Nucor Corporation — Q2 2015 Form 10-Q
Business context and period: Nucor manufactures steel and steel products, produces direct reduced iron (DRI), and processes and brokers metals. It reports steel mills, steel products, and raw materials segments. This unaudited report covers the 13 weeks ended July 4, 2015, and the six months ended that date; comparisons are with the corresponding 2014 periods. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $4.358B | $5.291B | $8.757B | $10.400B |
| Earnings before tax and noncontrolling interests | $216.2M | $241.9M | $335.3M | $449.4M |
| Net earnings attributable to Nucor stockholders | $124.8M | $147.0M | $192.6M | $258.1M |
| Diluted earnings per share | $0.39 | $0.46 | $0.60 | $0.80 |
| Gross margin | $386.3M (9%) | $415.9M (8%) | $674.6M (8%) | $793.1M (8%) |
- Q2 sales fell 18% year over year; average selling price per ton declined 13% to $720 and outside shipments declined 5% to 6.055 million tons. First-half sales fell 16%, with average price down 10% to $749 and outside shipments down 7%.
- Steel mills sales fell 19% in Q2 and 17% in the first half, principally reflecting lower prices and elevated imports. Steel products sales decreased 2% in Q2 but increased 1% in the first half. Raw materials sales fell 36% and 34%, respectively, mainly on lower brokerage and scrap-processing volumes and prices.
- Steel mills pretax earnings declined to $198.5M in Q2 from $368.1M; steel products pretax earnings rose to $70.6M from $42.6M. Raw materials recorded pretax losses of $38.1M versus $9.6M. For the first half, the same segment pattern persisted: steel mills earnings were $415.6M, steel products $103.1M, and raw materials lost $79.6M.
- Steel scrap and scrap-substitute costs per ton fell 29% year over year in Q2, but lower steel selling prices and volumes weighed on steel mill metal margins. A $95.5M Q2 LIFO credit benefited gross margin; the first-half LIFO credit was $112.0M, versus a $14.5M charge in the prior-year half.
- Q2 effective tax rate was 26.3%, versus 31.0%, including a $9.3M state tax-credit benefit. Management expected a 29.2% full-year 2015 tax rate. Net earnings attributable to Nucor stockholders were 3% of sales in Q2 and 2% for the first half; first-half return on average stockholders’ equity was approximately 5%, versus 7%.
Cash flow, liquidity and debt
- First-half cash provided by operating activities was $1.195B, up from $443.3M. The improvement was driven largely by working-capital changes, including lower receivables and inventories and reduced federal income taxes, partly offset by cash used for accounts payable and accrued compensation.
- Cash used in investing activities was $191.4M, versus $598.4M, including capital expenditures of $175.3M versus $446.8M. Cash used in financing was $450.7M, including $239.5M of dividends and repayment of short-term debt.
- Cash and cash equivalents were $1.576B at July 4, 2015; short-term investments were $112.2M. Together they totaled approximately $1.69B. The current ratio was 3.6, up from 3.1 at year-end 2014.
- Debt carrying amounts totaled approximately $4.412B: $42.7M short-term debt, $8.3M long-term debt due within one year, and $4.361B long-term debt. Funded debt to total capitalization was 36%; the $1.5B revolving credit facility was undrawn, with no borrowings outstanding. Nucor reported compliance with its 60% funded-debt covenant.
- Cash and short-term debt changes included repayment of approximately $151M in commercial paper outstanding at year-end 2014. The quarterly dividend declared was $0.3725 per share, Nucor’s 169th consecutive quarterly cash dividend.
Outlook, commentary and risks
- Management expected Q3 2015 earnings to improve from Q2, mainly from better steel mills performance and lower average inventory costs; it also expected improved downstream products performance and raw materials results comparable to Q2.
- Management identified automotive and construction as the strongest end markets, while expecting nonresidential construction growth in 2015 to be slower than in 2014. It expected some downward pressure on scrap prices as Q3 began.
- Steel imports accounted for an estimated 32% of the finished steel market in the first half of 2015, compared with 27% in the prior-year period. Management cited imports and overseas steel overcapacity as major challenges.
- Nucor Steel Louisiana resumed operations late in Q1 after process-gas-heater repairs and produced approximately 540,000 tons of DRI in Q2. It nevertheless recorded an approximately $64M operating loss for the first half, including a $44M loss in Q1 and a $20M loss in Q2. Management expected the facility to work through higher-cost iron ore purchased in 2014 by the end of Q3.
- Projected 2015 capital expenditures were approximately $450M, compared with $568.9M in 2014. Management said operating cash flow, cash, investments, and available borrowing capacity should meet existing-operation capital and working-capital needs for at least 24 months.
- Principal stated risks include steel-price and import competition, raw-material and energy costs, demand and industry cyclicality, foreign trade policy and currency movements, equipment interruptions, environmental regulation, safety, and possible impairment of investments or long-lived assets. Management reported no material changes to the risk factors in the 2014 Form 10-K.
Contingencies and unusual items
- Nucor disclosed an appealed MM Steel antitrust judgment of $160.8M against defendants jointly and severally. Following other parties’ settlements, Nucor estimated its practical exposure at approximately $40M, but recorded no reserve because it believed affirmation was not probable; the ultimate outcome remained uncertain.
- A separate steel-purchaser antitrust class action remained pending. Nucor said it could not estimate its potential exposure and had recorded no reserve.
- Accrued environmental costs were $22.0M, undiscounted. These estimates involve uncertainty from site conditions, remediation technology, and changing regulations.
- Nucor’s $371.4M equity investment in Duferdofin Nucor remained exposed to possible impairment amid difficult European steel-market conditions. Nucor also guaranteed 50% of certain affiliate borrowings; no guarantee liability was recorded. The filing gives the maximum borrowing capacity and amounts outstanding, but any payment obligation depends on the affiliate’s failure to pay.
- The two remaining iron-ore storage domes at the Louisiana site had a carrying value of approximately $19.8M. Nucor was assessing their use and expected to finalize its assessment by year-end; decisions could affect asset carrying values and insurance proceeds. Approximately $84.1M of site development assets were also subject to potential impairment if planned development changed.
Important facts for investors to verify
- Whether Q3 improvement materialized and whether steel selling prices, shipments, imports, and scrap costs supported steel mill margins.
- How much of reported gross margin and operating cash flow depended on the LIFO credit and working-capital movements, and how those effects compare with recurring performance.
- Progress in reducing Louisiana DRI losses, working through higher-cost ore, and resolving the storage-dome and development-asset assessments.
- Developments in the MM Steel appeal and class-action litigation, as well as potential impairment or guarantee exposure tied to Duferdofin Nucor.
- Capital spending versus the approximately $450M plan, liquidity and covenant headroom, and the sustainability of dividends under changing steel-market conditions.