Nucor Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended October 3, 2015 (13 and 39 weeks), compared with periods ended October 4, 2014. Financial statements are unaudited. Amounts below are in U.S. dollars unless noted.
Business context and results
Nucor manufactures steel and steel products and produces and processes raw materials. It reports steel mills, steel products, and raw materials segments. Management attributed weaker steel-mill performance chiefly to exceptionally high steel imports, which it estimated represented 30% of the U.S. finished steel market in the first nine months of 2015, versus 27% a year earlier.
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Net sales | $4.226bn | $5.702bn | $12.983bn | $16.101bn |
| Net earnings attributable to Nucor stockholders | $227.1m | $245.4m | $419.7m | $503.5m |
| Diluted EPS | $0.71 | $0.76 | $1.30 | $1.57 |
| Cash provided by operating activities | Not stated for quarter | $1.757bn | $925.6m |
Financial position, cash flow, and margins
- Q3 sales fell 26% year over year; average selling price per ton fell 15% to $718 and outside shipments fell 13% to 5.883m tons. For the first nine months, sales declined 19%, average price fell 11% to $739 per ton, and outside shipments declined 9%.
- Q3 gross margin was $523.8m, or 12% of sales, versus $599.6m, or 11%, a year earlier. Nine-month gross margin was $1.20bn, or 9%, versus $1.39bn, or 9%. The Q3 margin benefited materially from a $137.0m LIFO credit; the nine-month LIFO credit was $249.0m.
- Q3 pretax earnings were $354.3m versus $404.0m; nine-month pretax earnings were $689.5m versus $853.4m. Q3 effective tax rate was 24.4%, down from 32.1%; management attributed much of the decline to a favorable $10.2m non-cash deferred-tax adjustment. The expected full-year 2015 tax rate was approximately 26.9%.
- Nine-month operating cash flow rose 90% to $1.757bn, primarily reflecting working-capital movements, including reductions in receivables and inventory. Investing activities used $297.1m and financing activities used $583.9m. Capital expenditures were $283.1m.
- At October 3, cash and cash equivalents were $1.895bn and short-term investments were $100m. Current assets were $6.466bn and current liabilities $1.847bn; the reported current ratio was 3.5, versus 3.1 at year-end 2014.
- Debt comprised $54.6m short-term debt and $4.361bn long-term debt; total debt was approximately $4.415bn. Cash plus short-term investments exceeded short-term debt. The $1.5bn revolving credit facility was undrawn; funded debt to total capitalization was 35%, against a 60% covenant limit. The next significant debt maturity was December 2017.
- Quarterly declared dividend was $0.3725 per share. Nine-month cash dividends paid were $359.5m.
Material changes by segment
- Steel mills: Q3 external sales declined 28% and nine-month sales declined 21%. Segment pretax earnings were $260.8m in Q3 and $676.4m year to date, below prior-year periods, reflecting lower prices, shipments, and metal margins. Average steel-mill utilization for the first nine months was 69%, down from 78%.
- Steel products: Q3 external sales declined 5%, but segment pretax earnings increased to $96.2m from $63.9m. Nine-month pretax earnings rose to $199.3m from $108.2m. Management cited lower input costs and gradual improvement in nonresidential construction; combined joist/deck and building systems operations recorded Q3 record profitability.
- Raw materials: Q3 external sales fell 50% and nine-month sales fell 40%. Segment recorded pretax losses of $43.2m in Q3 and $122.8m for nine months, worsening year over year, amid weak scrap markets, lower natural-gas prices, and lower volumes and margins.
Outlook, risks, and unusual items
- Management expected Q4 2015 earnings to decrease from Q3, citing continued deterioration in global steel markets, China-related overcapacity and imports, seasonal weakness in downstream products, and lower scrap and metallic prices. It noted ongoing strength in automotive and gradual improvement in nonresidential construction.
- Projected 2015 capital expenditures were approximately $400m, below 2014 spending, with reduced drilling and completion of major expansion projects cited. Management said available cash, operating funds, investments, and credit facilities should cover existing-operation capital and working-capital needs for at least 24 months.
- Nucor Steel Louisiana resumed operations late in Q1 after a process-gas-heater failure. Its first-nine-month operating loss was approximately $92m. In Q3, the company recorded a $7.7m net charge after writing off two iron-ore storage domes and recognizing an estimated insurance receivable; total related insurance receivable was $15.4m.
- Two antitrust matters remain notable. In the MM Steel case, the court judgment was $160.8m jointly and severally; Nucor estimated practical exposure at approximately $40m, appealed, and recorded no reserve. In the Standard Iron Works class action, the court certified a class only on the alleged-conspiracy issue, not impact or damages; Nucor recorded no reserve and said exposure could not be estimated.
- Other risks include steel-price and import competition, global overcapacity, raw-material and energy prices, construction demand, currency movements, environmental requirements, and potential impairment of assets or investments. Management highlighted continued challenging European steel conditions and lower natural-gas prices as possible impairment indicators for equity investments. No material changes to the 2014 Form 10-K risk factors were reported.
Important facts for investors to verify
- Whether Q4 performance and subsequent results reflect the forecast deterioration in steel markets and seasonal demand.
- How much reported gross margin and earnings depend on LIFO credits, and how year-end inventory-cost estimates may change.
- Progress on import competition and its effects on steel-mill prices, shipments, and utilization.
- Developments in the MM Steel appeal and Standard Iron Works litigation, including any change in estimated exposure or reserves.
- Performance and carrying values of Duferdofin Nucor and Hunter Ridge, including associated loan and guarantee exposure.
- Actual 2015 capital spending versus the approximately $400m projection, and execution of the authorized $900m share-repurchase program; no repurchases had been made as of the filing.