Nucor Corporation — Q2 2010 Form 10-Q
Business context and period. Nucor manufactures steel and steel products and operates scrap and raw-material businesses. This unaudited report covers the 13 weeks and 26 weeks ended July 3, 2010, compared with the periods ended July 4, 2009.
Key financial results
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net sales | $4.196 billion | $2.478 billion | $7.851 billion | $5.132 billion |
| Gross margin | $308.0 million (7%) | $(61.9) million (-2%) | $520.8 million (7%) | $(185.9) million (-4%) |
| Pre-tax earnings (loss) | $155.6 million | $(200.8) million | $219.6 million | $(482.5) million |
| Net earnings (loss) attributable to Nucor stockholders | $91.0 million; $0.29/share | $(133.3) million; $(0.43)/share | $122.0 million; $0.38/share | $(323.0) million; $(1.03)/share |
| Cash from (used in) operating activities | Not separately stated for Q2 | $(293.8) million | $633.0 million |
Q2 sales rose 69% year over year as average selling price per ton increased 25% and shipments to outside customers rose 35%. First-half sales increased 53%, with price per ton up 8% and shipments up 41%. First-half steel-mill utilization was about 72%, versus 46% in 2009; steel-products utilization was 52% versus 47%, and raw-materials utilization was 72% versus 42%.
Q2 gross margin recovery reflected stronger pricing, higher volumes and improved metal margins. Cost pressures and offsets included a $67 million Q2 LIFO charge (versus a $125 million credit in 2009), $43.4 million of start-up costs, and higher scrap costs. First-half LIFO charge was $91 million versus a $230 million credit in 2009. Energy cost per ton declined on improved utilization and efficiency.
Balance sheet, liquidity and cash flow
- At July 3, cash and cash equivalents were $801.5 million and short-term investments were $340.5 million, together $1.142 billion, down from $2.242 billion at year-end 2009.
- Total debt was approximately $3.083 billion on the balance sheet; long-term debt was $3.080 billion, with no long-term maturities until 2012. The $1.3 billion revolving credit facility was undrawn. Funded debt to total capitalization was 29%, against a 60% covenant limit.
- Current assets were $5.187 billion and current liabilities $1.512 billion; management reported a current ratio of 3.4, down from 4.2 at year-end.
- First-half operating cash use of $293.8 million reflected working-capital investment, including a $628.9 million inventory cash outflow and $290.5 million receivables outflow. Capital expenditures were $163.2 million. Investing cash use was $680.4 million, including $402.4 million invested in or advanced to affiliates. Financing cash use was $244.5 million, including $228.5 million in dividends.
- Management projected 2010 capital expenditures of approximately $375 million and said available operating funds, cash, investments and borrowing capacity should meet existing-operation capital and working-capital needs for at least 24 months.
Outlook, risks and unusual items
- Management said second-quarter operating results excluding LIFO improved over Q1, but continuation of the improvement was uncertain. It cited a broad slowdown and economic uncertainty, with residential and non-residential construction markets particularly weak, especially for downstream businesses.
- Management cited market-share gains, a flexible low-cost operating model and financial strength as advantages, but results remain exposed to steel prices, scrap and other input costs, energy prices, demand, imports, currency movements, trade policy, regulation, safety and the cyclical global steel market.
- Potential goodwill and intangible-asset impairment was identified if economic conditions or results at the Buildings Group or Steel Trading units fail to improve as expected. Duferdofin Nucor’s valuation also remains sensitive to projected revenue and discount-rate assumptions; no impairment was recorded as of July 3.
- Nucor faces antitrust class-action litigation alleging anticompetitive conduct by steel producers. The company said it believes the claims lack merit, but could not predict the outcome or estimate potential exposure. Accrued environmental costs were $36.5 million.
- Additional contractual obligations reported totaled $1.839 billion, including $1.173 billion of additional raw-material purchase commitments. Management noted that estimated obligations can change with pricing under minimum-volume contracts. A seven-year natural-gas well-development agreement began in June 2010.
- Nucor used commodity and foreign-exchange derivatives to manage certain exposures. At July 3, natural-gas swaps covered 17.7 million MMBTUs through December 2012. The filing reports $81.1 million of accumulated unrealized, net-of-tax hedge losses.
Important facts for investors to verify
- Whether the improvement in steel pricing, shipments and margins continued after the quarter, given management’s warning of a slowdown and uncertain construction demand.
- How inventory levels, receivables and operating cash flow evolve after the substantial first-half working-capital use.
- Whether the $91 million first-half LIFO charge and new-facility start-up costs differ materially from management’s estimates or expectations.
- Performance and valuation assumptions for Duferdofin Nucor, NuMit/Steel Technologies, Buildings Group and Steel Trading, including impairment indicators and affiliate funding exposure.
- Developments in the antitrust litigation, environmental obligations and raw-material purchase commitments, and any effect on cash needs or reported earnings.