Nucor Corporation — Q2 2012 Form 10-Q
Business context and period. Nucor manufactures steel and steel products and processes and brokers raw materials. This unaudited report covers the 13 weeks and 26 weeks ended June 30, 2012, compared with periods ended July 2, 2011. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $5.104 billion | $5.108 billion | $10.177 billion | $9.942 billion |
| Gross margin | $399.9 million (8%) | $649.5 million (13%) | $780.5 million (8%) | $1.07 billion (11%) |
| Earnings before tax and noncontrolling interests | $216.2 million | $477.3 million | $441.3 million | $743.5 million |
| Net earnings attributable to Nucor stockholders | $112.3 million | $299.8 million | $257.4 million | $459.6 million |
| Diluted earnings per share | $0.35 | $0.94 | $0.81 | $1.44 |
| Cash provided by operating activities | Not separately provided for the quarter | $446.5 million | $292.7 million |
Q2 sales were essentially flat year over year: average selling price per ton fell 6%, while external tons sold rose 6%. First-half sales increased 2%, reflecting a 2% increase in external tons; average price per ton was unchanged. Q2 earnings attributable to Nucor stockholders fell about 63%; first-half earnings fell about 44%.
- Margins and segments: Steel mills pretax earnings declined 48% in Q2 and 31% in the first half, pressured by lower metal margins, import competition, new domestic supply and uncertainty. Steel products returned to quarterly profitability for the first time since 2008, though its first-half pretax loss was $23.8 million. Raw materials pretax earnings declined to $15.1 million in Q2 and $29.7 million in the first half, largely due to scrap-processing margin compression.
- Cash flow and investment: First-half operating cash flow increased 53% year over year. Capital expenditures were $383.4 million, versus $212.9 million; investing cash outflow was $266.7 million, including $746.4 million for acquisitions. Financing cash outflow was $269.6 million, including $232.8 million of dividends.
- Liquidity and debt: At June 30, cash and cash equivalents were $1.112 billion and short-term investments were $569.4 million; restricted cash and investments were a further $491.6 million, largely designated for the Louisiana DRI project. The current ratio was 2.4, down from 2.8 at year-end 2011. Debt, including short-term debt and current maturities, totaled approximately $4.287 billion; $900 million of long-term debt was due within one year. The $1.5 billion revolving credit facility was undrawn. Funded debt to total capitalization was 35%, and the company reported compliance with its covenants.
- Other metrics: The board declared a quarterly dividend of $0.365 per share. The company reported an expected full-year 2012 effective tax rate of approximately 31.8%. Steel mills, steel products and raw-materials utilization averaged 77%, 59% and 67%, respectively, in the first half.
Material changes and unusual items
- Nucor acquired Skyline Steel LLC on June 20 for approximately $683.5 million in cash. Skyline serves infrastructure and construction markets and is included in the steel mills segment. The acquisition added preliminary goodwill of $143.2 million and identifiable intangible assets of $219.1 million. Q2 results included $8.5 million of acquisition-related purchase accounting and intercompany-profit elimination charges.
- Nucor recorded a $30.0 million noncash impairment of its Duferdofin Nucor equity investment, citing weak European steel demand, economic and political turmoil, and below-budget performance. Further impairment was identified as reasonably possible if near-term performance or valuation assumptions change.
- Q2 steel mills average selling price per ton declined 9% year over year, while scrap and scrap-substitute cost per ton declined 4%. The faster selling-price decline reduced metal margins. A $14.5 million LIFO credit benefited Q2 gross margin; first-half 2012 had no LIFO charge, compared with a $63.0 million charge in first-half 2011.
- Cash and short-term investments declined from year-end, principally as short-term investments were sold to help fund acquisitions. Receivables and inventories rose 12% and 21%, respectively, from year-end, partly due to Skyline, higher sales prices and increased shipments.
Outlook, commentary and risks
Management expected a modest reduction in third-quarter earnings, excluding the Duferdofin impairment and Skyline-related charges. It cited slow domestic growth, global economic uncertainty and persistently challenging construction markets. Potential offsets included lower scrap costs in transit and inventory, possible stabilization in scrap prices, reduced sheet-steel imports and lower operating rates among some newer domestic producers. Automotive, heavy equipment, energy and general manufacturing remained comparatively improved markets.
Management projected approximately $1.0 billion of capital expenditures for 2012, including approximately $500 million for the Louisiana DRI facility; construction was expected to finish and start-up operations to begin in mid-2013. Weather and low Mississippi River water levels could delay construction. A Nucor-Yamato project to expand hot-rolled sheet-piling capacity, estimated at $115 million, was expected to be completed in early 2014. Management said available funds and borrowing capacity should meet existing operating, working-capital and capital-spending needs for at least 24 months.
- Key exposures include steel selling prices; scrap, iron ore, energy and other input costs; demand, imports and competition; construction-market weakness; global economic conditions; currency movements; environmental regulation; and execution of capital projects and acquisitions.
- For the Duferdofin guarantee, Nucor guaranteed its 50% ownership share of borrowings under a facility with €106.6 million outstanding; no liability was recorded. Nucor also reported lending and credit exposure to Steel Technologies, including $87.5 million outstanding under a $130 million line of credit.
- Environmental liabilities accrued were $29.5 million, with estimates subject to uncertainty. Nucor was a defendant in steel-industry antitrust litigation and said it could not estimate potential exposure. Management did not expect existing claims or proceedings to materially adversely affect the financial statements. A civil penalty related to an Ohio facility permitting matter was being satisfied through payments and a future credit for testing and monitoring.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material changes to the risk factors in the 2011 Form 10-K.
Important facts for investors to verify
- Whether steel selling prices, metal margins and segment profitability stabilized after the Q2 deterioration, and whether management’s Q3 outlook was borne out.
- Skyline’s subsequent contribution to sales, earnings, cash flow and integration costs, and any changes to the preliminary purchase-price allocation.
- Duferdofin Nucor’s operating performance and valuation assumptions, including whether additional impairment was required.
- Actual 2012 capital spending and timing, cost and start-up progress for the Louisiana DRI facility and the sheet-piling expansion.
- Working-capital requirements, the $900 million current debt maturity, liquidity and covenant headroom, and any developments in litigation, environmental matters or the Duferdofin guarantee.