Nucor Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of 2016; the quarter ended October 1, 2016 (13 weeks), and the year-to-date period was 39 weeks. Comparative periods ended October 3, 2015. Figures below are in U.S. dollars.
Business context and financial performance
Nucor manufactures steel and steel products, produces direct reduced iron (DRI), and operates scrap-processing and brokerage businesses. It reports three segments: steel mills, steel products, and raw materials.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $4.290 billion | $4.226 billion | $12.252 billion | $12.983 billion |
| Gross margin | $624.3 million (15%) | $523.8 million (12%) | $1.48 billion (12%) | $1.20 billion (9%) |
| Earnings before tax and noncontrolling interests | $426.3 million | $354.3 million | $938.7 million | $689.5 million |
| Net earnings attributable to Nucor stockholders | $270.0 million | $227.1 million | $574.6 million | $419.7 million |
| Diluted earnings per share | $0.84 | $0.71 | $1.79 | $1.30 |
- Q3 sales rose 2% year over year: average selling price per ton increased 2% to $729, while outside shipments were flat at 5.889 million tons. Nine-month sales fell 6% as average price per ton declined 10% to $662, partly offset by a 5% increase in shipments.
- Steel mills pretax earnings increased to $593.1 million in Q3 from $260.8 million; nine-month earnings rose to $1.404 billion from $676.4 million. Steel products pretax earnings fell to $72.6 million in Q3 from $96.2 million; nine-month earnings were $197.9 million versus $199.3 million. Raw materials posted Q3 pretax earnings of $14.3 million versus a $43.2 million loss, but a nine-month loss of $76.2 million versus $122.8 million.
- Q3 gross margin improved on higher selling prices and lower raw-material costs. Steel-mill scrap and scrap-substitute cost per ton was $252, down 4% year over year. Nine-month margins benefited from lower input and energy costs and increased steel-mill volumes, but included a $105.8 million LIFO charge versus a $249.0 million credit a year earlier. Q3 included a $59.3 million LIFO charge versus a $137.0 million credit.
- Marketing, administrative and other expenses included $33.7 million of legal-settlement charges in Q3. The filing also reports a $11.1 million net benefit from fair-value adjustments, primarily related to gaining control of a former joint venture. Equity-method earnings were $14.2 million in Q3 and $30.2 million year to date, substantially above prior-year amounts.
Cash flow, balance sheet and liquidity
- Cash provided by operations for the first nine months was $1.172 billion, down 33% from $1.757 billion. Working-capital changes used $101.1 million, compared with $720.5 million provided in the prior-year period; higher receivables and inventory were key factors.
- Investing activities used $945.5 million, including $650 million in purchases of short-term investments and $327.4 million of capital expenditures. Financing activities used $472.2 million, including $360.7 million of dividends and $86.8 million of distributions to noncontrolling interests.
- At October 1, cash and cash equivalents were $1.705 billion and short-term investments were $650 million. Total debt was approximately $4.368 billion by balance-sheet carrying value ($29.8 million short-term and $4.338 billion long-term). The current ratio was 3.5, compared with 4.2 at year-end 2015.
- Nucor reported a 35% funded-debt-to-total-capital ratio, no borrowings under its amended $1.5 billion credit facility, and compliance with its covenants. Management said available funding sources should cover existing-operation capital and working-capital needs for at least 24 months. The quarterly dividend was $0.375 per share.
- 2016 capital expenditures were expected to be approximately $635 million, versus $364.8 million in 2015. Nucor reported $2.35 billion of cash and short-term investments at quarter-end.
Changes, outlook and material items
- Management expected Q4 2016 earnings to decrease notably from Q3, mainly because of lower steel-mill margins, particularly in sheet; lower DRI transfer prices were expected to return raw materials to a loss, and steel products faced typical year-end seasonality.
- Management expected scrap prices to rise modestly in Q4 and anticipated lower sheet pricing and margins, reflecting contract-price timing. Hot-rolled sheet demand had weakened, while cold-rolled and galvanized sheet demand remained robust. Energy, heavy equipment and agricultural markets remained weak; automotive markets remained strong.
- On October 1, Nucor acquired a 49% interest in Encana leasehold interests covering about 54,000 acres, terminated two drilling agreements, and sold its 50% Hunter Ridge interest for $135 million. The revised arrangement gives Nucor discretion over future drilling participation and eliminated $4.85 billion of previously disclosed natural-gas drilling commitments.
- After quarter-end, on October 31, Nucor acquired Independence Tube Corporation for approximately $435 million in cash. It also announced a planned $230 million specialty cold-mill complex at its Arkansas division, expected to operate in about two years.
- Nucor agreed to settle direct-purchaser antitrust claims for $23.4 million without admitting liability; the settlement was subject to court approval. Indirect-purchaser claims remained unresolved, and the company said it could not estimate potential exposure. Accrued environmental costs were $21.2 million.
- Management identified risks including steel pricing and demand, imports and trade policy, raw-material and energy costs, industry overcapacity and cyclicality, foreign exchange, safety, and potential impairments. It noted possible further impairment of the Duferdofin Nucor investment and natural-gas well assets if market conditions or estimates worsen.
Most important facts for investors to verify
- Whether Q4 margin deterioration, especially in sheet steel and DRI, matched management’s stated outlook.
- How working-capital demands and operating cash flow developed after the year-to-date decline.
- The earnings and cash-flow contribution, acquisition accounting and integration costs of Independence Tube.
- Final court approval and payment of the $23.4 million direct-purchaser settlement, and developments in the unresolved indirect-purchaser litigation.
- Whether weak European steel and natural-gas markets triggered impairment charges on equity investments or producing wells.
- Execution and returns on the planned capital program, including the Arkansas cold-mill project and expected 2016 capital expenditures.