Nucor Corporation — Q3 2010 Form 10-Q
Business context and period: Steel and steel-products manufacturer and scrap processor, reporting the 13 weeks ended October 2, 2010, and the first 39 weeks of 2010. Comparisons are with the corresponding 2009 periods unless stated otherwise. Financial statements are unaudited.
Financial performance
| Metric | Q3 2010 | First nine months 2010 |
|---|---|---|
| Net sales | $4.14 billion, up 33% | $11.99 billion, up 45% |
| Gross margin | $190.3 million (5%); prior year $119.2 million (4%) | $711.1 million (6%); prior year loss of $66.7 million (-1%) |
| Net earnings attributable to Nucor stockholders | $23.5 million; $0.07 per diluted share | $145.5 million; $0.46 per diluted share |
| Cash from operations | Not provided for the quarter | $216.2 million; prior year $950.3 million |
| Capital expenditures | Not provided for the quarter | $238.3 million; prior year $316.0 million |
Consolidated net earnings, including earnings attributable to noncontrolling interests, were $50.0 million for Q3 and $197.4 million for the first nine months. The comparable periods in 2009 recorded consolidated losses of $5.3 million and $323.6 million, respectively.
- Q3 shipments to outside customers rose 10% and average selling price per ton rose 20% to $735. For the nine months, shipments rose 29% and average price rose 13% to $719.
- Steel mills led the sales recovery: segment sales increased 35% in Q3 and 61% year to date. Steel products sales rose 17% in Q3 but were nearly flat year to date; raw-materials sales rose 60% and 70%, respectively.
- Steel-products segment reported pre-tax losses of $40.8 million in Q3 and $143.8 million year to date. Steel mills reported pre-tax earnings of $231.8 million and $652.5 million, respectively.
- Q3 gross margin benefited from improved metal margins and higher volumes, but included a $50 million LIFO charge versus a $120 million LIFO credit in Q3 2009. The nine-month LIFO charge was $141 million versus a $350 million credit in 2009.
- Pre-operating and start-up costs were $41.9 million in Q3 and $135.8 million year to date, mainly related to the Memphis SBQ mill and Decatur galvanizing line.
Liquidity, debt and capital
- At October 2, cash and cash equivalents were $1.85 billion and short-term investments were $156.5 million, together about $2.01 billion. Current assets were $5.76 billion and current liabilities $1.48 billion; management reported a 3.9 current ratio.
- Long-term debt was $3.68 billion, with no long-term debt due within one year; short-term debt was $3.1 million. Nucor issued $600 million of 4.125% unsecured notes due 2022 in September.
- The $1.3 billion revolving credit facility was undrawn. Funded debt to total capitalization was 33%, below the facility’s 60% covenant limit. Management reported no long-term debt maturities until 2012 and said 75% of long-term debt matures in 2017 or later.
- Operating cash flow fell from $950.3 million to $216.2 million, as higher earnings were offset by working-capital investment, particularly receivables and inventories. Cash declined by $166.9 million during the nine months to $1.85 billion.
- Management projected 2010 capital expenditures of approximately $360 million and said available funds and borrowing capacity should cover existing-operation capital and working-capital needs for at least 24 months. After quarter-end, Nucor received about $345 million in federal tax refunds recorded as a current receivable at quarter-end.
- The quarterly dividend was $0.36 per share, declared as the company’s 150th consecutive quarterly cash dividend.
Outlook, risks and notable items
- Management warned that operating results excluding LIFO weakened from Q2 and that Q4 could be the most challenging quarter of 2010. It cited lower realized steel selling prices, broad-based slowing, weak residential and non-residential construction demand, deteriorating rebar pricing, and oversupply and new capacity in sheet and plate markets.
- Management remained confident in Nucor’s longer-term prospects, citing market-share gains, a variable-cost structure, financial strength and the ability to increase production as demand improves.
- Nucor selected St. James Parish, Louisiana, for a planned $750 million, 2.5-million-ton-per-year direct-reduced-iron facility, subject to environmental permits. The company anticipated issuing about $600 million in Gulf Zone Opportunity Bonds to partially fund the project. A seven-year natural-gas drilling arrangement is intended to offset future gas-price exposure at the facility.
- Key exposures include cyclical steel demand and prices, scrap and other raw-material costs, energy prices, imports and competition, construction activity, global economic conditions, foreign exchange, environmental regulation, and possible impairment of inventory, investments or long-lived assets.
- Goodwill impairment was not recorded, but management cautioned that continued weak performance or failure of economic conditions to improve could require impairment charges, particularly for the Buildings Group and Steel Trading reporting units.
- Nucor guaranteed 50% of specified Duferdofin Nucor credit facilities; the guaranteed share of amounts outstanding was €38.3 million ($52.6 million) at quarter-end. No liability was recorded. It also had a $40 million note receivable and a $70 million outstanding line of credit to Steel Technologies.
- Environmental costs accrued were $36.3 million. Nucor was defending steel-industry antitrust class actions and said it could not predict the outcome or estimate potential exposure. An Ohio environmental matter was expected to result in a civil penalty, which management did not believe would materially affect financial condition or results.
Important facts for investors to verify
- Whether the demand slowdown and weak construction markets further pressure prices, shipments and segment profitability in Q4.
- How much of reported margin improvement reflects underlying operations versus significant year-over-year changes in LIFO charges and credits.
- Whether working-capital needs continue to constrain operating cash flow as sales and inventories change.
- Project funding, permitting, costs and execution for the Louisiana DRI facility, and related natural-gas exposure.
- Potential exposure from the Duferdofin guarantee, equity-investment impairment, antitrust litigation and environmental matters.