<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------
USX CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-5153 25-0996816
--------------- ------------ -------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
600 Grant Street, Pittsburgh, PA 15219-4776
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 433-1121
------------------------------
(Registrant's telephone number,
including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes..X..No.....
Common stock outstanding at April 30, 1998 follows:
USX-Marathon Group - 289,202,123 shares
USX-U. S. Steel Group - 86,835,989 shares
<PAGE> 2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED March 31, 1998
---------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION
A. Consolidated Corporation
Item 1. Financial Statements:
Consolidated Statement of Operations 4
Consolidated Balance Sheet 6
Consolidated Statement of Cash Flows 8
Selected Notes to Consolidated
Financial Statements 9
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends and Ratio of
Earnings to Fixed Charges 15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 23
Financial Statistics 25
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 26
Marathon Group Balance Sheet 27
Marathon Group Statement of Cash Flows 28
Selected Notes to Financial Statements 29
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 34
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 43
Supplemental Statistics 45
<PAGE> 3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED March 31, 1998
---------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION (Continued)
C. U. S. Steel Group
Item 1. Financial Statements:
U. S. Steel Group Statement of Operations 47
U. S. Steel Group Balance Sheet 48
U. S. Steel Group Statement of Cash Flows 49
Selected Notes to Financial Statements 50
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 54
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 60
Supplemental Statistics 61
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 62
Item 5. Other Information 63
Item 6. Exhibits and Reports on Form 8-K 64
<PAGE> 4
Part I - Financial Information
A. Consolidated Corporation
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales $6,887 $5,661
Dividend and affiliate income 25 18
Gain on disposal of assets 14 13
Gain on ownership change in Marathon Ashland
Petroleum LLC 248 -
Other income 13 3
------ ------
Total revenues 7,187 5,695
------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 5,270 4,123
Selling, general and administrative expenses 85 47
Depreciation, depletion and amortization 347 245
Taxes other than income taxes 864 767
Exploration expenses 82 33
Inventory market valuation charges (credits) (25) 114
------ ------
Total costs and expenses 6,623 5,329
------ ------
INCOME FROM OPERATIONS 564 366
Net interest and other financial costs 82 81
Minority interest in income of Marathon Ashland
Petroleum LLC 54 -
------ ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 428 285
Provision for estimated income taxes 158 90
------ ------
INCOME FROM CONTINUING OPERATIONS 270 195
INCOME FROM DISCONTINUED OPERATIONS (net of income tax) - 1
------ ------
NET INCOME 270 196
Dividends on preferred stock 2 6
------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $268 $190
====== ======
<FN>
Selected notes to financial statements appear on pages 9-15.
</TABLE>
<PAGE> 5
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited)
INCOME PER COMMON SHARE
------------------------------------------------------------
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
CONTINUING OPERATIONS
APPLICABLE TO MARATHON STOCK:
Net income $183 $108
- Per share - basic and diluted .63 .37
Dividends paid per share .21 .19
Weighted average shares, in thousands
- Basic 288,846 287,620
- Diluted 289,490 294,621
APPLICABLE TO STEEL STOCK:
Net income $85 $81
- Per share - basic .98 .96
- diluted .95 .93
Dividends paid per share .25 .25
Weighted average shares, in thousands
- Basic 86,600 84,996
- Diluted 94,125 94,581
DISCONTINUED OPERATIONS
APPLICABLE TO DELHI STOCK:
Net income - $1
- Per share - basic and diluted - .15
Dividends paid per share - .05
Weighted average shares, in thousands
- Basic - 9,449
- Diluted - 9,466
<FN>
Selected notes to financial statements appear on pages 9-15.
</TABLE>
<PAGE> 6
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
----------------------------------------
<CAPTION>
ASSETS
March 31 December 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $487 $54
Receivables, less allowance for doubtful
accounts of $19 and $15 1,826 1,417
Inventories 2,359 1,685
Deferred income tax benefits 229 229
Other current assets 172 87
------ ------
Total current assets 5,073 3,472
Investments and long-term receivables,
less reserves of $15 and $15 1,201 1,028
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$15,660 and $15,466 11,501 10,062
Prepaid pensions 2,308 2,247
Other noncurrent assets 259 280
Cash restricted for redemption of Delhi Stock - 195
------ ------
Total assets $20,342 $17,284
====== ======
<FN>
Selected notes to financial statements appear on pages 9-15.
</TABLE>
<PAGE> 7
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Continued) (Unaudited)
--------------------------------------------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31 December 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Current liabilities:
Notes payable $- $121
Accounts payable 2,854 2,011
Payroll and benefits payable 537 521
Accrued taxes 331 304
Accrued interest 58 95
Long-term debt due within one year 518 471
------ ------
Total current liabilities 4,298 3,523
Long-term debt, less unamortized discount 3,313 2,932
Long-term deferred income taxes 1,443 1,353
Employee benefits 2,872 2,713
Deferred credits and other liabilities 707 736
Preferred stock of subsidiary 250 250
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior
subordinated convertible debentures of USX 182 182
Minority interest in Marathon Ashland Petroleum LLC 1,682 -
Redeemable Delhi Stock - 195
STOCKHOLDERS' EQUITY
Preferred stock -
6.50% Cumulative Convertible issued - 2,961,887 shares and
2,962,037 shares ($148 liquidation preference) 3 3
Common stocks:
Marathon Stock issued - 288,894,747 shares and
288,786,343 shares 289 289
Steel Stock issued - 86,636,843 shares and
86,577,799 shares 87 86
Additional paid-in capital 3,931 3,924
Retained earnings 1,323 1,138
Accumulated other comprehensive income (loss) (36) (37)
Deferred compensation adjustments (2) (3)
------ ------
Total stockholders' equity 5,595 5,400
------ ------
Total liabilities and stockholders' equity $20,342 $17,284
====== ======
<FN>
Selected notes to financial statements appear on pages 9-15.
</TABLE>
<PAGE> 8
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------------------
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $270 $196
Adjustments to reconcile to net cash provided
from operating activities:
Minority interest in income of Marathon Ashland
Petroleum LLC - net of distributions 30 -
Depreciation, depletion and amortization 347 253
Exploratory dry well costs 56 14
Inventory market valuation charges (credits) (25) 114
Pensions (57) (47)
Postretirement benefits other than pensions 5 9
Deferred income taxes 92 39
Gain on disposal of assets (14) (14)
Gain on ownership change in Marathon Ashland
Petroleum LLC (248) -
Changes in:
Current receivables 224 239
Inventories (67) (30)
Current accounts payable and accrued expenses 25 (331)
All other - net (23) (23)
------ ------
Net cash provided from operating activities 615 419
------ ------
INVESTING ACTIVITIES:
Capital expenditures (276) (185)
Disposal of assets 6 19
Investments in equity affiliates - net (88) (56)
Cash restricted for redemption of Delhi Stock 195 -
All other - net 11 5
------ ------
Net cash used in investing activities (152) (217)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving
credit arrangements - net (120) 22
Other debt - borrowings 462 -
- repayments (31) (134)
Common stock - issued 5 14
- repurchased (195) -
Cash restricted for redemption of debt (66) -
Dividends paid (85) (81)
------ ------
Net cash used in financing activities (30) (179)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 433 23
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 54 55
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $487 $78
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(115) $(132)
Income taxes paid (47) (44)
<FN>
Selected notes to financial statements appear on pages 9-15.
</TABLE>
<PAGE> 9
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1997.
2. Effective January 1, 1998, USX adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No.
130). This statement establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by and distributions to owners. Total
comprehensive income for the first quarter 1998 was $271 million.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP
98-1 provides guidelines for companies to capitalize or expense costs
incurred to develop or obtain internal-use software. USX will adopt SOP
98-1 effective January 1, 1999. For additional information, see USX
Consolidated Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Effective January 1, 1997, USX adopted American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to recognition,
measurement and disclosure of environmental remediation liabilities. As a
result of adopting SOP 96-1, USX identified additional environmental
remediation liabilities of $46 million, of which $28 million was discounted
to a present value of $13 million and $18 million was not discounted.
Assumptions used in the calculation of the present value amount included an
inflation factor of 2% and an interest rate of 7% over a range of 22 to 30
years. Estimated receivables for recoverable costs related to adoption of
SOP 96-1 were $4 million. The net unfavorable effect of adoption on income
from operations at January 1, 1997, was $27 million.
3. Effective October 31, 1997, USX sold its stock in Delhi Gas Pipeline
Corporation and other subsidiaries of USX that comprised all of the Delhi
Group. The net proceeds of the sale of $195 million were used to redeem
all shares of USX-Delhi Group Common Stock (Delhi Stock) and were
distributed to the holders thereof on January 26, 1998.
<PAGE> 10
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
<TABLE>
<CAPTION>
(In millions)
----------------------
March 31 December 31
1998 1997
-------- -----------
<S> <C> <C>
Raw materials $837 $582
Semi-finished products 335 331
Finished products 1,290 922
Supplies and sundry items 156 134
------ ------
Total (at cost) 2,618 1,969
Less inventory market valuation reserve 259 284
------ ------
Net inventory carrying value $2,359 $1,685
====== ======
The inventory market valuation reserve reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. The reserve is decreased to reflect
increases in market prices and inventory turnover and increased to reflect
decreases in market prices. Changes in the inventory market valuation
reserve result in noncash charges or credits to costs and expenses. For
additional information, see discussion of results of operations in the
Marathon Group's Management's Discussion and Analysis of Financial
Condition and Results of Operations.
5. The method of calculating net income per share for the Marathon Stock,
Steel Stock and, prior to November 1, 1997, the Delhi Stock reflects the
USX Board of Directors' intent that the separately reported earnings and
surplus of the Marathon Group, the U. S. Steel Group and the Delhi Group,
as determined consistent with the USX Certificate of Incorporation, are
available for payment of dividends on the respective classes of stock,
although legally available funds and liquidation preferences of these
classes of stock do not necessarily correspond with these amounts. The
financial statements of the Marathon Group, the U. S. Steel Group and the
Delhi Group, taken together, include all accounts which comprise the
corresponding consolidated financial statements of USX.
Basic net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and is based on the weighted
average number of common shares outstanding.
Diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
<PAGE> 11
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
5. (Continued)
</TABLE>
<TABLE>
COMPUTATION OF INCOME PER COMMON SHARE
<CAPTION>
First Quarter Ended
March 31
1998 1997
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTINUING OPERATIONS
Marathon Group
Net income (millions) $183 $183 $108 $108
Effect of dilutive securities -
Convertible debentures - - - 2
------ ------ ------ ------
Net income assuming conversions $183 $183 $108 $110
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 288,846 288,846 287,620 287,620
Effect of dilutive securities:
Convertible debentures - - - 6,634
Stock options - 644 - 367
------ ------ ------ ------
Average common shares and dilutive effect 288,846 289,490 287,620 294,621
====== ====== ====== ======
Net income per share $.63 $.63 $.37 $.37
====== ====== ====== ======
U. S. Steel Group
Net income (millions):
Net income $87 $87 $87 $87
Dividends on preferred stock 2 - 6 -
------ ------ ------ ------
Net income applicable to Steel Stock 85 87 81 87
Effect of dilutive securities -
Convertible debentures - 2 - 1
------ ------ ------ ------
Net income assuming conversions $85 $89 $81 $88
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 86,600 86,600 84,996 84,996
Effect of dilutive securities:
Trust preferred securities - 4,256 - -
Preferred stock - 3,211 - 7,480
Convertible debentures - - - 2,095
Stock options - 58 - 10
------ ------ ------ ------
Average common shares and dilutive effect 86,600 94,125 84,996 94,581
====== ====== ====== ======
Net income per share $.98 $.95 $.96 $.93
====== ====== ====== ======
</TABLE>
<PAGE> 12
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
6. The items below are included in both revenues and costs and expenses,
resulting in no effect on income.
<TABLE>
<CAPTION>
(In millions)
-------------------
First Quarter Ended
March 31
1998 1997
---- ----
<S> <C> <C>
Matching crude oil and refined product buy/sell
transactions settled in cash $988 $755
Consumer excise taxes on petroleum products and
merchandise 764 655
</TABLE>
7. During 1997, Marathon Oil Company (Marathon) and Ashland Inc.
(Ashland) agreed to combine the major elements of their refining, marketing
and transportation (RM&T) operations. On January 1, 1998, Marathon
transferred certain RM&T net assets to a new consolidated subsidiary, which
was named Marathon Ashland Petroleum LLC (MAP). Also on January 1, 1998,
Marathon acquired certain RM&T net assets from Ashland in exchange for a
38% interest in MAP. The acquisition is being accounted for under the
purchase method of accounting. The purchase price was determined to be
$1.9 billion, based upon an external valuation. The change in Marathon's
ownership interest in MAP resulted in a gain of $248 million, which is
included in first quarter 1998 revenues.
The following unaudited pro forma data for USX includes the results of
operations for the Ashland RM&T net assets, giving effect to the
acquisition as if it had been consummated at the beginning of the period
presented. The pro forma data is based on historical information and does
not necessarily reflect the actual results that would have occurred nor is
it necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
(In millions, except per share amounts)
First Quarter Ended
March 31, 1997 (a)
-------------------
<S> <C>
Revenues $7,367
Net income (b) 188
Net income per common share of Marathon Stock -
Basic and diluted .35
<FN>
(a) Pro forma data is based on USX and Ashland results of operations for
the quarter ended March 31, 1997.
(b) Excluding the pro forma inventory market valuation reserve
adjustment, pro forma net income would have been $254 million. Reported
first quarter 1997 net income, excluding the reported inventory market
valuation reserve adjustment, was $268 million, which excludes the
results of operations for the Ashland RM&T net assets.
</TABLE>
<PAGE> 13
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
8. Income from operations includes net periodic pension credits of $50
million and $38 million in the first quarter of 1998 and 1997,
respectively. These pension credits are primarily noncash and for the most
part are included in selling, general and administrative expenses.
9. The provision for estimated income taxes for the periods reported is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities.
10. At March 31, 1998, USX had no borrowings against its $2,350 million
long-term revolving credit agreement.
USX has a short-term credit agreement totaling $125 million at March
31, 1998. Interest is based on the bank's prime rate or London Interbank
Rate (LIBOR), and carries a facility fee of .15%. Certain other banks
provide short-term lines of credit totaling $200 million which require a
.125% fee or maintenance of compensating balances of 3%. At March 31,
1998, there were no borrowings against these facilities.
In the event of a change in control of USX, debt obligations totaling
$3,370 million at March 31, 1998, may be declared immediately due and
payable.
11. In the first quarter of 1998, USX issued $400 million in aggregate
principal amount of 6.85% Notes due 2008.
12. USX has an agreement (the program) to sell an undivided interest in
certain accounts receivable of the U. S. Steel Group. Payments are
collected from the sold accounts receivable; the collections are reinvested
in new accounts receivable for the buyers; and a yield, based on defined
short-term market rates, is transferred to the buyers. At March 31, 1998,
the amount sold under the program that had not been collected was $350
million, which will be forwarded to the buyers at the end of the agreement,
or in the event of earlier contract termination. If USX does not have a
sufficient quantity of eligible accounts receivable to reinvest in for the
buyers, the size of the program will be reduced accordingly. The buyers
have rights to a pool of receivables that must be maintained at a level of
at least 115% of the program's size. In the event of a change in control
of USX, as defined in the agreement, USX may be required to forward
payments collected on sold accounts receivable to the buyers.
13. USX 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.
Certain of these matters are discussed below. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material to
the consolidated financial statements. However, management believes that
USX will remain a viable and competitive enterprise even though it is
possible that these contingencies could be resolved unfavorably. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
<PAGE> 14
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
13. (Continued)
USX is subject to federal, state, local and foreign laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At March 31, 1998, and
December 31, 1997, accrued liabilities for remediation totaled $156 million
and $158 million, respectively. It is not presently possible to estimate
the ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed. Receivables for recoverable costs from
certain states, under programs to assist companies in cleanup efforts
related to underground storage tanks at retail marketing outlets, were $43
million at March 31, 1998, and $42 million at December 31, 1997.
For a number of years, USX has made substantial capital expenditures
to bring existing facilities into compliance with various laws relating to
the environment. In the first quarter of 1998 and for the years 1997 and
1996, such capital expenditures totaled $30 million, $134 million and $165
million, respectively. USX anticipates making additional such expenditures
in the future; however, the exact amounts and timing of such expenditures
are uncertain because of the continuing evolution of specific regulatory
requirements.
At March 31, 1998, and December 31, 1997, accrued liabilities for
platform abandonment and dismantlement totaled $131 million and $128
million, respectively.
Guarantees by USX of the liabilities of affiliated entities totaled
$71 million at March 31, 1998. In the event that any defaults of
guaranteed liabilities occur, USX has access to its interest in the assets
of most of the affiliates to reduce losses resulting from these guarantees.
As of March 31, 1998, the largest guarantee for a single affiliate was $27
million.
At March 31, 1998, USX's pro rata share of obligations of LOOP LLC and
various pipeline affiliates secured by throughput and deficiency agreements
totaled $164 million. Under the agreements, USX is required to advance
funds if the affiliates are unable to service debt. Any such advances are
prepayments of future transportation charges.
Contract commitments to acquire property, plant and equipment and
long-term investments at March 31, 1998, totaled $817 million compared
with $533 million at December 31, 1997.
<PAGE> 15
<TABLE>
<CAPTION>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
Continuing Operations
----------------------------------------------------------
First Quarter Ended
March 31 Year Ended December 31
- --------------------- -------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
4.77 3.38 3.92 3.62 1.49 2.01 (a)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Earnings did not cover combined fixed charges and preferred stock
dividends by $356 million for 1993.
</TABLE>
<TABLE>
<CAPTION>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
Continuing Operations
-------------------------------------------------
First Quarter Ended
March 31 Year Ended December 31
- --------------------- -------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
4.95 3.67 4.11 3.90 1.62 2.18 (a)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Earnings did not cover fixed charges by $312 million for 1993.
</TABLE>
<PAGE> 16
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX Corporation ("USX") is a diversified company engaged primarily in the
energy business through its Marathon Group and in the steel business through its
U. S. Steel Group. The following discussion should be read in conjunction with
the first quarter 1998 USX consolidated financial statements and selected notes.
For income per common share amounts applicable to USX's two classes of common
stock, USX-Marathon Group Common Stock ("Marathon Stock") and USX-U. S. Steel
Group Common Stock ("Steel Stock"), see Consolidated Statement of Operations -
Income per Common Share. For Group results, see Management's Discussion and
Analysis of Financial Condition and Results of Operations for the Marathon Group
and the U. S. Steel Group. For operating statistics, see Supplemental Statistics
following Management's Discussion and Analysis of Financial Condition and
Results of Operations for the respective Groups.
During 1997, Marathon Oil Company ("Marathon") and Ashland Inc. ("Ashland")
agreed to combine the major elements of their refining, marketing and
transportation ("RM&T") operations. On January 1, 1998, Marathon transferred
certain RM&T net assets to a new consolidated subsidiary, which was named,
Marathon Ashland Petroleum LLC ("MAP"). Also, on January 1, 1998, Marathon
acquired certain RM&T net assets from Ashland in exchange for a 38% interest in
MAP. Financial measures such as revenues, income from operations and capital
expenditures in 1998 include 100% of MAP and are not comparable to prior period
amounts. Net income and related per share amounts for 1998 are net of the
minority interest. For further discussion of MAP, see Note 7 to the USX
Consolidated Financial Statements.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting USX. These
statements typically contain words such as "anticipates", "believes",
"estimates", "expects" or similar words indicating that future outcomes are
uncertain. In accordance with "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, these statements are accompanied by cautionary
language identifying important factors, though not necessarily all such factors,
that could cause future outcomes to differ materially from those set forth in
the forward-looking statements. For additional risk factors affecting the
businesses of USX, see Supplementary Data - Disclosures About Forward-Looking
Statements in the USX 1997 Form 10-K.
<PAGE> 17
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the first quarter of 1998 and 1997 are set forth in the
following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues (a)
Marathon Group $5,498 $4,103
U. S. Steel Group 1,696 1,631
Eliminations (7) (39)
------ ------
Total USX Corporation Revenues 7,187 5,695
Less:
Excise taxes (b)(c) 764 655
Matching buy/sell transactions (b)(d) 988 755
------ ------
Revenues excluding above items $5,435 $4,285
====== ======
- ------
<FN>
(a) Amounts for first quarter 1997 were reclassified to conform to 1998
classifications.
(b) Included in both revenues and costs and expenses for the Marathon Group and
USX Consolidated.
(c) Consumer excise taxes on petroleum products and merchandise.
(d) Matching crude oil and refined products buy/sell transactions settled in
cash.
</TABLE>
Revenues (excluding matching buy/sell transactions and excise taxes)
increased by $1,150 million in the first quarter of 1998 as compared with the
first quarter of 1997. The improvement reflected increases of 39% for the
Marathon Group and 4% for the U. S. Steel Group. The increase for the Marathon
Group was primarily due to higher refined products, crude oil and merchandise
sales, reflecting 100% of MAP's operations, the gain of $248 million recorded as
a result of Marathon's ownership change in MAP, and increased domestic liquid
hydrocarbon sales volumes. These revenue increases were partially offset by the
unfavorable effects of reduced worldwide liquid hydrocarbon and domestic natural
gas prices. The increase in domestic liquid hydrocarbon sales volumes was
mainly due to a higher volume of upstream production being sold to third parties
beginning in January 1998. The increase for the U. S. Steel Group primarily
reflected higher steel shipments.
<PAGE> 18
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations and certain items included in income from operations
for the first quarter of 1998 and 1997 are set forth in the following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Income from operations (a) $564 $366
Less: certain favorable (unfavorable) items for
Marathon Group
Inventory market valuation reserve adjustment (b) 25 (114)
Write-off of certain international investments net of a
favorable domestic contract settlement (c) (76) -
Gain on ownership change
net of one-time transition charges - MAP (d) 225 -
U. S. Steel Group
Effect of adoption of SOP 96-1 (e) - (20)
Other environmental accrual adjustments - net - 11
---- ----
Subtotal 174 (123)
---- ----
Income from operations adjusted to exclude above items $390 $489
==== ====
- ------
<FN>
(a) Amounts for first quarter 1997 were reclassified to conform to 1998
classifications.
(b) The inventory market valuation ("IMV") reserve reflects the extent to which
the recorded LIFO cost of crude oil and refined product inventories exceeds
net realizable value. For additional discussion of the IMV reserve
adjustment, see Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Marathon Group.
(c) This represents a write-off of certain non-revenue producing international
investments and the gain from the resolution of contract disputes with a
purchaser of the Marathon Group's natural gas production from certain domestic
properties.
(d) The gain on ownership change and one-time transition charges relate to the
formation of MAP. For additional discussion of the gain on ownership
change, see Note 7 to the USX Consolidated Financial Statements.
(e) American Institute of Certified Public Accountants Statement of Position
No. 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") provides
additional guidance on recognition, measurement and disclosure of remediation
liabilities.
</TABLE>
Adjusted income from operations decreased by $99 million in the first
quarter of 1998 as compared with the first quarter of 1997, reflecting a
decrease of $121 million for the Marathon Group and an increase of $22 million
for the U. S. Steel Group. The decrease for the Marathon Group was due primarily
to lower worldwide liquid hydrocarbon and domestic natural gas prices. The
increase for the U. S. Steel Group was due primarily to higher pension credits.
<PAGE> 19
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net interest and other financial costs for the first quarter of 1998 and
1997 are set forth in the following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest and other financial income $7 $(2)
Interest and other financial costs (89) (79)
------ ------
Net interest and other financial costs (82) (81)
Less:
Adjustment to carrying value of indexed debt(a) (4) 16
------ ------
Net interest and other financial costs
adjusted to exclude above item $(78) $(97)
====== ======
- ------
<FN>
(a) In December 1996, USX issued $117 million in aggregate principal amount of
6-3/4% Notes Due February 1, 2000 ("indexed debt"), mandatorily exchangeable
at maturity for common stock of RMI Titanium Company ("RMI") (or for the
equivalent amount of cash, at USX's option). The carrying value of indexed
debt is adjusted quarterly to settlement value based on changes in the value
of RMI common stock. Any resulting adjustment is charged or credited to
income and included in interest and other financial costs. USX's 27% interest
in RMI continues to be accounted for under the equity method.
</TABLE>
Excluding the adjustment to the carrying value of indexed debt, net
interest and other financial costs decreased by $19 million in the first quarter
of 1998 as compared with the first quarter of 1997, due primarily to increased
interest income and capitalized interest.
Provision for estimated income taxes of $158 million and $90 million for
the first quarter of 1998 and 1997 were based on tax rates and amounts that
recognize management's best estimate of current and deferred tax assets and
liabilities.
Net income was $270 million in the first quarter of 1998, an increase of
$74 million from the first quarter of 1997, mainly reflecting the items
discussed above.
Dividends to Stockholders
- -------------------------
On April 28, 1998, the USX Board of Directors (the "Board") declared
dividends of 21 cents per share on Marathon Stock and 25 cents per share on
Steel Stock, payable June 10, 1998, to stockholders of record at the close of
business on May 20, 1998. The Board also declared a dividend of $0.8125 per
share on USX's 6.50% Cumulative Convertible Preferred Stock, payable June 30,
1998, to stockholders of record at the close of business on June 1, 1998.
<PAGE> 20
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Cash Flows
- ----------
Cash and cash equivalents totaled $487 million at March 31, 1998, compared
with $54 million at December 31, 1997. The increase is primarily the result of
the temporary change in excise tax payment patterns mentioned below.
Net cash provided from operating activities totaled $615 million in the
first quarter of 1998, compared with $419 million in the first quarter of 1997.
The $196 million increase mainly reflected favorable working capital changes,
partially offset by a decrease in net income (excluding the IMV reserve
adjustment, gain on ownership change and other noncash items). The favorable
working capital effect reflects a temporary change in excise tax payment
patterns.
Capital expenditures for property, plant and equipment in the first quarter
of 1998 were $276 million, compared with $185 million in the first quarter of
1997. For further details, see USX Corporation - Financial Statistics, following
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Net investments in equity affiliates of $88 million in the first quarter of
1998 reflects spending on capital projects by equity affiliates, primarily for
the entry into a joint venture in Slovakia with VSZ a.s. for the U. S. Steel
Group, and the Sakhalin II project in Russia for the Marathon Group.
Contract commitments to acquire property, plant and equipment and long-term
investments at March 31, 1998, totaled $817 million compared with $533 million
at December 31, 1997.
USX's total long-term debt, preferred stock of subsidiary, USX obligated
preferred securities of a subsidiary trust and notes payable, was $4.3 billion
at March 31, 1998, up $307 million from December 31, 1997, primarily due to the
issuance of $400 million of 6.85% Notes due 2008.
Liquidity
- ---------
At March 31, 1998, USX had no borrowings against its $2,350 million long-
term revolving credit agreement. At March 31, 1998, USX had no borrowings
against its $125 million short-term credit agreement. Interest is based on the
bank's prime rate or London Interbank Offered Rate, and there is a facility fee
of .15%. Certain other banks provide additional short-term lines of credit
totaling $200 million which require a .125% fee or maintenance of compensating
balances of 3%. At March 31, 1998, there were no borrowings against these
facilities.
USX management believes that its short-term and long-term liquidity is
adequate to satisfy its obligations as of March 31, 1998, and to complete
currently authorized capital spending programs. Future requirements for USX's
business needs, including the funding of capital expenditures, debt maturities
for the balance of 1998 and years 1999 and 2000, and any amounts that may
ultimately be paid in connection with contingencies (which are discussed in Note
13 to the Consolidated Financial Statements), are expected to be financed by a
combination of internally generated funds, proceeds from the sale of stock,
borrowings and other external financing sources.
<PAGE> 21
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX management's opinion concerning liquidity and USX's ability to avail
itself in the future of the financing options mentioned in the above forward-
looking statements are based on currently available information. To the extent
that this information proves to be inaccurate, future availability of financing
may be adversely affected. Factors that could affect the availability of
financing include the performance of each Group (as measured by various factors
including cash provided from operating activities), the state of worldwide debt
and equity markets, investor perceptions and expectations of past and future
performance, the overall U.S. financial climate, and, in particular, with
respect to borrowings, by levels of USX's outstanding debt and credit ratings by
rating agencies.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
USX has incurred and will continue to incur substantial capital, operating
and maintenance, and remediation expenditures as a result of environmental laws
and regulations. To the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of USX's products and services, operating
results will be adversely affected. USX believes that domestic competitors of
the U. S. Steel Group and substantially all the competitors of the Marathon
Group are subject to similar environmental laws and regulations. However, the
specific impact on each competitor may vary depending on a number of factors,
including the age and location of its operating facilities, marketing areas,
production processes and the specific products and services it provides.
USX has been notified that it is a potentially responsible party ("PRP") at
41 waste sites under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of March 31, 1998. In addition, there are 25 sites
where USX has received information requests or other indications that USX may be
a PRP under CERCLA but where sufficient information is not presently available
to confirm the existence of liability. There are also 110 additional sites,
excluding retail marketing outlets, where remediation is being sought under
other environmental statutes, both federal and state, or where private parties
are seeking remediation through discussions or litigation. At many of these
sites, USX is one of a number of parties involved and the total cost of
remediation, as well as USX's share thereof, is frequently dependent upon the
outcome of investigations and remedial studies. USX 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 additional
remediation obligations arise, charges in excess of those previously accrued may
be required.
USX 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 (see Note 13 to the
Consolidated Financial Statements for a discussion of certain of these matters).
The ultimate resolution of these contingencies could, individually or in the
aggregate, be material to the Consolidated Financial Statements. However,
management believes that USX will remain a viable and competitive enterprise
even though it is possible that these contingencies could be resolved
unfavorably. See discussion of Liquidity herein.
<PAGE> 22
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Outlook
- -------
See Outlook in Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Marathon Group and the U. S. Steel Group.
Year 2000
- ---------
See Year 2000 in Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Marathon Group and the U. S. Steel
Group.
Accounting Standard
- -------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which introduces a "management approach" for
identifying reportable industry segments of an enterprise. USX plans to adopt
the standard, effective with its 1998 annual financial statements.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". USX plans to adopt the standard,
effective with its 1998 annual financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidelines for companies to capitalize or expense costs incurred to
develop or obtain internal-use software. USX will adopt SOP 98-1 effective
January 1, 1999. USX has not determined the impact of adoption of SOP 98-1 at
this time.
<PAGE> 23
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for open derivative
commodity instruments as of March 31, 1998 are provided in the following table:
(a)
<TABLE>
<CAPTION>
Incremental Decrease
in Pretax Income
Assuming a Hypothetical
Price Change of(a)
(Dollars in millions) 10% 25%
- --------------------------------------------------------------------------------
<S> <C> <C>
Derivative Commodity Instruments
Marathon Group (b) (c)
Crude oil (price increase) $10.4 $29.5
Natural gas (price decrease) 4.4 11.5
Refined products (price increase) .3 1.3
---- ----
Total $15.1 $42.3
U. S. Steel Group
Natural gas (price decrease) $.9 $2.2
<FN>
(a) Gains and losses on derivative commodity instruments are generally
offset by price changes in the underlying commodity. Effects of these
offsets are not reflected in the sensitivity analyses. Amounts reflect
the estimated incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open contract position
at March 31, 1998. The direction of the price change used in calculating
the sensitivity amount for each commodity reflects that which would
result in the largest incremental decrease in pretax income when applied
to the derivative commodity instruments used to hedge that commodity.
Marathon Group and U. S. Steel Group management evaluate their portfolios
of derivative commodity instruments on an ongoing basis and add or revise
strategies to reflect anticipated market conditions and changes in risk
profiles. Changes to the portfolios subsequent to March 31, 1998, would
cause future pretax income effects to differ from those presented in the
table.
(b) The number of net open contracts varied throughout first quarter
1998, from a low of 1,268 contracts at January 1, to a high of 13,047
contracts at March 31, and averaged 5,522 for the quarter. The
derivative commodity instruments used and hedging positions taken also
varied throughout first quarter 1998, and will continue to vary in the
future. Because of these variations in the composition of the portfolio
over time, the number of open contracts, by itself, cannot be used to
predict future income effects.
(c) The calculation of sensitivity amounts for basis swaps assumes that
the physical and paper indices are perfectly correlated. Gains and
losses on options are based on the difference between the strike price
and the underlying commodity price.
</TABLE>
<PAGE> 24
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
The number of net open contracts for the Marathon Group was 13,047 at
March 31, 1998 as compared to 637 at December 31, 1997. The number of net open
contracts at December 31, 1997 was unusually low as a result of market
conditions. On January 1, 1998, the number of net open contracts was 1,268,
which includes contracts transferred to MAP from Ashland. The number of net
open contracts is subject to wide variations as management continuously
evaluates MAP's risk exposures and hedging needs.
The discussion of USX's interest rate risk, foreign currency exchange rate
risk and equity price risk has not changed materially from that presented in
Quantitative and Qualitative Disclosures About Market Risk included in USX's
1997 Form 10-K.
For additional information on market risk for USX, see Quantitative and
Qualitative Disclosures About Market Risk in the USX 1997 Form 10-K.
USX's quantitative and qualitative disclosures about market risk include
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. These statements are accompanied by cautionary language
identifying important factors (particularly the underlying assumptions and
limitations disclosed in footnotes to the tables), though not necessarily all
such factors, that could cause future outcomes to differ materially from those
projected.
Forward-looking statements with respect to management's opinion about risks
associated with USX's use of derivative instruments, and projected changes in
the size of the Marathon Group's hedge portfolio, are based on certain
assumptions with respect to market prices and industry supply of and demand for
crude oil, natural gas, refined products, steel products and certain raw
materials. To the extent that these assumptions prove to be inaccurate, future
outcomes with respect to USX's hedging programs may differ materially from those
discussed in the forward-looking statements.
<PAGE> 25
<TABLE>
USX CORPORATION
FINANCIAL STATISTICS (Unaudited)
--------------------------------
<CAPTION>
First Quarter
Ended
March 31
----------------
(Dollars in Millions) 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Marathon Group $5,498 $4,103
U. S. Steel Group 1,696 1,631
Eliminations (7) (39)
------- -------
Total $7,187 $5,695
INCOME FROM OPERATIONS
Marathon Group $402 $235
U. S. Steel Group 162 131
----- -----
Total $564 $366
CAPITAL EXPENDITURES
Marathon Group $219 $118
U. S. Steel Group 57 50
Discontinued Operations -- 17
----- -----
Total $276 $185
INVESTMENTS IN EQUITY AFFILIATES - NET
Marathon Group $25 $57
U. S. Steel Group 63 (1)
----- -----
Total $88 $56
</TABLE>
<PAGE> 26
Part I - Financial Information (Continued):
B. Marathon Group
<TABLE>
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales $5,224 $4,081
Dividend and affiliate income 10 7
Gain on disposal of assets 3 12
Gain on ownership change in Marathon Ashland
Petroleum LLC 248 -
Other income 13 3
------ ------
Total revenues 5,498 4,103
------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 3,822 2,758
Selling, general and administrative expenses 131 84
Depreciation, depletion and amortization 270 171
Taxes other than income taxes 816 708
Exploration expenses 82 33
Inventory market valuation charges (credits) (25) 114
------ ------
Total costs and expenses 5,096 3,868
------ ------
INCOME FROM OPERATIONS 402 235
Net interest and other financial costs 54 70
Minority interest in income of Marathon Ashland
Petroleum LLC 54 -
------ ------
INCOME BEFORE INCOME TAXES 294 165
Provision for estimated income taxes 111 57
------ ------
NET INCOME $183 $108
====== ======
MARATHON STOCK DATA:
Net income per share - basic and diluted $.63 $.37
Dividends paid per share .21 .19
Weighted average shares, in thousands
- Basic 288,846 287,620
- Diluted 289,490 294,621
<FN>
Selected notes to financial statements appear on pages 29-33.
</TABLE>
<PAGE> 27
<TABLE>
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
<CAPTION>
March 31 December 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $475 $36
Receivables, less allowance for doubtful
accounts of $7 and $2 1,321 856
Inventories 1,641 980
Other current assets 223 146
------ ------
Total current assets 3,660 2,018
Investments and long-term receivables 557 455
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$9,850 and $9,667 9,026 7,566
Prepaid pensions 294 290
Other noncurrent assets 221 236
------ ------
Total assets $13,758 $10,565
====== ======
LIABILITIES
Current liabilities:
Notes payable $- $108
Accounts payable 2,204 1,348
Payroll and benefits payable 173 142
Accrued taxes 128 102
Deferred income taxes 61 61
Accrued interest 50 84
Long-term debt due within one year 462 417
------ ------
Total current liabilities 3,078 2,262
Long-term debt, less unamortized discount 2,837 2,476
Long-term deferred income taxes 1,364 1,318
Employee benefits 536 375
Deferred credits and other liabilities 331 332
Preferred stock of subsidiary 184 184
Minority interest in Marathon Ashland Petroleum LLC 1,682 -
COMMON STOCKHOLDERS' EQUITY 3,746 3,618
------ ------
Total liabilities and common
stockholders' equity $13,758 $10,565
====== ======
<FN>
Selected notes to financial statements appear on pages 29-33.
</TABLE>
<PAGE> 28
<TABLE>
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $183 $108
Adjustments to reconcile to net cash provided from
operating activities:
Minority interest in income of Marathon Ashland
Petroleum LLC - net of distributions 30 -
Depreciation, depletion and amortization 270 171
Exploratory dry well costs 56 14
Inventory market valuation charges (credits) (25) 114
Pensions (5) (5)
Postretirement benefits other than pensions 5 3
Deferred income taxes 49 16
Gain on disposal of assets (3) (12)
Gain on ownership change in Marathon Ashland
Petroleum LLC (248) -
Changes in:
Current receivables 167 119
Inventories (54) (14)
Current accounts payable and accrued expenses 58 (323)
All other - net (2) 13
------ ------
Net cash provided from operating activities 481 204
------ ------
INVESTING ACTIVITIES:
Capital expenditures (219) (118)
Disposal of assets 4 13
Investments in equity affiliates - net (25) (57)
All other - net 11 1
------ ------
Net cash used in investing activities (229) (161)
------ ------
FINANCING ACTIVITIES:
Increase in Marathon Group's portion of USX
consolidated debt 304 39
Marathon Stock issued 3 3
Cash restricted for redemption of debt (59) -
Dividends paid (61) (55)
------ ------
Net cash provided from (used in)
financing activities 187 (13)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 439 30
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 36 32
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $475 $62
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(92) $(92)
Income taxes paid, including settlements with other
groups (63) (71)
<FN>
Selected notes to financial statements appear on pages 29-33.
</TABLE>
<PAGE> 29
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1997.
2. Effective January 1, 1998, USX adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No.
130). This statement establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by and distributions to owners. The Marathon
Group's total comprehensive income for the first quarter 1998 was $184
million.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP
98-1 provides guidelines for companies to capitalize or expense costs
incurred to develop or obtain internal-use software. USX will adopt SOP
98-1 effective January 1, 1999. For additional information, see the
Marathon Group Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Effective January 1, 1997, USX adopted American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to recognition,
measurement and disclosure of environmental remediation liabilities. As a
result of adopting SOP 96-1, the Marathon Group identified additional
environmental remediation liabilities of $11 million. Estimated
receivables for recoverable costs related to adoption of SOP 96-1 were $4
million. The net unfavorable effect of adoption on the Marathon Group's
income from operations at January 1, 1997, was $7 million.
3. The financial statements of the Marathon Group include the financial
position, results of operations and cash flows for the businesses of
Marathon Oil Company and certain other subsidiaries of USX, and a portion
of the corporate assets and liabilities and related transactions which are
not separately identified with ongoing operating units of USX. These
financial statements are prepared using the amounts included in the USX
consolidated financial statements. Corporate amounts reflected in these
financial statements are determined based upon methods which management
believes to be reasonable. The accounting policies applicable to the
preparation of the financial statements of the Marathon Group may be
modified or rescinded in the sole discretion of the Board of Directors of
USX (Board), although the Board has no present intention to do so. The
Board may also adopt additional policies depending on the circumstances.
<PAGE> 30
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
Although the financial statements of the Marathon Group and the U. S.
Steel Group separately report the assets, liabilities (including contingent
liabilities) and stockholders' equity of USX attributed to each such Group,
such attribution of assets, liabilities (including contingent liabilities)
and stockholders' equity among the Marathon Group and the U. S. Steel Group
for the purpose of preparing their respective financial statements does not
affect legal title to such assets and responsibility for such liabilities.
Holders of USX-Marathon Group Common Stock (Marathon Stock) and USX-U. S.
Steel Group Common Stock (Steel Stock) are holders of common stock of USX
and continue to be subject to all the risks associated with an investment
in USX and all of its businesses and liabilities. Financial impacts
arising from one Group that affect the overall cost of USX's capital could
affect the results of operations and financial condition of the other
Group. In addition, net losses of either Group, as well as dividends or
distributions on any class of USX Common Stock or series of Preferred Stock
and repurchases of any class of USX Common Stock or series of Preferred
Stock at prices in excess of par or stated value, will reduce the funds of
USX legally available for payment of dividends on both classes of Common
Stock. Accordingly, the USX consolidated financial information should be
read in connection with the Marathon Group financial information.
4. The method of calculating net income per share for the Marathon Stock,
Steel Stock and, prior to November 1, 1997, Delhi Stock reflects the
Board's intent that the separately reported earnings and surplus of the
Marathon Group, the U. S. Steel Group and the Delhi Group, as determined
consistent with the USX Certificate of Incorporation, are available for
payment of dividends on the respective classes of stock, although legally
available funds and liquidation preferences of these classes of stock do
not necessarily correspond with these amounts.
Basic net income per share is based on the weighted average number of
common shares outstanding.
Diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
See Note 5, page 10 of the Notes to USX Consolidated Financial
Statements for the computation of income per common share.
5. The items below are included in both revenues and costs and expenses,
resulting in no effect on income.
<TABLE>
<CAPTION>
(In millions)
-------------------
First Quarter Ended
March 31
1998 1997
---- ----
<S> <C> <C>
Matching crude oil and refined product buy/sell
transactions settled in cash $988 $755
Consumer excise taxes on petroleum products and
merchandise 764 655
</TABLE>
<PAGE> 31
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. During 1997, Marathon Oil Company (Marathon) and Ashland Inc.
(Ashland) agreed to combine the major elements of their refining, marketing
and transportation (RM&T) operations. On January 1, 1998, Marathon
transferred certain RM&T net assets to a new consolidated subsidiary, which
was named Marathon Ashland Petroleum LLC (MAP). Also on January 1, 1998,
Marathon acquired certain RM&T net assets from Ashland in exchange for a
38% interest in MAP. The acquisition is being accounted for under the
purchase method of accounting. The purchase price was determined to be
$1.9 billion, based upon an external valuation. The change in Marathon's
ownership interest in MAP resulted in a gain of $248 million, which is
included in first quarter 1998 revenues.
The following unaudited pro forma data for the Marathon Group includes
the results of operations for the Ashland RM&T net assets, giving effect to
the acquisition as if it had been consummated at the beginning of the
period presented. The pro forma data is based on historical information
and does not necessarily reflect the actual results that would have
occurred nor is it necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
(In millions, except per share amounts)
First Quarter Ended
March 31, 1997 (a)
-------------------
<S> <C>
Revenues $5,775
Net income (b) 100
Net income per common share (basic and diluted) .35
<FN>
(a) Pro forma data is based on Marathon Group and Ashland results of
operations for the quarter ended March 31, 1997.
(b) Excluding the pro forma inventory market valuation reserve
adjustment, pro forma net income would have been $166 million. Reported
first quarter 1997 net income, excluding the reported inventory market
valuation reserve adjustment, was $180 million, which excludes the
results of operations for the Ashland RM&T net assets.
</TABLE>
7. The financial statement provision for estimated income taxes and
related tax payments or refunds have been reflected in the Marathon Group,
the U. S. Steel Group and, prior to November 1, 1997, the Delhi Group
financial statements in accordance with USX's tax allocation policy for
such groups. In general, such policy provides that the consolidated tax
provision and related tax payments or refunds are allocated among the
Marathon Group, the U. S. Steel Group and, prior to November 1, 1997, the
Delhi Group for group financial statement purposes, based principally upon
the financial income, taxable income, credits, preferences and other
amounts directly related to the respective groups.
The provision for estimated income taxes for the Marathon Group is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities. Differences between
the combined interim tax provisions of the Marathon, U. S. Steel and Delhi
Groups and USX consolidated are allocated to each group based on the
relationship of the individual group provisions to the combined interim
provisions.
<PAGE> 32
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. Inventories are carried at the lower of cost or market. Cost of
inventories of crude oil and refined products is determined under the last-
in, first-out (LIFO) method.
<TABLE>
<CAPTION>
(In millions)
----------------------
March 31 December 31
1998 1997
-------- -----------
<S> <C> <C>
Crude oil and natural gas liquids $723 $452
Refined products and merchandise 1,079 735
Supplies and sundry items 98 77
------ ------
Total (at cost) 1,900 1,264
Less inventory market valuation reserve 259 284
------ ------
Net inventory carrying value $1,641 $980
====== ======
</TABLE>
The inventory market valuation reserve reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. The reserve is decreased to reflect
increases in market prices and inventory turnover and increased to reflect
decreases in market prices. Changes in the inventory market valuation
reserve result in noncash charges or credits to costs and expenses. For
additional information, see discussion of results of operations in the
Marathon Group's Management's Discussion and Analysis of Financial
Condition and Results of Operations.
9. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the
Marathon Group involving a variety of matters, including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the Marathon Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Marathon Group is subject to federal, state, local and foreign
laws and regulations relating to the environment. These laws generally
provide for control of pollutants released into the environment and require
responsible parties to undertake remediation of hazardous waste disposal
sites. Penalties may be imposed for noncompliance. At March 31, 1998, and
December 31, 1997, accrued liabilities for remediation totaled $50 million
and $52 million, respectively. It is not presently possible to estimate
the ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed. Receivables for recoverable costs from
certain states, under programs to assist companies in cleanup efforts
related to underground storage tanks at retail marketing outlets, were $43
million at March 31, 1998, and $42 million at December 31, 1997.
<PAGE> 33
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. (Continued)
For a number of years, the Marathon Group has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In the first quarter of 1998 and for the
years 1997 and 1996, such capital expenditures totaled $21 million, $81
million and $66 million, respectively. The Marathon Group anticipates
making additional such expenditures in the future; however, the exact
amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
At March 31, 1998, and December 31, 1997, accrued liabilities for
platform abandonment and dismantlement totaled $131 million and $128
million, respectively.
Guarantees by USX of the liabilities of affiliated entities of the
Marathon Group totaled $12 million at March 31, 1998. As of March 31,
1998, the largest guarantee for a single affiliate was $12 million.
At March 31, 1998, the Marathon Group's pro rata share of obligations
of LOOP LLC and various pipeline affiliates secured by throughput and
deficiency agreements totaled $164 million. Under the agreements, the
Marathon Group is required to advance funds if the affiliates are unable to
service debt. Any such advances are prepayments of future transportation
charges.
The Marathon Group's contract commitments to acquire property, plant
and equipment and long-term investments at March 31, 1998, totaled $576
million compared with $377 million at December 31, 1997.
<PAGE> 34
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Marathon Group includes Marathon Oil Company ("Marathon") and certain
other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide
exploration, production, transportation and marketing of crude oil and natural
gas; domestic refining, marketing and transportation of petroleum products; and
power generation. Management's Discussion and Analysis should be read in
conjunction with the first quarter 1998 USX consolidated financial information
and the Marathon Group Financial Statements and selected notes. The discussion
of Results of Operations should be read in conjunction with the Supplemental
Statistics beginning on page 45.
During 1997, Marathon and Ashland Inc. ("Ashland") agreed to combine the
major elements of their refining, marketing and transportation ("RM&T")
operations. On January 1, 1998, Marathon transferred certain RM&T net assets to
a new consolidated subsidiary, which was named Marathon Ashland Petroleum LLC
("MAP"). Also, on January 1, 1998, Marathon acquired certain RM&T net assets
from Ashland in exchange for a 38% interest in MAP. Financial measures such as
revenues, income from operations and capital expenditures in 1998 include 100%
of MAP and are not comparable to prior period amounts. Net income and related
per share amounts for 1998 are net of the minority interest. For further
discussion of MAP, see Note 6 to the Marathon Group Financial Statements.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of the Marathon Group. These statements typically contain words such
as "believes", "estimates", "expects" or similar words indicating that future
outcomes are uncertain. In accordance with "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, these statements are
accompanied by cautionary language identifying important factors, though not
necessarily all such factors, that could cause future outcomes to differ
materially from those set forth in forward-looking statements.
<PAGE> 35
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the first quarter of 1998 and 1997 are summarized in the
following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Refined products $2,225 $1,686
Merchandise 403 238
Liquid hydrocarbons 420 266
Natural gas 345 438
Transportation and other (a) 105 65
Gain on ownership change in MAP (b) 248 -
------ ------
Subtotal 3,746 2,693
Excise taxes (c)(e) 764 655
Matching buy/sell transactions (d)(e) 988 755
------ ------
Total revenues (a)(b) $5,498 $4,103
====== ======
- --------
<FN>
(a) Amount for first quarter 1997 was reclassified to conform to 1998
classifications.
(b) See Note 6 to the Marathon Group Financial Statements for a discussion of
the gain on ownership change in MAP and pro forma 1997 revenue information.
(c) Consumer excise taxes on petroleum products and merchandise.
(d) Matching crude oil and refined products buy/sell transactions settled in
cash.
(e) Included in both revenues and costs and expenses, resulting in no effect on
income.
</TABLE>
Revenues (excluding matching buy/sell transactions and excise taxes)
increased by $1,053 million in the first quarter of 1998 from the comparable
prior-year period. The increase was primarily due to higher refined products,
crude oil and merchandise sales, reflecting 100% of MAP's operations, the gain
of $248 million recorded as a result of Marathon's ownership change in MAP, and
increased domestic liquid hydrocarbon sales volumes. These revenue increases
were partially offset by the unfavorable effects of reduced worldwide liquid
hydrocarbon and domestic natural gas prices. The increase in domestic liquid
hydrocarbon sales volumes was mainly due to a higher volume of upstream
production being sold to third parties beginning in January 1998.
<PAGE> 36
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations and certain items included in income from operations
for the first quarter of 1998 and 1997 are set forth in the following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Income from operations (a) $402 $235
Less: Certain favorable (unfavorable) items
IMV reserve adjustment (b) 25 (114)
Write-off of certain international investments net of a
favorable domestic contract settlement (c) (76) -
Gain on ownership change net of
one-time transition charges - MAP (d) 225 -
------ ------
Subtotal 174 (114)
------ ------
Income from operations adjusted to exclude above items $228 $349
====== ======
- --------
<FN>
(a)Amount for first quarter 1997 was reclassified to conform to 1998
classifications.
(b) The inventory market valuation ("IMV") reserve reflects the extent to which
the recorded LIFO cost basis of crude oil and refined product inventories
exceeds net realizable value. For additional details of this noncash
adjustment, see discussion below.
(c) This represents a write-off of certain non-revenue producing international
investments and the gain from the resolution of contract disputes with a
purchaser of the Marathon Group's natural gas production from certain
domestic properties.
(d)The gain on ownership change and one-time transition charges relate to the
formation of MAP. For additional discussion of the gain on ownership change
in MAP, see Note 6 to the Marathon Group Financial Statements.
</TABLE>
Adjusted income from operations in the first quarter of 1998 decreased by
$121 million from last year's first quarter, due primarily to lower worldwide
liquid hydrocarbon and domestic natural gas prices.
With respect to the IMV reserve adjustment, when U. S. Steel Corporation
acquired Marathon Oil Company in March 1982, crude oil and refined product
prices were at historically high levels. In applying the purchase method of
accounting, the Marathon Group's crude oil and refined product inventories
were revalued by reference to current prices at the time of the acquisition,
and this became the new LIFO cost basis of the inventories. Generally
accepted accounting principles require that inventories be reported at the
lower of recorded cost or current market value. Accordingly, the Marathon Group
has established an IMV reserve to reduce the cost basis of its inventories to
current market value. Quarterly adjustments to the IMV reserve result in
noncash charges or credits to income from operations. These adjustments
affect the comparability of financial results from period to period as well
as comparisons with other energy companies, many of which do not have such
adjustments. Therefore, the Marathon Group reports separately
the effects of the IMV reserve adjustments on financial
results. In management's opinion, the effects of such adjustments should be
considered separately when evaluating operating performance.
<PAGE> 37
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
When Marathon acquired the crude oil and refined product inventories
associated with Ashland's RM&T operations in January 1998, the Marathon Group
established a new LIFO cost basis for those inventories. The acquisition
cost of these inventories lowered the overall average cost of the Marathon
Group's combined RM&T inventories. As a result, the price threshold at which
an IMV reserve will be recorded has also been lowered. This acquisition
resulted in a one-time reduction in the IMV reserve, resulting in a net
favorable IMV reserve adjustment of $25 million in the first quarter of 1998.
First quarter income from operations for domestic exploration and
production ("upstream"), excluding the favorable effect of the gas contract
settlement in 1998, decreased by $109 million in 1998 from 1997. This decrease
was mainly due to lower liquid hydrocarbon and natural gas prices, partially
offset by higher liquid hydrocarbon volumes, primarily attributable to new
production in the Gulf of Mexico.
International upstream operations, excluding the unfavorable effect of the
1998 write-offs, recorded a $54 million decline in first quarter income from
operations in 1998 from 1997, primarily reflecting lower liquid hydrocarbon
prices and natural gas volumes. The lower gas volumes were mainly attributable
to offshore operations in Ireland and Norway.
First quarter income from operations for refining, marketing and
transportation ("downstream") operations, excluding the effects of the gain on
ownership change and one-time transition charges, increased by $49 million in
1998 from 1997. However, 1998 results include 100% of MAP operations, in which
Marathon has a 62% interest, while 1997 results include the results of
Marathon's downstream operations, only. Therefore, quarterly income from
operations amounts for 1998 and 1997 are not comparable.
Other energy related businesses recorded income from operations of $14
million in the first quarter of 1998, compared with $22 million in the first
quarter of 1997. Last year's first quarter included an $8 million gain on the
sale of the Marathon Group's interest in a domestic pipeline company.
Net interest and other financial costs for the first quarter of 1998 and
1997 are set forth in the following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest and other financial income $5 $(3)
Interest and other financial costs (59) (67)
------ ------
Net interest and other financial costs $(54) $(70)
====== ======
</TABLE>
The decrease in the first quarter of 1998 was mainly due to increases in
interest income and capitalized interest on upstream projects.
<PAGE> 38
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net income for the first quarter increased by $75 million in 1998 from
1997. Excluding the after-tax effects of the IMV reserve adjustment and other
special items, first quarter financial results decreased to $76 million in 1998
from $180 million in 1997, primarily reflecting the factors discussed above.
Pro forma RM&T income from operations and pro forma Marathon Group net
income for first quarter 1997 compared to reported amounts (excluding, in all
cases, IMV reserve adjustments) are set forth below.
<TABLE>
<CAPTION>
Quarter Ended
March 31, 1997
(Dollars in millions) As Reported Pro Forma
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
RM&T - Income from Operations (a) $79 $82
Marathon Group - Net Income (a) 180 166
<FN>
(a) Excludes IMV reserve adjustment
</TABLE>
The pro forma data give effect to Marathon's acquisition of Ashland's RM&T
assets as if the acquisition had been consummated on January 1, 1997. On this
basis, the acquisition would have increased the Marathon Group's first quarter
RM&T income from operations, excluding the IMV reserve adjustment. The increase
in income from operations is primarily due to reduced depreciation charges as a
result of purchase accounting, which were partially offset by
Ashland's reported operating loss from refining and marketing of $8
million for the quarter ended March 31, 1997, and other pro forma
adjustments. The Marathon Group's pro forma net income, excluding the IMV
reserve adjustment, would have decreased as compared to reported net income.
This decrease is the result of the minority interest deduction exceeding the
increased income from operations described above. The pro forma data do not
include any of the potential efficiencies expected to be derived by MAP. See
Note 6 to the Marathon Group financial statements, and supplemental
statistics on page 46, for additional pro forma information.
Cash Flows
- ----------
Cash and cash equivalents increased by $439 million from year-end 1997,
primarily due to the change in excise tax payment patterns mentioned below.
Net cash provided from operating activities was $481 million in the first
quarter of 1998, compared with $204 million in the first quarter of 1997. The
$277 million increase mainly reflected favorable working capital changes,
partially offset by a decrease in net income (excluding the IMV reserve
adjustment and other noncash items). The favorable working capital effect
reflects a temporary change in excise tax payment patterns.
Capital expenditures in the first quarter of 1998 totaled $219 million,
compared with $118 million in the first quarter of 1997. Expenditures in both
periods, and the increase in 1998, were primarily for upstream projects.
Net investments in equity affiliates were $25 million in the first quarter
of 1998, compared with $57 million in the first quarter of 1997. Cash outflows
in both periods mainly reflected spending on capital projects by equity
affiliates, primarily the Sakhalin II project in Russia. The 1997 amount also
included spending on the Nautilus natural gas pipeline system in the Gulf of
Mexico and the purchase of a 50% interest in an Ecuadorian power generation
company.
<PAGE> 39
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Contract commitments to acquire property, plant and equipment and long-term
investments at March 31, 1998, totaled $576 million compared with $377 million
at December 31, 1997.
Financial obligations increased by $304 million in the first quarter of
1998, but were partially offset by $59 million of cash restricted for redemption
of debt. Financial obligations increased as a result of new debt issued by
USX. For further details, see USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations. Financial
obligations consist of the Marathon Group's portion of USX debt and preferred
stock of a subsidiary attributed to both groups, as well as debt specifically
attributed to the Marathon Group.
Dividends paid in the first quarter of 1998 increased by $6 million from
the prior year quarter, reflecting the two-cents-per-share increase in the
quarterly USX-Marathon Group Common Stock dividend rate, initially declared in
January 1998.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see USX
Consolidated Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The Marathon Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. To the extent these expenditures, as with
all costs, are not ultimately reflected in the prices of the Marathon Group's
products and services, operating results will be adversely affected. The
Marathon Group believes that substantially all of its competitors are subject to
similar environmental laws and regulations. However, the specific impact on
each competitor may vary depending on a number of factors, including the age and
location of its operating facilities, marketing areas, production processes and
whether or not it is engaged in the petrochemical business or the marine
transportation of crude oil and refined products.
USX has been notified that it is a potentially responsible party ("PRP") at
16 waste sites related to the Marathon Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of March
31, 1998. In addition, there are eight sites related to the Marathon Group
where USX has received information requests or other indications that USX may be
a PRP under CERCLA but where sufficient information is not presently available
to confirm the existence of liability. There are also 74 additional sites,
excluding retail marketing outlets, related to the Marathon Group where
remediation is being sought under other environmental statutes, both federal and
state, or where private parties are seeking remediation through discussions or
litigation. At many of these sites, USX is one of a number of parties involved
and the total cost of remediation, as well as USX's share thereof, is frequently
dependent upon the outcome of investigations and remedial studies. The Marathon
Group 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 additional remediation obligations arise, charges in excess of
those previously accrued may be required.
<PAGE> 40
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Marathon Group
involving a variety of matters, including laws and regulations relating to the
environment. See Note 9 to the Marathon Group Financial Statements for a
discussion of certain of these matters. The ultimate resolution of these
contingencies could, individually or in the aggregate, be material to the
Marathon Group Financial Statements. However, management believes that USX will
remain a viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Outlook
- -------
The outlook regarding the Marathon Group's upstream revenues and income is
largely dependent upon future prices and volumes of liquid hydrocarbons and
natural gas. Prices have historically been volatile and have frequently been
driven by unpredictable changes in supply and demand resulting from fluctuations
in economic activity and political developments in the world's major oil and gas
producing areas, including OPEC member countries. Any substantial decline in
such prices could have a material adverse effect on the Marathon Group's results
of operations. A prolonged decline in such prices could also adversely affect
the quantity of crude oil and natural gas reserves that can be economically
produced and the amount of capital available for exploration and development.
The Marathon Group's current estimate of 1998 worldwide liquid
hydrocarbon production is approximately 200,000 barrels per day ("bpd"),
slightly below previous estimates, primarily reflecting delays in
attaining full production in the Troika field, partially offset by better than
expected performance from other domestic fields. The Marathon Group's natural
gas volumes for 1998 are expected to be approximately 1.2 billion cubic feet
per day, consistent with previous estimates.
Production from the Ewing Bank 917 (Oyster) field commenced on April 5,
1998, at 8,900 gross barrels per day. The Marathon Group has a two-thirds
working interest in this field, which is being developed as a one-well,
subsea tie back to the Marathon Group-operated Ewing Bank 873 platform.
The above discussion of expected production levels includes forward-looking
statements which are based on a number of assumptions, including (among
others) prices, supply and demand, regulatory constraints, reserve estimates,
production decline rates of mature fields, reserve replacement rates, and
geological and operating considerations. In addition, development of new
production properties in countries outside the United States may require
protracted negotiations with host governments and is frequently subject to
political considerations, such as tax regulations, which could adversely
affect the economics of projects. To the extent these assumptions prove
inaccurate and/or negotiations and other considerations are not
satisfactorily resolved, actual results could be materially different
than present expectations.
<PAGE> 41
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Downstream income of the Marathon Group is largely dependent upon the
margin between the cost of crude oil and other feedstocks refined and the
selling prices of refined products. Refined product margins have been
historically volatile and vary with the level of economic activity in the
various marketing areas, the regulatory climate and the available supply of
crude oil and refined products.
With respect to downstream operations, the integration process at MAP
continues. The current focus is on actively integrating the logistical,
wholesale marketing and refining operations, as well as administrative
functions, that Marathon and Ashland transferred to MAP.
A major maintenance shutdown ("turnaround") was completed at the Garyville
(La.) refinery in the first quarter of 1998. Following an internal review at
the Catlettsburg (Ky.), Canton (Ohio) and St. Paul Park (Minn.) refineries,
MAP is implementing a maintenance and safety improvement program at these
refineries which will result in the scheduled shutdown of certain production
units at various times over the next several months. MAP does not expect
product shortages as a result of this downtime. The costs of the program, as
well as the effects of reduced production levels, will have a negative impact
on MAP profitability during the remainder of 1998; however, such effects are
not expected to be material to the Marathon Group.
The above discussion of maintenance and safety programs includes
forward-looking statements based on a number of assumptions,
including (among others) the time required to complete the maintenance
and safety programs, costs and downtime related to these activities,
and the effect of reduced production on profitability. To the extent these
assumptions prove inaccurate, actual results could be materially different
than present expectations.
Year 2000
- ---------
The Marathon Group continues its progress in identifying, analyzing, modifying
and/or replacing non-compliant systems, equipment and other devices that utilize
date/time-oriented software or computer chips. The Marathon Group continues
to follow up with all of its vendors from which systems have been purchased
and has requested that appropriate corrections be provided by mid-1998.
The modifications being handled in-house to internally developed systems
are progressing on schedule. The Marathon Group includes Year 2000 provisions
in a variety of its contracts. Letters are being sent to all critical supply
chain vendors to ensure that they do not have Year 2000 problems that will
affect the critical products or services used by the Marathon Group. An
extensive effort is in progress to identify and correct any
date/time-oriented problems in all operations areas of the Marathon
Group. An outside engineering and information technology consulting firm has
been engaged to review critical operating facilities and provide an assessment
of Year 2000 readiness. Business unit audits include a review of systems for
Year 2000 readiness. The incremental costs associated with these efforts have
not been material, and, in management's opinion, future incremental costs
associated with Year 2000 readiness are not expected to be material to the
operating results of the Marathon Group.
<PAGE> 42
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
This discussion of the Marathon Group's efforts and management's
expectations relating to the effect of Year 2000 readiness on operating
results includes forward-looking statements. Actual results could be
materially different because the Marathon Group's ability to achieve Year
2000 readiness and the level of incremental costs associated therewith could
be adversely affected by unanticipated problems identified in the ongoing
compliance review. In addition, the Marathon Group has limited or no control
over comparable corrective actions by proprietary software vendors and other
entities with which it interacts. Therefore, Year 2000 readiness problems
experienced by these entities could adversely affect the operating
results of the Marathon Group.
Accounting Standards
- --------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which introduces a "management approach" for
identifying reportable industry segments of an enterprise. USX plans to adopt
the standard, effective with its 1998 annual financial statements.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". USX plans to adopt the standard,
effective with its 1998 annual financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidelines for companies to capitalize or expense costs incurred to
develop or obtain internal-use software. USX will adopt SOP 98-1 effective
January 1, 1999. USX has not determined the impact of adoption of SOP 98-1 on
the Marathon Group at this time.
<PAGE> 43
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for open derivative
commodity instruments as of March 31, 1998 are provided in the following table:
(a)
<TABLE>
<CAPTION>
Incremental Decrease
in Pretax Income
Assuming a Hypothetical
Price Change of(a)
(Dollars in millions) 10% 25%
- --------------------------------------------------------------------------------
<S> <C> <C>
Derivative Commodity Instruments
Marathon Group (b) (c)
Crude oil (price increase) $10.4 $29.5
Natural gas (price decrease) 4.4 11.5
Refined products (price increase) .3 1.3
---- ----
Total $15.1 $42.3
<FN>
(a) Gains and losses on derivative commodity instruments are generally
offset by price changes in the underlying commodity. Effects of these
offsets are not reflected in the sensitivity analyses. Amounts reflect
the estimated incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open contract position
at March 31, 1998. The direction of the price change used in calculating
the sensitivity amount for each commodity reflects that which would
result in the largest incremental decrease in pretax income when applied
to the derivative commodity instruments used to hedge that commodity.
Marathon Group management evaluates its portfolio of derivative commodity
instruments on an ongoing basis and adds or revises strategies to reflect
anticipated market conditions and changes in its risk profile. Changes
to the portfolio subsequent to March 31, 1998, would cause future pretax
income effects to differ from those presented in the table.
(b) The number of net open contracts varied throughout first quarter
1998, from a low of 1,268 contracts at January 1, to a high of 13,047
contracts at March 31, and averaged 5,522 for the quarter. The
derivative commodity instruments used and hedging positions taken also
varied throughout first quarter 1998, and will continue to vary in the
future. Because of these variations in the composition of the portfolio
over time, the number of open contracts, by itself, cannot be used to
predict future income effects.
(c) The calculation of sensitivity amounts for basis swaps assumes that
the physical and paper indices are perfectly correlated. Gains and
losses on options are based on the difference between the strike price
and the underlying commodity price.
</TABLE>
<PAGE> 44
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
The number of net open contracts for the Marathon Group was 13,047 at
March 31, 1998 as compared to 637 at December 31, 1997. The number of net open
contracts at December 31, 1997 was unusually low as a result of market
conditions. On January 1, 1998, the number of net open contracts was 1,268,
which includes contracts transferred to MAP from Ashland. The number of net
open contracts is subject to wide variations as management continuously
evaluates MAP's risk exposures and hedging needs.
The discussion of the Marathon Group's interest rate risk, foreign currency
exchange rate risk and equity price risk has not changed materially from that
presented in Quantitative and Qualitative Disclosures About Market Risk included
in USX's 1997 Form 10-K.
For additional information on market risk for the Marathon Group, see
Quantitative and Qualitative Disclosures About Market Risk for the Marathon
Group in the USX 1997 Form 10-K.
The Marathon Group's quantitative and qualitative disclosures about market
risk include forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995. These statements are accompanied by cautionary
language identifying important factors (particularly the underlying assumptions
and limitations disclosed in footnotes to the tables), though not necessarily
all such factors, that could cause future outcomes to differ materially from
those projected.
Forward-looking statements with respect to management's opinion about risks
associated with the Marathon Group's use of derivative instruments, and
projected changes in the size of the Marathon Group's hedge portfolio are based
on certain assumptions with respect to market prices and industry supply of and
demand for crude oil, natural gas and refined products. To the extent that
these assumptions prove to be inaccurate, future outcomes with respect to the
Marathon Group's hedging programs may differ materially from those discussed in
the forward-looking statements.
<PAGE> 45
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS
-----------------------
First Quarter
Ended March 31
(Dollars in millions) 1998 1997(a)
- --------------------------------------------------------------------------------
<S> <C> <C>
INCOME (LOSS) FROM OPERATIONS(b)
Exploration & production
Domestic $74 $183
International 50 104
Refining, marketing & transportation (c) 128 79
Other energy related businesses (d) 14 22
Administrative (38) (39)
----- -----
$228 $349
International impairment & domestic contract settlement (76) -
Gain on ownership change & one-time
transition charges - MAP 225 -
IMV reserve adjustment. 25 (114)
----- -----
Total Marathon Group $402 $235
CAPITAL EXPENDITURES $219 $118
INVESTMENTS IN EQUITY AFFILIATES-NET 25 57
OPERATING STATISTICS
Net liquid hydrocarbon production (e):
Domestic 125.8 114.8
International 46.1 53.6
----- -----
Worldwide 171.9 168.4
Net natural gas production (f):
Domestic 748.2 758.5
International - equity 440.9 537.1
International - other (g) 25.8 37.9
------- -------
Total Consolidated 1,214.9 1,333.5
Equity affiliate 42.5 54.9
------- -------
Worldwide 1,257.4 1,388.4
Average equity sales prices (h):
Liquid hydrocarbons (per bbl)
Domestic $12.10 $19.26
International 13.75 21.30
Natural gas (per mcf)
Domestic $1.90 $2.53
International 2.16 2.18
Natural gas sales (f)(i):
Domestic 1,232.2 1,245.5
International 466.7 575.0
------- -------
Total Consolidated 1,698.9 1,820.5
Equity affiliate 42.5 54.9
------- -------
Worldwide 1,741.4 1,875.4
Crude oil refined (e) 905.3 476.1
Refined products sold (e) 1,142.5 724.0
Matching buy/sell volumes included in refined
products sold (e) 47.6 63.7
- ------------
<FN>
(a) Certain 1997 amounts have been reclassified to conform to 1998
classifications
(b) Income from operations for operating components includes operating
income previously reported, plus dividend and affiliate income and other
income.
(c) For 1998, this amount includes MAP's operations, as well as certain
RM&T activities not transferred to MAP. For 1997, this amount represents
the Marathon Group RM&T operations, only.
(d) Includes domestic natural gas and crude oil marketing and
transportation, and power generation
(e) Thousands of barrels per day
(f) Millions of cubic feet per day
(g) Represents gas acquired for injection and subsequent resale
(h) Prices exclude gains and losses from hedging activities
(i) Represents equity, royalty and resale volumes
</TABLE>
<PAGE> 46
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS
-----------------------
The following unaudited pro forma data for the Marathon Group includes
the results of operations for the Ashland RM&T net assets, giving effect to
the acquisition as if it had been consummated at the beginning of the period
presented. The pro forma data is based on historical information and does not
necessary reflect the actual results that would have occurred nor is it
necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
Quarter Ended
March 31, 1997
Pro Forma
- --------------------------------------------------------------------------------
<S> <C>
In Millions:
RM&T-Income from operations (a)(b) $82
Thousands of barrels per day:
Crude oil refined 800.3
Refined products sold 1,108.2
Matching buy/sell volumes included in refined
products sold 88.3
<FN>
(a) Excludes the IMV reserve adjustment
(b) Includes income from operations from RM&T assets transferred to MAP
by Marathon and Ashland, purchase accounting effects and other pro forma
adjustments. Ashland reported an operating loss from refining and
marketing of $8 million for the quarter ended March 31, 1997. Ashland
attributed the loss to the impact of heavy flooding in the Ohio
Valley which limited their ability to ship product on the river.
</TABLE>
<PAGE> 47
Part I - Financial Information (Continued):
C. U. S. Steel Group
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales $1,670 $1,619
Income from affiliates 15 11
Gain on disposal of assets 11 1
------ ------
Total revenues 1,696 1,631
------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 1,455 1,404
Selling, general and administrative expenses (credits) (46) (37)
Depreciation, depletion and amortization 77 74
Taxes other than income taxes 48 59
------ ------
Total costs and expenses 1,534 1,500
------ ------
INCOME FROM OPERATIONS 162 131
Net interest and other financial costs 28 11
------ ------
INCOME BEFORE INCOME TAXES 134 120
Provision for estimated income taxes 47 33
------ ------
NET INCOME 87 87
Dividends on preferred stock 2 6
------ ------
NET INCOME APPLICABLE TO STEEL STOCK $85 $81
====== ======
STEEL STOCK DATA:
Net income per share - basic $.98 $.96
- diluted .95 .93
Dividends paid per share .25 .25
Weighted average shares, in thousands
- Basic 86,600 84,996
- Diluted 94,125 94,581
<FN>
Selected notes to financial statements appear on pages 50-53.
</TABLE>
<PAGE> 48
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
March 31 December 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $12 $18
Receivables, less allowance for doubtful
accounts of $12 and $13 519 588
Inventories 718 705
Deferred income tax benefits 219 220
Other current assets 8 -
------ ------
Total current assets 1,476 1,531
Investments and long-term receivables,
less reserves of $15 and $15 741 670
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$5,810 and $5,799 2,475 2,496
Prepaid pensions 2,014 1,957
Other noncurrent assets 37 40
------ ------
Total assets $6,743 $6,694
====== ======
LIABILITIES
Current liabilities:
Notes payable $- $13
Accounts payable 663 687
Payroll and benefits payable 364 379
Accrued taxes 191 190
Accrued interest 8 11
Long-term debt due within one year 56 54
------ ------
Total current liabilities 1,282 1,334
Long-term debt, less unamortized discount 476 456
Employee benefits 2,336 2,338
Deferred credits and other liabilities 552 536
Preferred stock of subsidiary 66 66
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior
subordinated convertible debentures of USX 182 182
STOCKHOLDERS' EQUITY
Preferred stock 3 3
Common stockholders' equity 1,846 1,779
------ ------
Total stockholders' equity 1,849 1,782
------ ------
Total liabilities and stockholders' equity $6,743 $6,694
====== ======
<FN>
Selected notes to financial statements appear on pages 50-53.
</TABLE>
<PAGE> 49
<TABLE>
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $87 $87
Adjustments to reconcile to net cash provided
from operating activities:
Depreciation, depletion and amortization 77 74
Pensions (52) (42)
Postretirement benefits other than pensions - 6
Deferred income taxes 43 21
Gain on disposal of assets (11) (1)
Changes in:
Current receivables 70 96
Inventories (13) (19)
Current accounts payable and accrued expenses (44) 31
All other - net (23) (40)
------ ------
Net cash provided from operating activities 134 213
------ ------
INVESTING ACTIVITIES:
Capital expenditures (57) (50)
Disposal of assets 2 5
Investments in equity affiliates - net (63) 1
All other - net - 4
------ ------
Net cash used in investing activities (118) (40)
------ ------
FINANCING ACTIVITIES:
Increase (decrease) in U. S. Steel Group's portion of USX
consolidated debt 7 (163)
Specifically attributed debt repayments - (2)
Steel Stock issued 2 11
Cash restricted for redemption of debt (7) -
Dividends paid (24) (26)
------ ------
Net cash used in financing activities (22) (180)
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6) (7)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18 23
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $12 $16
====== ======
Cash provided from (used in) operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(23) $(33)
Income taxes refunded, including settlements
with other groups 16 27
<FN>
Selected notes to financial statements appear on pages 50-53.
</TABLE>
<PAGE> 50
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1997.
2. Effective January 1, 1998, USX adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No.
130). This statement establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by and distributions to owners. The U. S. Steel
Group's total comprehensive income for the first quarter 1998 was $87
million.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP
98-1 provides guidelines for companies to capitalize or expense costs
incurred to develop or obtain internal-use software. USX will adopt SOP
98-1 effective January 1, 1999. For additional information, see the U. S.
Steel Group Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Effective January 1, 1997, USX adopted American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to recognition,
measurement and disclosure of environmental remediation liabilities. As a
result of adopting SOP 96-1, the U. S. Steel Group identified additional
environmental remediation liabilities of $35 million, of which $28 million
was discounted to a present value of $13 million and $7 million was not
discounted. Assumptions used in the calculation of the present value
amount included an inflation factor of 2% and an interest rate of 7% over a
range of 22 to 30 years. The net unfavorable effect of adoption on income
from operations at January 1, 1997, was $20 million.
3. The financial statements of the U. S. Steel Group include the
financial position, results of operations and cash flows for all businesses
of USX other than the businesses, assets and liabilities included in the
Marathon Group and a portion of the corporate assets and liabilities and
related transactions which are not separately identified with ongoing
operating units of USX.
<PAGE> 51
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
These financial statements are prepared using the amounts included in
the USX consolidated financial statements. Corporate amounts reflected in
these financial statements are determined based upon methods which
management believes to be reasonable. The accounting policies applicable
to the preparation of the financial statements of the U. S. Steel Group may
be modified or rescinded in the sole discretion of the Board of Directors
of USX (Board), although the Board has no present intention to do so. The
Board may also adopt additional policies depending on the circumstances.
Although the financial statements of the U. S. Steel Group and the
Marathon Group separately report the assets, liabilities (including
contingent liabilities) and stockholders' equity of USX attributed to each
such Group, such attribution of assets, liabilities (including contingent
liabilities) and stockholders' equity among the U. S. Steel Group and the
Marathon Group for purposes of preparing their respective financial
statements does not affect legal title to such assets and responsibility
for such liabilities. Holders of USX-U. S. Steel Group Common Stock (Steel
Stock) and USX-Marathon Group Common Stock (Marathon Stock) are holders of
common stock of USX and continue to be subject to all the risks associated
with an investment in USX and all of its businesses and liabilities.
Financial impacts arising from one Group that affect the overall cost of
USX's capital could affect the results of operations and financial
condition of the other Group. In addition, net losses of either Group, as
well as dividends or distributions on any class of USX Common Stock or
series of Preferred Stock and repurchases of any class of USX Common Stock
or series of Preferred Stock at prices in excess of par or stated value,
will reduce the funds of USX legally available for payment of dividends on
both classes of Common Stock. Accordingly, the USX consolidated financial
information should be read in connection with the U. S. Steel Group
financial information.
4. The method of calculating net income per share for the Steel Stock,
Marathon Stock and, prior to November 1, 1997, Delhi Stock reflects the
Board's intent that the separately reported earnings and surplus of the U.
S. Steel Group, the Marathon Group and the Delhi Group, as determined
consistent with the USX Certificate of Incorporation, are available for
payment of dividends on the respective classes of stock, although legally
available funds and liquidation preferences of these classes of stock do
not necessarily correspond with these amounts.
Basic net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and is based on the weighted
average number of common shares outstanding.
Diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
See Note 5, page 10 of the Notes to USX Consolidated Financial
Statements for the computation of income per common share.
<PAGE> 52
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. Income from operations includes net periodic pension credits of $51
million and $38 million in the first quarter of 1998 and 1997,
respectively. These pension credits are primarily noncash and for the most
part are included in selling, general and administrative expenses.
6. The financial statement provision for estimated income taxes and
related tax payments or refunds have been reflected in the U. S. Steel
Group, the Marathon Group and, prior to November 1, 1997, the Delhi Group
financial statements in accordance with USX's tax allocation policy for
such groups. In general, such policy provides that the consolidated tax
provision and related tax payments or refunds are allocated among the U. S.
Steel Group, the Marathon Group and, prior to November 1, 1997, the Delhi
Group for group financial statement purposes, based principally upon the
financial income, taxable income, credits, preferences and other amounts
directly related to the respective groups.
The provision for estimated income taxes for the U. S. Steel Group is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities. Differences between
the combined interim tax provisions of the U. S. Steel, Marathon and Delhi
Groups and USX consolidated are allocated to each group based on the
relationship of the individual group provisions to the combined interim
provisions.
7. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
<TABLE>
<CAPTION>
(In millions)
-----------------------
March 31 December 31
1998 1997
-------- -----------
<S> <C> <C>
Raw materials $114 $130
Semi-finished products 335 331
Finished products 211 187
Supplies and sundry items 58 57
---- ----
Total $718 $705
==== ====
</TABLE>
8. The U. S. Steel Group participates in an agreement (the program) to
sell an undivided interest in certain accounts receivable. Payments are
collected from the sold accounts receivable; the collections are reinvested
in new accounts receivable for the buyers; and a yield, based on defined
short-term market rates, is transferred to the buyers. At March 31, 1998,
the amount sold under the program that had not been collected was
$350 million, which will be forwarded to the buyers at the end of the
agreement, or in the event of earlier contract termination. If the
U. S. Steel Group does not have a sufficient quantity of eligible accounts
receivable to reinvest in for the buyers, the size of the program will be
reduced accordingly. The buyers have rights to a pool of receivables that
must be maintained at a level of at least 115% of the program size. In the
event of a change in control of USX, as defined in the agreement, the U. S.
Steel Group may be required to forward payments collected on sold accounts
receivable to the buyers.
<PAGE> 53
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the U.
S. Steel Group involving a variety of matters including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the U. S. Steel Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The U. S. Steel Group is subject to federal, state and local laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At both March 31, 1998, and
December 31, 1997, accrued liabilities for remediation totaled $106
million. It is not presently possible to estimate the ultimate amount of
all remediation costs that might be incurred or the penalties that may be
imposed.
For a number of years, the U. S. Steel Group has made substantial
capital expenditures to bring existing facilities into compliance with
various laws relating to the environment. In the first quarter of 1998 and
for the years 1997 and 1996, such capital expenditures totaled $9 million,
$43 million and $90 million, respectively. The U. S. Steel Group
anticipates making additional such expenditures in the future; however, the
exact amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
Guarantees by USX of the liabilities of affiliated entities of the U.
S. Steel Group totaled $59 million at March 31, 1998. In the event that
any defaults of guaranteed liabilities occur, USX has access to its
interest in the assets of the affiliates to reduce U. S. Steel Group losses
resulting from these guarantees. As of March 31, 1998, the largest
guarantee for a single affiliate was $27 million.
The U. S. Steel Group's contract commitments to acquire property,
plant and equipment at March 31, 1998, totaled $241 million
compared with $156 million at December 31, 1997.
<PAGE> 54
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------
The U. S. Steel Group includes U. S. Steel, which is primarily engaged in
the production and sale of steel mill products, coke and taconite pellets. The
U. S. Steel Group also includes the management of mineral resources, domestic
coal mining and engineering and consulting services (together with U. S. Steel,
the "Steel & Related Businesses"). Steel & Related - Equity Affiliates includes
Transtar Inc. and joint ventures such as USS/Kobe Steel Company ("USS/Kobe"),
USS-POSCO Industries ("USS-POSCO") and PRO-TEC Coating Company ("PRO-TEC").
Other businesses that are part of the U. S. Steel Group include real estate
development and management, and leasing and financing activities. Management's
Discussion and Analysis should be read in conjunction with the first quarter
1998 USX consolidated financial information and the U. S. Steel Group Financial
Statements and selected notes. The discussion of Results of Operations should
be read in conjunction with the Supplemental Statistics provided on page 61.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of the U. S. Steel Group. These statements typically contain words
such as "anticipates", "believes", "estimates", "expects" or similar words
indicating that future outcomes are not known with certainty and subject to risk
factors that could cause these outcomes to differ significantly from those
projected. In accordance with "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, these statements are accompanied by
cautionary language identifying important factors, though not necessarily all
such factors, that could cause future outcomes to differ materially from those
set forth in forward-looking statements. For additional risk factors affecting
the businesses of the U. S. Steel Group, see Supplementary Data - Disclosures
About Forward-Looking Statements in USX's 1997 Form 10-K.
Results of Operations
- ---------------------
Revenues for the first quarter of 1998 and 1997 are set forth in the
following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Steel & Related Businesses $1,669 $1,608
Steel & Related - Equity Affiliates 11 9
------ ------
Subtotal - Steel & Related 1,680 1,617
Administrative & Other Businesses 16 14
------ ------
Total Revenues (a) $1,696 $1,631
====== ======
- ------
<FN>
(a) Consists of sales, affiliate income, net gains on disposal of assets
and other income. Amounts for 1997 were reclassified in 1998 to include
affiliate income and other income.
</TABLE>
Total revenues increased $65 million in the first quarter of 1998 compared
with the first quarter of 1997. The increase primarily reflected higher steel
shipment volumes.
<PAGE> 55
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations and certain items included in income from operations
for the first quarter of 1998 and 1997 are set forth in the following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Total income from operations (a) $162 $131
Less: Certain favorable (unfavorable) items:
Effect of adoption of SOP 96-1 (b) - (20)
Other environmental accrual adjustments - net - 11
---- ----
Subtotal - (9)
---- ----
Income from operations adjusted to exclude above items$162 $140
==== ====
- -----
<FN>
(a) Consists of operating income, affiliate income, net gains on
disposal of assets and other income. Amounts for 1997 were reclassified
in 1998 to include affiliate income and other income.
(b) American Institute of Certified Public Accountants Statement of
Position No. 96-1, "Environmental Remediation Liabilities" ("SOP 96-1")
provides additional guidance on recognition, measurement and disclosure
of remediation liabilities.
</TABLE>
Adjusted income from operations for the U. S. Steel Group increased $22
million in the first quarter of 1998 compared with the first quarter of 1997,
primarily due to higher results from Administrative and Other Businesses.
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Steel & Related Businesses $89 $87
Steel & Related - Equity Affiliates 11 9
---- ----
Subtotal - Steel & Related 100 96
Administrative & Other Businesses 62 35
---- ----
Total income from operations $162 $131
==== ====
- -----
Income from operations for Steel & Related Businesses increased $2 million
in the first quarter of 1998 compared with the first quarter of 1997. The
increase was primarily due to higher steel shipments, improved product mix and
lower property tax accruals, primarily offset by lower average steel prices and
the absence of a partial insurance recovery.
Income from operations for Steel and Related - Equity Affiliates increased
$2 million in the first quarter of 1998 compared to the first quarter of 1997.
The increase was mainly due to higher income generated by USS/Kobe, primarily
offset by lower income from USS-POSCO and PRO-TEC.
<PAGE> 56
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Administrative and Other Businesses includes the portion of pension
credits, postretirement benefit costs and certain other expenses principally
attributable to the former businesses of the U. S. Steel Group as well as USX
corporate general and administrative costs allocated to the U. S. Steel Group.
Income from operations for Administrative and Other Businesses increased $27
million in the first quarter of 1998 compared with the first quarter of 1997.
Income from operations for Administrative and Other Businesses for the first
quarter of 1997 included charges of $9 million related to environmental accruals
and the adoption of SOP 96-1. Excluding these charges, first quarter 1998
income from operations increased $18 million from first quarter 1997 primarily
due to higher pension credits and higher equity income from RMI Titanium
Company.
The pension credits referred to in Administrative and Other Businesses,
combined with pension costs for ongoing operating units of the U. S. Steel
Group, resulted in net pension credits (which are primarily noncash) of $51
million and $38 million in the first quarters of 1998 and 1997, respectively.
To the extent that these credits decline in the future, income from operations
would be adversely affected.
Net interest and other financial costs for the first quarter of 1998 and
1997 are set forth in the following table:
</TABLE>
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest and other financial income $2 $1
Interest and other financial costs (30) (12)
----- -----
Net interest and other financial costs (28) (11)
Less:
Favorable (unfavorable) adjustments to
carrying value of indexed debt (a) (4) 16
----- -----
Net interest and other financial costs
adjusted to exclude above item $(24) $(27)
===== =====
- -----
<FN>
(a) In December 1996, USX issued $117 million of 6-3/4% Exchangeable
Notes Due February 1, 2000, ("indexed debt") indexed to the price of RMI
Titanium Company ("RMI") common stock. At maturity, USX must exchange
these notes for shares of RMI common stock, or redeem the notes for the
equivalent amount of cash. The carrying value of indexed debt is
adjusted quarterly to settlement value, based on changes in the value of
RMI common stock. Any resulting adjustment is charged or credited to
income and included in interest and other financial costs. USX's 27%
interest in RMI continues to be accounted for under the equity method.
</TABLE>
Adjusted net interest and other financial costs decreased by $3 million in
the first quarter of 1998 as compared with the same period in 1997, due
primarily to lower average debt levels in the U. S. Steel Group.
<PAGE> 57
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
The provision for estimated income taxes in the first quarter of 1998 was
higher than the first quarter 1997 provision, primarily due to reduced tax
credits.
Net income was $87 million in both the first quarter of 1998 and first
quarter of 1997.
Operating Statistics
- --------------------
First quarter 1998 steel shipments of 2.9 million tons and raw steel
production of 3.1 million tons each increased by 2% from the same period in
1997. Raw steel capability utilization in the first quarter of 1998 averaged
99.6%, versus 97.3% in the same period in 1997.
Cash Flows
- -----------
Net cash provided from operating activities decreased $79 million in the
first quarter of 1998, compared with the first quarter of 1997. The decrease
was due to unfavorable working capital changes, primarily related to accounts
payable and accrued expenses.
Capital expenditures in the first quarter of 1998 were $57 million,
compared with $50 million in the same period in 1997. Contract commitments to
acquire property, plant and equipment at March 31, 1998, totaled $241 million
compared with $156 million at December 31, 1997.
Net cash used in investments in equity affiliates of $63 million mainly
reflects funding for entry into a joint venture in Slovakia with VSZ a.s.
("VSZ"). In February, 1998, the joint venture, doing business as VSZ U. S.
Steel, s. r.o., took over ownership and commenced operation of an existing tin
mill facility (VSZ's Ocel plant in Kosice) with an annual production capacity of
140,000 metric tons. The joint venture plans to add 200,000 annual metric tons
of new tin mill production capacity in the next two years.
Financial obligations increased by $7 million in the first quarter of 1998.
Financial obligations consist of the U. S. Steel Group's portion of USX debt and
preferred stock of a subsidiary attributed to both groups, as well as debt and
financing agreements specifically attributed to the U. S. Steel Group.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see Management's
Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and
Liquidity.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The U. S. Steel Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. In recent years, these expenditures have
been
<PAGE> 58
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
mainly for process changes in order to meet Clean Air Act obligations, although
ongoing compliance costs have also been significant. To the extent these
expenditures, as with all costs, are not ultimately reflected in the prices of
the U. S. Steel Group's products and services, operating results will be
adversely affected. The U. S Steel Group believes that all of its domestic
competitors are subject to similar environmental laws and regulations. However,
the specific impact on each competitor may vary depending on a number of
factors, including the age and location of its operating facilities, marketing
areas, production processes and the specific products and services it provides.
To the extent that competitors are not required to undertake equivalent costs in
their operations, the competitive position of the U. S Steel Group could be
adversely affected.
USX has been notified that it is a potential responsible party ("PRP") at
25 waste sites related to the U. S. Steel Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of
March 31, 1998. In addition, there are 17 sites related to the U. S. Steel
Group where USX has received information requests or other indications that USX
may be a PRP under CERCLA but where sufficient information is not presently
available to confirm the existence of liability or make any judgment as to the
amount thereof. There are also 36 additional sites related to the U. S. Steel
Group where remediation is being sought under other environmental statutes, both
federal and state, or where private parties are seeking remediation through
discussions or litigation. At many of these sites, USX is one of a number of
parties involved and the total cost of remediation, as well as USX's share
thereof, is frequently dependent upon the outcome of investigations and remedial
studies. The U. S. Steel Group 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 additional remediation obligations arise,
charges in excess of those previously accrued may be required.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the U. S. Steel Group
involving a variety of matters, including laws and regulations relating to the
environment, certain of which are discussed in Note 9 to the U. S. Steel Group
Financial Statements. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group Financial
Statements. However, management believes that USX will remain a viable and
competitive enterprise even though it is possible that these contingencies could
be resolved unfavorably to the U. S. Steel Group.
Outlook
- -------
The U. S. Steel Group expects a continued strong order book for the second
quarter of 1998 as the outlook remains positive for the markets it serves.
Shipments in the second quarter of 1998 are expected to remain at high levels.
This market strength is dependent on continued strong demand for capital goods,
oil and gas tubular products and consumer durables in domestic and international
economies. Based on the continuing strong demand for plate products,
U. S. Steel Group announced a price increase for plate products scheduled for
delivery after June 27, 1998. However, growing domestic production capability
for flat-rolled products and continuing high levels of imports, could have an
adverse effect on U. S. Steel's product prices and shipment levels. In
addition, uncertainties related to Asian economic activities could potentially
impact the domestic market, if Asian countries increase their level of steel
exports to the United States.
<PAGE> 59
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Steel imports to the United States accounted for an estimated 23%, 24% and
23% of the domestic steel market in the first two months of 1998, and for the
years 1997 and 1996, respectively. The domestic steel industry has, in the
past, been adversely affected by unfairly traded imports, and higher levels of
imported steel may have an adverse effect on product prices, shipment levels and
results of operations.
During the second and third quarters of 1998, raw steel production is
expected to be reduced by a 100 day planned blast furnace reline at Gary Works.
U. S. Steel expects to supplement raw steel production with the purchase of
slabs from outside sources, which should allow it to maintain shipment levels
during this planned outage.
The preceding statements concerning anticipated steel demand, steel
pricing, purchasing slabs to supplement raw steel production and shipment levels
are forward-looking and are based upon assumptions as to future product prices
and mix, and levels of steel production capability, production and shipments.
These assumptions can be affected by imports, domestic and international
economies, domestic production capacity, availability of slabs, and customer
demand. In the event these assumptions prove to be inaccurate, actual results
may differ significantly from those presently anticipated.
Year 2000
- ---------
A task force continues to analyze potential areas of risk associated to the
Year 2000 and to make any required modifications as they relate to business
computer systems, technical infrastructure, end-user computing, business
partners, manufacturing, environmental operations, systems products produced and
sold, and dedicated R&D test facilities. An inventory of computer systems and
date-sensitive automated devices for the aforementioned areas was completed in
April 1998; however, the impact assessment is continuing. The technical
software infrastructure for mainframe computers is essentially Year 2000 ready;
however, vendor software and other computing platforms continue to be analyzed
for Year 2000 readiness. Management believes that roughly half of the mainframe
applications are capable of correctly processing transactions with dates before,
during and after the Year 2000. The U. S. Steel Group is also monitoring the
efforts of entities with which it does business and is participating with steel
industry and other trade associations to collect information on the Year 2000
readiness of such entities.
The U. S. Steel Group's objective is to achieve Year 2000 readiness by the
end of 1998 except for certain systems that are to be replaced with third-party
vendor systems in 1999. The year 1999 will be used to test Year 2000 readiness,
including continued monitoring of progress by entities with which the
U. S. Steel Group does business. Based on information available at this time,
management believes that the incremental costs associated with achieving Year
2000 readiness will not be material to the operating results of the U. S. Steel
Group.
<PAGE> 60
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The discussion of the U. S. Steel Group's efforts, and management's
expectations, relating to Year 2000 readiness, includes forward-looking
statements. The U. S. Steel Group's ability to achieve Year 2000 readiness
and the level of incremental costs associated therewith, could be adversely
impacted by, among other things, the availability and cost of programming and
testing resources, vendors' ability to install or modify proprietary hardware
and software and unanticipated problems identified in the ongoing Year 2000
readiness review. The U. S. Steel Group has limited or no control over the
actions of proprietary hardware and software vendors and other entities with
which it interacts. Therefore, problems experienced by these entities in
becoming Year 2000 ready could adversely affect the operating results of
the U. S. Steel Group.
Accounting Standard
- -------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which introduces a "management approach" for
identifying reportable industry segments of an enterprise. USX plans to adopt
the standard, effective with its 1998 annual financial statements.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". USX plans to adopt the standard
effective with its 1998 annual financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued its Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidelines for companies to capitalize or expense costs incurred to
develop or obtain internal-use software. USX will adopt SOP 98-1 effective
January 1, 1999. USX has not determined the impact of adoption of SOP 98-1 on
the U. S. Steel Group at this time.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------
The discussion of the U. S. Steel Group's commodity price risk, interest
rate risk, foreign currency exchange rate risk and equity price risk has not
changed materially from that presented in Quantitative and Qualitative
Disclosures About Market Risk included in USX's 1997 Form 10-K. For additional
information on market risk, see Quantitative and Qualitative Disclosures About
Market Risk for USX Corporation on page 23.
<PAGE> 61
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS
------------------------------------
($ in Millions)
First Quarter
Ended March 31
--------------
1998 1997(e)
---- ----
<S> <C> <C>
REVENUES $ 1,696 $ 1,631
INCOME FROM OPERATIONS
Steel and Related Businesses (a) $89 $87
Steel and Related-Equity Affiliates 11 9
---- -----
Subtotal - Steel & Related $100 $96
Administrative and Other Businesses(b) 62 35
------ ------
Total U. S. Steel Group $162 $ 131
CAPITAL EXPENDITURES $57 $50
OPERATING STATISTICS (Steel & Related Businesses)
Steel Shipments (c) 2,933 2,866
Raw Steel-Production (c) 3,143 3,071
Raw Steel-Capability Utilization (d) 99.6% 97.3%
- ------------
<FN>
(a) Includes the production and sale of steel products, coke and
taconite pellets; domestic coal mining; the management of mineral
resources; and engineering and consulting services.
(b) Includes pension credits, other postretirement benefit costs and
certain other expenses principally attributable to former business units
of the U. S. Steel Group. Also includes results of real estate
development and management, and leasing and financing activities and
equity income from RMI Titanium Company.
(c) Thousands of net tons
(d) Based on annual raw steel production capability of 12.8 million
tons.
(e) Certain 1997 amounts have been reclassified to conform to 1998
classifications.
</TABLE>
<PAGE> 62
Part II - Other Information
- ----------------------------
Item 1. LEGAL PROCEEDINGS
U. S. Steel Group
Aloha Stadium Litigation
On April 17, 1998, USX and the State of Hawaii entered into a
Settlement Agreement and on April 30, 1998, the Court entered a final
Order dismissing, with prejudice, all of the claims brought by the
State in this litigation.
Pursuant to the Settlement Agreement, USX paid $12.1 million to
the State, all of which had been reserved in prior periods.
<PAGE> 63
Part II - Other Information (continued)
- --------------------------------------
Item 5. OTHER INFORMATION
(b) SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF MARATHON OIL COMPANY
Supplementary Data
---------------------------------------------------------------------
(Unaudited)
The following summarized consolidated financial information of Marathon Oil
Company, a wholly owned subsidiary of USX, is included in this Form 10-Q in
satisfaction of the reporting obligation of Marathon which has debt securities
registered under the Securities Exchange Act of 1934. All such securities are
guaranteed by USX.
<TABLE>
<CAPTION>
(In millions)
-------------------
First Quarter Ended
March 31
1998 1997
---- ----
<S> <C> <C>
INCOME DATA:
Revenues $5,489 $4,096
Income from operations 408 242
Net income 173 98
</TABLE>
<TABLE>
<CAPTION>
(In millions)
----------------------
March 31 December 31
1998 1997
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Assets:
Current assets $5,163 $3,436
Noncurrent assets 9,964 8,413
------ ------
Total assets $15,127 $11,849
====== ======
Liabilities and Stockholder's Equity:
Current liabilities $2,957 $1,997
Noncurrent liabilities 8,031 7,569
Minority interest in consolidated subsidiary 1,682 -
Stockholder's equity 2,457 2,283
------ ------
Total liabilities and stockholder's equity $15,127 $11,849
====== ======
</TABLE>
<PAGE> 64
Part II - Other Information (Continued):
- ----------------------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 USX Restated Certificate of
Incorporation dated
September 1, 1996................. Incorporated by reference
to Exhibit 3.1 to the USX
Report on Form 10-Q
for the quarter ended
March 31, 1997.
3.2 USX By-Laws, effective as of
July 30, 1996..................... Incorporated by reference
to Exhibit 3(a) to the
USX Report on Form
10-Q for the quarter
ended June 30, 1996.
4.1 Amended and Restated Rights
Agreement......................... Incorporated by reference
to USX's Form 8
Amendment to Form 8-A
filed on October 9,
1992 (File No. 1-5153).
12.1 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
12.2 Computation of Ratio of Earnings to Fixed Charges
27.Financial Data Schedule
(b) REPORTS ON FORM 8-K
Form 8-K dated January 1, 1998, reporting under Item 5. Other Events,
the closing of the transaction that formed the refining, marketing,
and transportation company, Marathon Ashland Petroleum LLC.
Form 8-K dated February 27, 1998, reporting under Item 5. Other
Events, the audited Financial Statements and Supplementary Data for
USX corporation for the fiscal year ended December 31, 1997, together
with the related Management's Discussion and Analysis of Financial
Condition and Results of Operations, Quantitative and Qualitative
Disclosures About Market Risk and reports of the independent
accountants.
Form 8-K dated March 5, 1998, reporting under Item 5. Other Events, an
Underwriting Agreement in connection with the issuance of 6.85% Notes
Due 2008 pursuant to a shelf registration statement on Form S-3, File
No. 33-52937.
<PAGE> 65
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned chief accounting officer thereunto duly authorized.
USX CORPORATION
By /s/ Kenneth L. Matheny
Kenneth L. Matheny
Vice President &
Comptroller
May ,1998
Exhibit 12.1
<TABLE>
<CAPTION>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
Continuing Operations
----------------------------------------------------------
(Dollars in Millions)
First Quarter
Ended Year Ended December 31
March 31 --------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Portion of rentals
representing interest $21 $19 $82 $78 $76 $83 $81
Capitalized interest 9 4 31 11 13 58 105
Other interest and fixed
charges 75 85 312 382 452 456 365
Pretax earnings which would
be required to cover
preferred stock dividend
requirements of parent 4 9 20 36 46 49 44
---- ---- ---- ---- ---- ---- ----
Combined fixed charges
and preferred stock
dividends (A) $109 $117 $445 $507 $587 $646 $595
==== ==== ==== ==== ==== ==== ====
Earnings-pretax income
with applicable
adjustments (B) $520 $396 $1745 $1837 $877 $1300 $239
==== ==== ==== ==== ==== ==== ====
Ratio of (B) to (A) 4.77 3.38 3.92 3.62 1.49 2.01 (a)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Earnings did not cover combined fixed charges and preferred stock
dividends by $356 million for 1993.
</TABLE>
Exhibit 12.2
<TABLE>
<CAPTION>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
Continuing Operations
-------------------------------------------------
(Dollars in Millions)
First Quarter
Ended Year Ended December 31
March 31 --------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Portion of rentals
representing interest $21 $19 $82 $78 $76 $83 $81
Capitalized interest 9 4 31 11 13 58 105
Other interest and fixed
charges 75 85 312 382 452 456 365
---- ---- ---- ---- ----- ---- ----
Total fixed charges (A) $105 $108 $425 $471 $541 $597 $551
==== ==== ==== ==== ==== ==== ====
Earnings-pretax income
with applicable
adjustments (B) $520 $396 $1745 $1837 $877 $1300 $239
==== ==== ==== ==== ==== ==== ====
Ratio of (B) to (A) 4.95 3.67 4.11 3.90 1.62 2.18 (a)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Earnings did not cover fixed charges by $312 million for 1993.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 487
<SECURITIES> 0
<RECEIVABLES> 1845
<ALLOWANCES> 19
<INVENTORY> 2359
<CURRENT-ASSETS> 5073
<PP&E> 27161
<DEPRECIATION> 15660
<TOTAL-ASSETS> 20342
<CURRENT-LIABILITIES> 4298
<BONDS> 3313
182
3
<COMMON> 376<F1>
<OTHER-SE> 5216
<TOTAL-LIABILITY-AND-EQUITY> 20342
<SALES> 6887
<TOTAL-REVENUES> 7187
<CGS> 6623
<TOTAL-COSTS> 6623
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89
<INCOME-PRETAX> 482
<INCOME-TAX> 158
<INCOME-CONTINUING> 270
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 270
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F3>
<FN>
<F1>Consists of Marathon Stock issued, $289; Steel Stock issued, $87.
<F2>Basic earnings per share applicable to Marathon Stock,$.63; Steel Stock,
$.98.
<F3>Diluted earnings per share applicable to Marathon Stock, $.63; Steel Stock,
$.95.
</FN>
</TABLE>
