Nucor Corporation — Q1 2015 Form 10-Q
Reporting period: 13 weeks ended April 4, 2015; unaudited. Nucor manufactures steel and steel products, produces direct reduced iron (DRI), and processes and brokers raw materials. Results are reported across steel mills, steel products, and raw materials.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $4.399 billion | $5.108 billion |
| Gross margin | $288.3 million (7%) | $377.2 million (7%) |
| Earnings before tax and noncontrolling interests | $119.0 million | $207.5 million |
| Net earnings attributable to Nucor stockholders | $67.8 million | $111.0 million |
| Diluted EPS | $0.21 | $0.35 |
| Cash provided by operating activities | $563.7 million | $149.2 million |
| Capital expenditures | $77.5 million | $258.1 million |
Net sales declined 14%; outside shipments fell 9% to 5.635 million tons, while average selling price per ton declined 5% to $781. Steel mills sales decreased 15%, steel products sales increased 5%, and raw materials sales decreased 32%. Steel mills earnings before tax fell to $217.1 million from $317.8 million; steel products rose to $32.5 million from $1.7 million; raw materials swung to a $41.5 million loss from $8.4 million of earnings.
At April 4, cash and cash equivalents were $1.154 billion and short-term investments were $111.9 million. Total debt was approximately $4.40 billion on the balance sheet; including current maturities, estimated fair value of debt was approximately $4.85 billion. The current ratio was 3.8, versus 3.1 at year-end 2014. The $1.5 billion revolving credit facility was undrawn; funded debt to total capitalization was 36%, within the 60% covenant limit. Cash, cash equivalents, and short-term investments totaled about $1.27 billion.
Material changes and management commentary
- Steel market pressure was driven by imports: imports rose 22% year over year and represented an estimated 33% of the finished-steel market, versus 25% a year earlier. Lower prices and volumes, energy-sector weakness, and customer purchase deferrals also weighed on steel mills.
- Scrap and scrap-substitute cost per ton used in steel mills fell 19% year over year to $324. A $16.5 million LIFO credit benefited Q1 2015 gross margin, compared with a $14.5 million charge in Q1 2014.
- Nucor Steel Louisiana restarted late in the quarter after repairs to a process gas heater. Its Q1 operating loss was approximately $44 million, treated by management as start-up costs; management anticipated a similar loss in Q2 as the facility consumed higher-cost iron ore inventory.
- Cash from operations increased mainly because working-capital changes provided substantially more cash, particularly from lower receivables and inventories. Short-term debt fell to $26.9 million from $207.5 million at year-end, partly reflecting repayment of commercial paper used to help fund the Gallatin Steel acquisition.
- Foreign-currency translation produced a $116.7 million other comprehensive loss; comprehensive loss attributable to Nucor stockholders was $51.0 million, despite positive net earnings.
Outlook, risks, and contingencies
Management expected Q2 earnings to be somewhat above Q1: steel-mill margins were expected to improve but remain pressured by imports and unsettled selling prices; downstream products were expected to perform much better; raw-materials results were expected to weaken due partly to a planned one-month Trinidad DRI outage. Management expected further improvement in the second half, citing nonresidential construction and anticipated steel-price stabilization. These are forward-looking expectations, not guarantees.
Expected 2015 capital expenditures were approximately $500 million, compared with $569.9 million in 2014. Natural-gas drilling was suspended through 2015, apart from a limited number of wells to retain leasehold rights. Management stated that available funds and borrowing capacity were expected to meet existing-operation capital and working-capital needs for at least 24 months.
Key risks include steel imports and pricing, cyclical demand, raw-material and energy costs, foreign exchange, equipment interruptions, environmental regulation, and possible impairment of assets or investments. European steel-market weakness could cause impairment of the Duferdofin Nucor investment. The company also disclosed ongoing assessment of assets at the Louisiana site, including storage domes and approximately $84.1 million of capitalized development-related assets; changes in plans could lead to impairment. Environmental costs accrued were $26.3 million.
Nucor was defending antitrust matters for which it had recorded no reserve: a class-action case with exposure not estimable from the filing, and the MM Steel case, in which a $160.8 million joint-and-several judgment was on appeal. Nucor said it believed the judgment should be vacated or reversed, but the outcome was uncertain. The filing reported no material change in risk factors from the 2014 Form 10-K.
Important facts for investors to verify
- Whether steel import levels, selling prices, and shipment volumes subsequently stabilized as management expected.
- Whether the Louisiana DRI facility returned to sustained operations and whether the anticipated Q2 loss and higher-cost inventory were realized.
- Whether scrap-cost benefits translated into improved steel-mill margins, considering continued pricing pressure and LIFO estimates.
- Developments in the MM Steel appeal and other antitrust litigation, as well as any resulting change in potential exposure or reserves.
- Whether challenging European market conditions or Louisiana-site assessments resulted in impairment charges or changes to carrying values.