Nucor Corporation — Q2 2013 Form 10-Q
Reporting period: Second quarter (13 weeks) ended June 29, 2013; six-month figures cover 26 weeks. Unaudited results. Nucor manufactures steel and steel products and operates steel mills, steel products and raw materials segments.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $4,665.6 million | $5,104.2 million | $9,216.4 million | $10,176.8 million |
| Gross margin | $313.1 million (7%) | $399.9 million (8%) | $616.3 million (7%) | $780.5 million (8%) |
| Net earnings attributable to Nucor stockholders | $85.1 million | $112.3 million | $169.9 million | $257.4 million |
| Diluted earnings per share | $0.27 | $0.35 | $0.53 | $0.81 |
| Cash provided by operating activities | — | $485.0 million | $446.5 million |
Net sales fell 9% in both comparisons. In Q2, average sales price per ton declined 7% and outside-customer shipments declined 1%; in the first half, price fell 7% and shipments declined 3%. Steel mills drove the sales decline: segment sales fell 12% in both periods. First-half average facility utilization was 73% for steel mills, 56% for steel products and 61% for raw materials.
Gross margins contracted as selling prices and metal margins declined. Steel mills scrap and scrap-substitute costs per ton were lower, but not enough to offset lower selling prices and margins. First-half 2013 gross margin included an $18.0 million LIFO charge; Q2 had no LIFO charge or credit. Q2 2012 included a $30.0 million impairment charge for the Duferdofin Nucor investment; no such charge was recorded in 2013. Reported operating income is not separately presented in the provided filing text.
Liquidity, debt and cash flow
- At June 29, 2013, cash and cash equivalents were $630.5 million and short-term investments were $47.7 million; together, $678.1 million. An additional $71.1 million of restricted cash was designated for the Louisiana DRI facility.
- Current assets were $5.18 billion and current liabilities $1.74 billion; the reported current ratio was 3.0, versus 2.8 at year-end 2012.
- Total reported debt was approximately $3.41 billion: $31.7 million short-term and $3.38 billion long-term. Nucor repaid $250.0 million of long-term debt during the first half. Funded debt to total capitalization was 31%; the $1.5 billion revolving credit facility was undrawn.
- Operating cash flow was $485.0 million; capital expenditures were $621.3 million, making operating cash flow less capital expenditures a net outflow. Investing activities used $366.0 million and financing activities used $538.9 million. Cash and cash equivalents decreased $422.4 million from year-end.
- Capital expenditures were projected at approximately $1.1 billion for 2013. Subsequent to quarter-end, Nucor issued $500 million of 4.00% notes due 2023 and $500 million of 5.20% notes due 2043, receiving net proceeds of $991.5 million.
Material changes and management commentary
- Steel mills earnings before tax fell to $237.1 million in Q2 from $336.5 million, and to $509.4 million for the first half from $726.2 million. Management cited lower volume, selling prices and metal margins, higher per-unit energy costs from lower production, imports and excess domestic capacity.
- Steel products segment earnings improved to $32.1 million in Q2 from $9.2 million; first-half earnings were $20.1 million versus a $23.8 million loss. Rebar fabrication initiatives and improved joist, decking and cold-finish results helped, while nonresidential construction remained weak.
- Raw materials first-half earnings declined to $13.8 million from $29.7 million, reflecting difficult scrap-processing conditions and an unplanned 18-day Trinidad DRI outage in Q1. Q2 performance improved from Q1 as the facility returned to normal operations.
- Construction of the 2.5-million-ton Louisiana DRI facility was nearing completion, with start-up expected late in Q3 2013 after weather-related delay. First-half capital spending rose 62% year over year, largely reflecting the DRI project and natural-gas drilling program.
- Management expected modestly higher Q3 earnings, citing a gradual recovery in sheet-steel pricing and margins, continued improvement in downstream businesses, and benefits from the second-quarter bottoming of scrap prices. Automotive and energy markets were strong; construction remained challenged. The filing gives no numerical earnings guidance.
- Management estimated a full-year 2013 effective tax rate of approximately 31%. The Q2 effective rate was 30.2%, versus 35.4% in 2012.
Risks, contingencies and unusual items
- Key exposures include steel prices and demand, imports and competition, scrap and other raw-material costs, energy prices, cyclicality, global steel overcapacity, foreign exchange, environmental regulation, and potential impairment of assets or investments.
- European steel conditions remained challenging. Nucor said changes in Duferdofin Nucor’s near-term performance assumptions could lead to further impairment of the investment.
- Nucor is a co-defendant in steel-industry antitrust class actions alleging conduct from 2005–2007. It disputes the claims but said it could not predict the outcome or estimate potential exposure.
- Accrued environmental costs were $24.7 million, undiscounted; estimates are subject to uncertainty. Nucor said other ordinary-course proceedings were not expected to have a material adverse effect.
- Nucor guarantees 50% of certain Duferdofin Nucor borrowings; no guarantee liability was recorded. A 50% guarantee exposure, if called, could arise upon the affiliate’s failure to pay covered amounts.
- The company reported compliance with its credit-facility covenants and effective disclosure controls. Risk factors were reported as unchanged from the 2012 Form 10-K.
Investor verification priorities
- Confirm the drivers and durability of steel pricing, metal margins, volumes and the projected Q3 earnings improvement.
- Track Louisiana DRI start-up timing, total project spending and expected operating contribution.
- Assess cash generation against projected capital expenditures, dividends and the subsequent $1.0 billion debt issuance.
- Monitor Duferdofin Nucor’s performance and valuation assumptions, including possible impairment and the related guarantee exposure.
- Review developments in the antitrust litigation and environmental obligations, for which the filing does not provide a clear estimate of potential litigation exposure.