Nucor Corporation — Q2 2016 Form 10-Q
Business context and reporting period. Nucor manufactures steel and steel products and produces and processes raw materials. This unaudited quarterly report covers the 13 weeks ended July 2, 2016; six-month comparisons are for the 26 weeks ended that date versus July 4, 2015.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $4.246 billion | $4.358 billion | $7.961 billion | $8.757 billion |
| Gross margin | $566.3 million (13%) | $386.3 million (9%) | $853.2 million (11%) | $674.6 million (8%) |
| Earnings before tax and noncontrolling interests | $370.9 million | $216.2 million | $512.4 million | $335.3 million |
| Net earnings attributable to Nucor stockholders | $233.8 million | $124.8 million | $304.5 million | $192.6 million |
| Diluted earnings per share | $0.73 | $0.39 | $0.95 | $0.60 |
- Q2 sales fell 3% year over year as average selling price per ton declined 9% to $658; outside-customer tons increased 7%. For the first half, sales declined 9%, average price fell 16% to $632, and outside-customer tons rose 8%.
- Steel mills drove the earnings improvement: Q2 segment pretax earnings were $530.7 million versus $198.5 million. Steel products earned $82.9 million versus $70.6 million; raw materials recorded a $27.2 million loss versus a $38.1 million loss.
- Q2 steel mills operating rate was 83%, compared with 73% a year earlier. Average scrap and scrap-substitute cost per ton used declined 14% year over year in Q2 and 28% in the first half.
- First-half cash provided by operations was $857.0 million, down from $1.195 billion. Capital expenditures were $227.3 million; operating cash flow less capital expenditures was approximately $629.6 million.
- At July 2, cash and cash equivalents were $1.781 billion and short-term investments were $550 million. Current assets were $6.538 billion versus current liabilities of $1.936 billion; the reported current ratio was 3.4, down from 4.2 at year-end 2015.
- Total debt carrying value was approximately $4.358 billion: $20.0 million short-term and $4.338 billion long-term. Funded debt to total capitalization was 35%; no borrowings were outstanding under the $1.5 billion credit facility. Debt fair value was approximately $4.72 billion.
- Total assets were $14.925 billion and total equity was $7.921 billion. Nucor declared dividends of $0.375 per share for Q2; first-half cash dividends paid were $240.3 million.
Material changes and management commentary
- Despite lower sales prices and revenue, gross margin and earnings increased, supported by higher shipment volumes, lower input and energy costs, and improved production efficiency. Q2 gross margin also rose from $286.9 million (8%) in Q1 2016 as volumes and prices improved.
- Steel mills outside shipments increased 11% in Q2 and 14% in the first half. Management attributed market-share and shipment gains partly to lower imports. Steel products revenue declined 9% in Q2 and 10% in the first half; raw-materials revenue fell 18% and 30%, respectively, largely due to lower prices and weaker brokerage and scrap-processing volumes.
- First-half operating cash flow was lower chiefly because working-capital movements generated substantially less cash than in 2015; receivables and inventories increased, partly offset by higher payables. Investing cash use rose $480.6 million year over year, including increased short-term investment purchases and capital spending.
- Corporate/eliminations pretax loss widened to $215.6 million in Q2 from $14.8 million, and to $332.9 million for the first half from $103.9 million. Management cited the shift from prior-year LIFO credits to current-year charges, higher incentive compensation, and greater intercompany inventory-profit eliminations.
- Q2 included a $19.0 million LIFO charge versus a $95.5 million credit a year earlier; the first-half charge was $46.5 million versus a $112.0 million credit. First-half equity-method earnings included a $5.7 million benefit at Duferdofin Nucor, mostly out of period; management said the adjustment was not material to current or prior periods.
Outlook, risks and contingencies
- Management expected “further strong improvement” in Q3 2016 earnings, primarily from steel mills and sheet mills; it also anticipated significant raw-materials improvement, especially at DRI facilities, and higher downstream-products profitability.
- Management expected further improvement in sheet-steel pricing and gross margins in Q3, noting that contract pricing—about 60% of sheet shipments—lags market movements. It expected scrap prices to begin leveling off in the second half and continued DRI improvement from better iron-unit pricing, lower iron-ore costs and yield gains.
- Full-year 2016 capital expenditures were expected to be approximately $500 million, compared with $364.8 million in 2015. The company expected available operating funds, cash, short-term investments and credit facilities to meet existing-operation capital and working-capital needs for at least 24 months.
- Management forecast a 2016 effective tax rate of approximately 30.2%. It reported $47.6 million of gross unrecognized tax benefits and said up to $9.0 million could decrease within 12 months, substantially all affecting the effective tax rate.
- Key risks include steel-price and import competition, cyclical demand and nonresidential construction, raw-material and energy costs, global excess capacity, foreign exchange, operating interruptions, safety, environmental regulation, and possible impairments. Low natural-gas prices and weak European steel conditions could affect natural-gas assets and equity investments; further impairment of Duferdofin Nucor was considered reasonably possible if performance diverged materially from valuation assumptions.
- Nucor continued to face steel-purchaser antitrust litigation alleging conduct from 2005–2007. The court certified a class only on the conspiracy issue, not impact or damages. Nucor denied the claims, could not estimate exposure, and recorded no reserve. Accrued environmental costs were $20.5 million, with estimation uncertainty related to site conditions, remediation technology and regulation.
- The filing reported no material change in risk factors from the 2015 Form 10-K. Management stated disclosure controls were effective and no materially significant internal-control changes occurred during the quarter.
Important facts for investors to verify
- Whether Q3 steel-price, shipment and margin improvement materialized, particularly given lagging sheet-contract prices and changing import levels.
- Whether higher volumes and lower input costs can offset pricing pressure, LIFO charges and cost increases across the segments.
- Working-capital trends and operating cash generation, including the effect of rising receivables, inventories and accounts payable.
- Progress and returns on the approximately $500 million 2016 capital program, alongside the dividend and authorized share-repurchase program.
- Any changes in the outlook or carrying values for Duferdofin Nucor, Hunter Ridge, and natural-gas well assets, and developments in the antitrust case and tax examinations.