Nucor Corporation — Q3 2011 Form 10-Q
Reporting period: 13 weeks ended October 1, 2011; year-to-date figures cover 39 weeks. Comparatives are the periods ended October 2, 2010. Financial statements are unaudited.
Business context
Nucor manufactures steel and steel products, produces direct reduced iron (DRI), and operates scrap processing and brokerage businesses. It reports steel mills, steel products, and raw materials segments. Average facility utilization in the first nine months was 75%, 57%, and 72%, respectively, versus 71%, 54%, and 71% a year earlier.
Financial performance and position
- Revenue: Q3 net sales were $5.252 billion, up 27% year over year; average selling price per ton rose 24% and shipments to outside customers increased 3%. Nine-month sales were $15.194 billion, up 27%, with average price per ton up 22% and outside shipments up 4%.
- Earnings: Q3 net earnings attributable to Nucor stockholders were $181.5 million, or $0.57 per diluted share, versus $23.5 million, or $0.07, a year earlier. Nine-month attributable earnings were $641.1 million, or $2.02 per diluted share, versus $145.5 million, or $0.46. Q3 consolidated net earnings, including noncontrolling interests, were $200.1 million.
- Margins: Gross margin was $475.9 million (9%) in Q3 versus $190.3 million (5%); for nine months it was $1.58 billion (10%) versus $711.1 million (6%). Nucor cited higher selling prices and expanded metal margins, partly offset by higher scrap costs, LIFO charges, and start-up costs.
- Segment results: Q3 pretax earnings were $436.2 million for steel mills and $22.5 million for raw materials; steel products recorded a $10.5 million loss. Nine-month results were $1.376 billion, $131.8 million, and a $56.4 million loss, respectively.
- Cash flow: Operating cash flow was $673.1 million for the first nine months, compared with $216.2 million. Capital expenditures were $318.3 million; investing cash outflow was $524.8 million and financing cash outflow was $369.8 million. Cash and cash equivalents declined by $224.0 million to $1.101 billion.
- Liquidity: Cash and short-term investments totaled $2.414 billion; a further $607.7 million was restricted for the Louisiana DRI project. Current assets were $6.894 billion and current liabilities $2.358 billion; management reported a 2.9 current ratio, down from 3.9 at year-end 2010, partly reflecting a $350 million debt maturity reclassified as current.
- Debt: Total reported debt was approximately $4.288 billion, including $350 million due within one year. The $1.3 billion revolving credit facility was undrawn. Funded debt to total capitalization was 36%, against a 60% covenant limit; 79% of long-term debt matures in 2017 or later.
- Shareholder returns: Nine-month cash dividends were $346.0 million. The declared quarterly dividend was $0.3625 per share, Nucor’s 154th consecutive quarterly dividend.
Changes versus prior period
Year-over-year sales and earnings improved substantially, driven mainly by higher prices, increased shipment volumes, and improved metal margins. Steel mills generated the largest earnings increase; steel products remained loss-making despite narrower losses. Q3 steel-mill pretax earnings fell from the second quarter as sheet prices and margins weakened. In Q3, average sheet-mill selling price was down 11% from the prior quarter, amid new domestic supply and increased imports.
Operating cash flow rose with higher earnings, but working capital absorbed cash as receivables and inventories increased. Inventory was up 41% and receivables up 28% from year-end. Total debt was broadly lower than year-end, although the upcoming $350 million maturity increased current liabilities.
Outlook, commentary, and risks
- Management expected Q4 earnings to be below Q3, with further sheet-market margin compression and a smaller compression in plate margins. Expected lower scrap costs were expected to cushion the pressure.
- Residential and non-residential construction remained at recessionary demand levels, with only slight improvement expected through year-end. Automotive, energy, heavy equipment, and general manufacturing were comparatively stronger but showed little improvement from the first half.
- Management projected approximately $475 million of 2011 capital expenditures. Funds from operations, cash, short-term investments, and available borrowing were expected to cover operating and capital needs for at least 24 months.
- The Louisiana DRI facility was under construction, with start-up expected in mid-2013. Restricted funds are designated to help finance the project.
- Notable Q3 items included a $13.9 million impairment charge for a dust-recycling project and a valuation allowance on a deferred tax asset tied to Italian tax-loss carryforwards at the Duferdofin Nucor joint venture. The Q3 tax rate was favorably affected by recognition of a realizable state tax credit.
- Risks include steel-price and raw-material volatility, energy costs, weak construction demand, imports and excess global capacity, cyclicality, currency movements, environmental regulation, and potential asset or investment impairments. Nucor also faces antitrust class-action litigation relating to alleged conduct from 2005 through 2008; the company disputes the claims and says it cannot estimate potential exposure.
- Environmental compliance accruals were $33.2 million. Management stated it did not believe existing claims or proceedings were likely to have a material adverse effect, while noting estimation uncertainties.
Important facts for investors to verify
- Whether falling sheet and plate prices, imports, and lower scrap costs produce the margin trajectory assumed in Q4 guidance.
- Working-capital needs and cash conversion as inventories and receivables rise, alongside planned capital spending for the DRI project.
- The $350 million debt maturity, refinancing or repayment plans, and continued access to the undrawn credit facility.
- Performance and valuation assumptions for Duferdofin Nucor and other equity investments, including the Italian tax-asset allowance and litigation exposure.
- Progress, cost, and timing of the Louisiana DRI facility, and the effect of start-up costs on future results.