conversion cycle increased nine days in the fourth quarter of 2019 from the fourth quarter of 2018 as shown below:
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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
(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.
Net cash provided by operating activities for 2019 and 2018 reflects employee benefits payments as shown in the following table.
Employee Benefits Payments
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
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Capital expenditures in 2019 were
[[Image Removed: a2019capexcolor.jpg]] [[Image Removed: a2018capexcolor.jpg]]
2019 Capital Spending Total capital expenditures for 2019 were$1.252 billion . Flat-Rolled capital expenditures were$943 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 B2 Blast Furnace,Midwest Tin Cold Mill upgrades, and various other infrastructure, environmental and strategic projects. Tubular capital expenditures were$145 million and included spending for theFairfield 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 improvedSinter Strand Emission control, improved Ore Bridges Emission control, the new Dynamo line and various other infrastructure and environmental projects. Capital expenditures for 2020 are expected to total approximately$875 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
In 2019, U. S. Steel purchased a 49.9% ownership interest in Big
In 2018, U. S. Steel sold its 40% ownership interest in
Revolving credit facilities - borrowings, net of financing costs, totaled$860 million in 2019, which represents cash received primarily from borrowings under the Fifth Credit Facility Agreement for the purchase of our 49.9% equity interest in BigRiver Steel . In 2018,$228 million was borrowed under the USSK Credit Agreement. Issuance of long-term debt, net of financing costs, totaled$702 million in 2019. In 2019, U. S. Steel issued$368 million under two series of environmental revenue bonds for which it received net proceeds of$362 million after underwriting fees and estimated offering expenses and issued$350 million aggregate principal amount of 2026 Senior Convertible Notes for which it received net proceeds of$340 million after underwriting fees and estimated offering expenses. In 2018, U. S. Steel issued$650 million of 6.250% Senior Notes dueMarch 15, 2026 . U. S. Steel received net proceeds from the offering of approximately$640 million after fees of approximately$10 million related to the underwriting and third-party expenses. For further information see Note 17 to the Consolidated Financial Statements.
Repayment of revolving credit facilities totaled
Repayment of long-term debt totaled$155 million in 2019. In 2019, U. S. Steel redeemed$148 million in environmental revenue bonds and made principal payments on finance leases of$7 million . In 2018, through a series of open market purchases, U. S. Steel repurchased approximately$75 million aggregate principal amount of its 7.375% Senior Notes due 2020 (7.375% Senior Notes) for an aggregate cash outflow of$80 million which included$5 million of premiums. U. S. Steel then redeemed the remaining$357 million aggregate principal amount of its 7.375% Senior Notes for an aggregate cash outflow of$376 million which included$19 million of premiums. Also in 2018, the Company tendered and then redeemed its$780 million 8.375% Senior Secured Notes due 2021 for an aggregate cash outflow of$840 84
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million which included
Common stock repurchased totaled$88 million in 2019. In 2019, U. S. Steel repurchased 5,289,475 shares under its common stock repurchase program that was approved in 2018. InDecember 2019 , the common stock repurchase program was terminated. In 2018, U. S. Steel repurchased 2,760,112 shares under the common stock repurchase program. See Note 27 to the Consolidated Financial Statements, "Common Stock Repurchase Program and Common Stock Issuance" for further details. For all four quarters in 2019 and 2018, dividends paid per share of U. S. Steel common stock was$0.05 . InDecember 2019 , U. S. Steel announced an adjustment to the quarterly dividend amount to$0.01 per share beginning with dividends declared in 2020.
Liquidity
The following table summarizes U. S. Steel's liquidity as of
(Dollars in millions) Cash and cash equivalents$ 749
Amount available under
$ 2,284 [[Image Removed: chart-3f10cf4f4cf051b9915.jpg]] As ofDecember 31, 2019 ,$255 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 election effectiveDecember 31, 2013 to liquidate forU.S. income tax purposes a foreign subsidiary that holds most of our international operations. U. S. Steel maintains a$2.0 billion asset-backed revolving credit facility (Fifth Credit Facility Agreement). As ofDecember 31, 2019 , there was$600 million drawn on the Fifth Credit Facility Agreement. U. S. Steel must maintain a fixed charge negative covenant test of at least 1.00 to 1.00 for the most recent four consecutive quarters when availability under the Fifth Credit Facility Agreement is less than the greater of 10% of the total aggregate commitments and$200 million . Based on the four quarters as ofDecember 31, 2019 , we would have met this covenant. If we are unable to meet this covenant in future periods, the amount available to the Company under this facility would be reduced by$200 million . OnOctober 30, 2019 , we drew$700 million on the Fifth Credit Facility Agreement and onNovember 14, 2019 repaid$100 million on the facility. OnJanuary 26, 2020 , U. S. Steel made another payment of$50 million on this facility. AtDecember 31, 2019 , USSK had borrowings of €350 million (approximately$393 million ) under its €460 million (approximately$517 million ) revolving credit facility (the USSK Credit Agreement). OnDecember 23, 2019 USSK 85
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entered into a supplemental agreement that amended the USSK Credit Agreement leverage covenant and pledged certain USSK trade receivables and inventory as collateral in support of USSK's obligations. If USSK does not comply with the financial covenants it may not be able to draw on the facility until the next measurement date. AtDecember 31, 2019 , USSK had availability of €110 million (approximately$124 million ) under the USSK Credit Agreement. See Note 17 to the Consolidated Financial Statements, "Debt" for further details. AtDecember 31, 2019 , USSK had no borrowings under its €20 million and €10 million credit facilities (collectively approximately$33 million ) and the aggregate availability was approximately$31 million due to approximately$2 million of customs and other guarantees outstanding. These facilities expire inDecember 2021 . OnDecember 10, 2019 , U. S. Steel entered into an Export Credit Agreement (ECA) withKfW IPEX-Bank GMBH and certain other lenders. Funding of the ECA is expected to occur during the first quarter of 2020. The purpose of the ECA is to finance equipment purchased for the endless casting and rolling facility under construction at our Mon Valley Works facility inBraddock, Pennsylvania . Loans available under the ECA total approximately$288 million and are made up of a Commercial Facility of approximately$38 million and a Covered Facility of approximately$250 million . See Note 17 to the Consolidated Financial Statements, "Debt" for further details. InMarch 2018 , U. S. Steel issued$650 million aggregate principal amount of 6.250% Senior Notes dueMarch 15, 2026 (2026 Senior Notes). U. S. Steel received net proceeds from the offering of approximately$640 million after fees of approximately$10 million related to the underwriting and third-party expenses. The net proceeds from the issuance of the 2026 Senior Notes, together with cash on hand, were used to tender or otherwise redeem all of our outstanding 2021 Senior Secured Notes. U. S. Steel will pay interest on the notes semi-annually in arrears onMarch 15th andSeptember 15th of each year, commencing onSeptember 15, 2018 . 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. 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 million of liquidity sources for financial assurance purposes as ofDecember 31, 2019 . Increases in certain of these commitments which use collateral are reflected in restricted cash on the Consolidated Statement of Cash Flows. AtDecember 31, 2019 , in the event of a change in control of U. S. Steel: (a) debt obligations totaling$3,093 million as ofDecember 31, 2019 may be declared due and payable; (b) the Credit Facility Agreement and the USSK credit facilities may be terminated and any amounts outstanding declared due and payable; and (c) U. S. Steel may be required to either repurchase the leasedFairfield slab caster for$19 million or provide a cash collateralized letter of credit to secure the remaining obligation. The maximum guarantees of the indebtedness of unconsolidated entities of U. S. Steel totaled$4 million atDecember 31, 2019 . 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
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(Dollars in millions)
Payments Due by Period
2021
through 2023 through Beyond
Contractual Obligations Total 2020 2022 2024 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 (a) See Note 17 to the Consolidated Financial Statements.
(b) See Note 24 to the Consolidated Financial Statements. Amounts exclude
subleases.
(c) Reflects 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
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
2022, projected amounts shown through 2023 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
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
premiums. After 2023, payments represent minimum contributions that may be
needed over the next five years, and which would fully fund the plan.
(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 toreflect 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.
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.
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The following table summarizes U. S. Steel's commercial commitments at
(Dollars in millions)
Scheduled Reductions by Period
2021 2023
through through Beyond
Commercial Commitments Total 2020 2022 2024 2024
Standby letters of credit(a)
$ - $ 10 (b)
Surety bonds(a) 109 - - - 109 (b)
Funded Trusts(a) 3 - - - 3 (b)
Total commercial commitments
$ -
(a) Reflects a commitment or guarantee for which future cash outflow is not
considered likely.
(b) Timing of potential cash outflows is not determinable.
Our major cash requirements in 2020 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 2019 with$749 million of cash and cash equivalents and$2,284 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.
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Environmental Matters
U. S. Steel's environmental expenditures were as follows:
(Dollars in millions)
2019 2018 2017
North America :
Capital $ 96 $ 105 $ 6
Compliance
Operating & maintenance 213 198 176
Remediation(a) 22 6 9
Total North America $ 331 $ 309 $ 191
USSE:
Capital $ 27 $ 20 $ 46
Compliance
Operating & maintenance 10 12 11
Remediation(a) 8 9 7
Total USSE $ 45 $ 41 $ 64
Total U. S. Steel $ 376 $ 350 $ 255
(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 10 percent of total capital expenditures in 2019 and 12 percent in 2018 and 10 percent in 2017.
Environmental compliance expenditures represented 2 percent of U. S. Steel's total costs and expenses in 2019, 2018 and 2017. Remediation spending during 2017 through 2019 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 endedDecember 31, 2019 andDecember 31, 2018 . 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) 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,$5 million of which is related to projects at USSE. U. S. Steel's environmental expenditures for 2020 for operating and maintenance and for remediation projects are expected to be approximately$215 million and$60 million , respectively, of which approximately$10 million and$5 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 2020 can only be broad-based estimates, which have varied, and will continue 89
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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.
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