Nucor Corporation — Form 10-Q Summary
Reporting period: Third quarter (13 weeks) and first nine months (39 weeks) ended October 4, 2014; comparative periods ended September 28, 2013. Financial statements are unaudited. Nucor manufactures steel and steel products and reports steel mills, steel products, and raw materials segments.
Financial performance
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $5,701.9m | $4,940.9m | $16,101.4m | $14,157.3m |
| Gross margin | $599.6m; 11% | $408.5m; 8% | $1,392.7m; 9% | $1,024.9m; 7% |
| Earnings before tax and noncontrolling interests | $404.0m | $248.2m | $853.4m | $553.9m |
| Net earnings attributable to Nucor stockholders | $245.4m | $147.6m | $503.5m | $317.5m |
| Diluted EPS | $0.76 | $0.46 | $1.57 | $0.99 |
Quarterly sales increased 15% and nine-month sales 14% year over year. Management attributed growth to higher volumes and prices: outside-customer tons sold rose 10% in Q3 and 9% in the first nine months, while average sales price per ton increased 5% and 4%, respectively. Gross margins improved, reflecting higher selling prices and volumes, stronger metal margins, and better steel-products results.
- Segment earnings before tax: Steel mills earned $502.7m in Q3 and $1,188.6m for nine months, versus $310.6m and $820.0m a year earlier. Steel products earned $63.9m and $108.2m, versus $31.0m and $51.2m. Raw materials recorded losses of $19.3m and $20.6m, versus a $0.5m loss and $13.3m profit.
- Cash flow: Nine-month cash from operations was $925.6m, up from $883.6m. Investing activities used $717.1m, including $557.2m of capital expenditures; financing activities used $393.0m. Cash and cash equivalents declined $187.3m to $1,295.9m.
- Liquidity and debt: Cash plus short-term investments totaled $1.396bn. The current ratio was 3.2. Short- and long-term debt, including current maturities, totaled approximately $4.418bn; funded debt to total capitalization was 36%, against a 60% credit-facility covenant. The $1.5bn revolving facility was undrawn. Management said liquidity was adequate for existing operations’ needs for at least 24 months.
- Dividends: Declared quarterly dividend was $0.37 per share; nine-month dividends declared were $1.11 per share.
Material changes and management commentary
- Steel-mill utilization averaged 78% in the first nine months, compared with 74% in 2013; steel-products utilization was 65% versus 58%, and raw-materials utilization 66% versus 62%.
- The Louisiana direct-reduced-iron (DRI) facility generated operating losses of approximately $45m in Q3 and $100m in the first nine months, including start-up costs. Management cited ramp-up challenges, outages, and use of higher-cost iron ore. The facility’s process gas heater suffered a major failure on November 2, after the quarter; operations were suspended, and the repair timeline and possible asset write-down were undetermined. Management expected the facility’s Q4 impact to be somewhat less than its Q3 operating loss.
- On October 8, after quarter-end, Nucor acquired Gallatin Steel for approximately $775.1m. It was partly funded with about $300m of commercial paper issued after quarter-end and the balance from cash. Gallatin adds approximately 1.8m tons of annual sheet-steel capacity and expands Nucor’s Midwest presence.
- Management expected a moderate decrease in Q4 earnings, citing typical year-end seasonality in steel mills and downstream products. It expected 2014 capital expenditures of approximately $600m, down from $1.2bn in 2013.
Risks, contingencies, and unusual items
- Steel imports, pricing and demand, scrap and energy costs, industry cyclicality, equipment interruptions, currency movements, environmental requirements, and potential asset or investment impairments remain important risks. Management said U.S. steel imports were up 35.7% year to date through the latest reported month, pressuring prices. Nonresidential construction was improving but remained historically weak.
- A Texas antitrust case resulted in a $160.8m judgment against defendants jointly and severally. Nucor appealed and recorded no reserve, citing its belief that affirmation was not probable. Separate antitrust class actions remain pending; Nucor said it could not estimate its potential exposure.
- European steel-market weakness could lead to impairment of the Duferdofin Nucor equity investment if future performance materially deviates from valuation assumptions. Environmental remediation accruals were $19.3m, with inherent estimation uncertainty.
- Q3 included $12.5m of charges for partial asset write-downs; nine-month charges were $21.5m. Foreign-currency translation reduced Q3 comprehensive income by $81.7m. Nucor also disclosed continued assessment of the remaining Louisiana iron-ore storage domes and related potential insurance proceeds.
- The expected full-year 2014 effective tax rate was approximately 32.6%, versus 26.0% in 2013. The filing reported no material changes in risk factors from the 2013 Form 10-K.
Key facts for investors to verify
- Progress, repair timing, and any impairment or financial impact from the Louisiana DRI heater failure.
- Gallatin acquisition integration, final working-capital adjustments, and the effect of post-quarter commercial-paper borrowing on liquidity and debt.
- Whether steel pricing and volumes withstand import competition and seasonal demand changes, and whether management’s Q4 earnings outlook is borne out.
- Outcome and potential financial exposure from the MM Steel appeal and other antitrust litigation.
- Performance and impairment assumptions for the Louisiana DRI facility and Duferdofin Nucor investment.